MARKET STRUCTURES: UNDERSTANDING COMPETITION

A Presentation by Banzon and Gadiano

OBJECTIVES:
 To understand firm behavior, pricing, and market efficiency.
 To be able to differentiate and analyze the four main structures.

INTRODUCTION TO MARKET STRUCTURES

MARKET STRUCTURES
 Basically, when we hear the word market, we think of a
place where goods are being bought and sold.
 In economics, market is a place where buyers and
sellers are exchanging goods and services with the following considerations such as:
 Types of goods and services being traded
 The number and size of buyers and sellers in the market
 The degree to which information can flow freely

Key Factors Determining Market Structure

1. Number of firms
 This refers to how many companies operate in a particular market.
 The number of firms affects competition, pricing, and consumer choices.

2. Type of product (homogeneous vs. differentiated)

 Products can be homogeneous (identical)Homogeneous products are goods or services without unique
characteristics and satisfy buyers in the same way or;
 A "differentiated product" is a good or service that stands out from similar products in the market due to
unique features, qualities, or perceptions, allowing a company to distinguish itself from competitors and
potentially command a higher price point based on its distinct value proposition; essentially, it's a
product that is designed to be noticeably different from others in its category, often through design,
quality, branding, or functionality. differentiated (unique in branding, quality, or features),
 The level of differentiation impacts consumer choice and pricing power.

3. Barriers to entry (high vs. low)

 Low barriers mean new firms can easily enter the market.
 High barriers prevent competition, often leading to monopolies or oligopolies.
 Barriers can be legal (patents, licenses), financial (high startup costs), or strategic (brand loyalty,
economies of scale).
4. Control over price (price taker vs. price maker)
 Price takers must accept the market price (no control over setting prices).
 Price makers have significant control over pricing due to market power.

PERFECT COMPETITION
Perfect competition is an idealized market structure in which equal and identical products are sold.
Perfect competition or pure competition is an idealized market condition where many sellers compete to
offer the best prices and large sellers have no advantages over smaller one but, it provides a useful model for
explaining how supply and demand affect prices and behavior in a market economy.

PERFECT COMPETITION: CHARACTERISTICS

Many Buyers and Sellers
 The market consists of a large number of buyers and sellers.
 No single buyer or seller can influence the price of the product.
 Each firm is a "price taker," meaning they must accept the market price as given.

Homogeneous Products (Identical Products)

 All firms sell identical (or perfectly substitutable) products.
 There is no differentiation in terms of branding, quality, or features.
 Consumers have no preference between products from different firms.

Free Entry and Exit

 Firms can enter or leave the market without significant barriers.
 No high startup costs, government restrictions, or legal barriers.
 This ensures that firms cannot make excessive profits in the long run, as new firms will enter if profits
are too high, and firms will exit if losses occur.

Perfect Information
 Buyers and sellers have complete knowledge about prices, products, and market conditions.
 Consumers can easily compare prices and quality, ensuring they always make the best choice.
 Firms cannot charge higher prices because buyers are aware of all available options.

Price Taker
 Sellers cannot control the price of the products
Perfect Competition: Example
Agricultural markets (e.g., wheat, corn, soybeans in a large, open market). Many farmers produce similar
products, and prices are set by the overall market supply and demand.

MONOPOLISTICS COMPETITION
Monopolistic competition is a market structure where many companies sell similar but differentiated
products. In this market, companies compete for customers by differentiating their products through
branding and quality.
Monopolistic competition exists when many companies offer competing products or services that are
similar, but not perfect substitutes.

MONOPOLISTIC COMPETITION: CHARACTERISTICS

1. Many Buyers and Sellers
 There are many firms competing in the market, but not as many as in perfect competition.
 Buyers have many options to choose from, leading to strong competition between firms.
Example: The restaurant industry—many restaurants sell food, but each has a unique style, menu, or
atmosphere.

2. Differentiated Products (Similar but Not Identical)

 Unlike perfect competition (where products are identical), firms in monopolistic competition
differentiate their products through Branding (Nike vs. Adidas), Quality (organic vs. non-organic food),
Features (iPhone vs. Android phones), Customer service and location
 Because of differentiation, buyers develop preferences for specific brands or products.
 Firms use advertising and marketing to convince consumers that their product is unique.

Example: Fast food chains like McDonald's, Burger King, and Wendy’s all sell burgers, but they
differentiate themselves through taste, price, and branding.

3. Relatively Easy Entry and Exit

 New firms can enter the market if they find a way to differentiate their product.
However, there are some barriers to entry, such as:
 Brand loyalty (customers sticking to well-known brands).
 Advertising costs.
Unlike oligopoly or monopoly, firms can enter and exit without facing extreme costs or government
restrictions.
Example: A new coffee shop can open and compete with Starbucks, but it needs to create a unique
experience (organic coffee, artistic ambiance, etc.) to attract customers.

4. Imperfect Information
 Consumers and producers do not have perfect knowledge about the market.
 Buyers may not know all prices, quality differences, or alternatives available.
 Firms use advertising to influence customer choices, sometimes making it harder to compare options.
 This imperfect information allows firms to charge different prices and build customer loyalty.
Example: If you are buying a laptop, you may not know the best one for your needs without researching or
relying on brand reputation.
5. A Price Maker
 In monopolistic competition, firms are considered price makers as they have some degree of control
over the price of their product due to product differentiation, unlike in perfect competition where firms
are price takers with no individual influence on market price.

MONOPOLISTIC COMPETITION is not considered a "big business" as it is characterized by a large

number of relatively small businesses competing in a market with slightly differentiated products, meaning
no single company holds a dominant market share; therefore, it's more associated with smaller firms rather
than large corporations.

OLIGOPOLY
 A state of limited competition, in which a market is shared by a small number of producers or sellers.
 An oligopoly is defined as a market in which the industry is dominated by a few companies that are
each influential participants in the market. There is no precise number of companies that qualifies a
market as an oligopoly. But as a rough guideline, the number of sellers must exceed two yet be fewer
than about five

OLIGOPOLY: CHARACTERISTICS
1. Few Large Firms
 An oligopoly consists of a small number of large firms (typically between 2 to 10) that dominate the
market.
 These firms control a significant share of the industry’s total sales.
 The market concentration is high, meaning that a few firms have a lot of power over the market.
 Due to the small number of competitors, each firm's decisions influence the market as a whole.
Example: The automobile industry (Toyota, Ford, Volkswagen, Honda, etc.). The smartphone industry
(Apple, Samsung, Google).
2. Homogeneous or Differentiated Products
 Oligopolies can sell either homogeneous (identical) or differentiated products.
 Homogeneous products → All firms produce nearly identical goods, competing mostly on price.
Example: The steel industry—one firm's steel is the same as another’s.

 Differentiated products → Firms make unique products through branding, technology, or design.
Example: The airline industry (Delta, American Airlines, United Airlines), where airlines offer different
services but still compete.

Since some oligopolies produce identical products while others offer differentiated ones, the competition
varies by industry.

3. Significant Barriers to Entry

 New firms struggle to enter the market due to high barriers to entry, which can include:
 High startup costs (e.g., building a car manufacturing plant requires billions of dollars).
 Economies of scale (large firms produce at lower costs per unit than new entrants).
 Brand loyalty (customers trust existing brands like Apple, making it hard for new brands to
compete).
 Government regulations (some industries, like airlines and telecommunications, require government
approval).
Example: Airline industry: Starting an airline requires billions in capital, government permits, and access to
airport gates.

4. Interdependence Among Firms

 In an oligopoly, firms are interdependent, meaning the decisions of one firm directly impact the others.
 If one company lowers its price, others may follow to avoid losing customers (price wars).
 If one firm launches a new product, others may also introduce new features to remain competitive.
Example: If Coca-Cola reduces prices, Pepsi must decide whether to lower prices too or risk losing market
share.
When Apple introduces a new iPhone, Samsung quickly responds with a competitive product.
This interdependence often leads to:
✅ Price leadership – A dominant firm sets the price, and others follow.
✅ Collusion or cartels – Firms secretly agree on prices to avoid price wars (illegal in many countries).
5.Are Oligopolies Price Takers or Price Makers?
 Oligopolies are price makers, not price takers.
Unlike perfect competition, where firms accept market prices, oligopolies have some control over pricing.
However, pricing decisions are strategic—firms must consider competitors’ reactions before changing prices.
Example: In the airline industry, if Delta Airlines increases ticket prices, American Airlines must decide
whether to follow or keep lower prices to attract customers.

Slide 12: Oligopoly: Game Theory

Game theory is a mathematical framework used to analyze strategic interactions between firms,
especially in oligopolistic markets where the decisions of one firm directly affect the others. Since firms in
an oligopoly are interdependent, game theory helps predict their behavior in pricing, production, and
marketing strategies.

1. Game theory studies how rational decision-makers interact in competitive situations where their actions
affect each other.
 Players = Firms in the oligopoly.
 Strategies = Choices firms can make (e.g., setting high or low prices).
 Payoffs = Outcomes based on decisions (e.g., profits, losses, market share).
Since oligopolistic firms must consider their rivals' reactions before making decisions, they often face
strategic dilemmas—one of the most famous being the Prisoner’s Dilemma.

2. The Prisoner’s Dilemma and Oligopoly

The Prisoner’s Dilemma is a classic example in game theory that shows how two players may not
cooperate, even if it's in their best interest.

Example: Price Wars Between Two Firms

Imagine Coca-Cola and Pepsi must decide whether to keep prices high or cut prices:

DESICION PEPSI KEEPS HIGH PRICE PEPSI CUTS PRICE

Coca-Cola Keeps High Price Both earn high profits Pepsi gains market share; Coca-
(cooperation) Cola loses
Coca-Cola gains market share; Both firms earn lower profits
Coca-Cola Cuts Price
Pepsi loses (price war)

Best for Both Firms? Keeping prices high and avoiding price wars.
What Happens in Reality? If one firm cuts prices, the other may feel forced to do the same to stay
competitive.

Example of Price War:

 Airlines: If Delta lowers ticket prices, United Airlines must also cut prices or risk losing passengers.
MONOPOLY
Monopoly is derived from the Greek words “monos” and “polein”, which mean "single" and "to
sell." A monopoly exists when only one establishment dominates the production or selling of a good or
service to the preclusion of all other potential competitors.
A monopoly is a market structure where a single firm dominates the entire industry, meaning there
are no direct competitors. This allows the firm to have significant control over prices and high market power.

What are the types of Monopolies?

 Pure Monopoly: A pure monopoly happens when one company has complete control over a product's
supply, with no similar alternatives and significant obstacles for others to enter the market.

 Natural Monopoly: Natural Monopoly occurs when one company can deliver a product or service more
effectively than several companies could, often due to special resources or technology (like utility
companies).

 Public Monopolies: These are government-controlled organizations that provide necessary services,
such as water and electricity, where competition isn't feasible.

MONOPOLY: CHARACTERISTICS

1. Single Seller
 A monopoly has only one firm that supplies the entire market.
 Since there are no competitors, consumers must buy from this firm if they need the product or service.
 This lack of competition allows the firm to dominate the industry and set its own rules.

Example:
 Google (Search Engine): Google dominates the global search market with a market share of over
90%.
 Microsoft (Windows OS): Microsoft has an overwhelming market share in the desktop operating
system industry.

2. Unique Product with No Close Substitutes

 A monopoly provides a unique good or service that cannot be easily replaced.
 If consumers want the product, they have no real alternative.
 Even if some alternatives exist, they are often inferior or less effective.
Example:
 Electricity Providers: In many areas, there is only one power company, so consumers must buy
electricity from them.
 Pharmaceutical Monopolies: If a company has an exclusive patent for a life-saving drug, no other
firm can legally sell that drug.

3. High Barriers to Entry

 New firms cannot easily enter the market because of barriers such as:
 High startup costs (e.g., infrastructure, R&D expenses).
 Legal restrictions (e.g., patents, government regulations).
 Brand loyalty & dominance (customers already trust the monopoly).
 These barriers protect the monopoly from competition, keeping it the sole provider in the market.

Example:
 OPEC (Oil Cartel): The Organization of Petroleum Exporting Countries controls a large portion of the
world’s oil supply.
 Patented Drugs: A pharmaceutical company with a patent on a drug has a legal monopoly on selling it.

4. Significant Control Over Price (Price Maker)

 Unlike firms in competitive markets, a monopoly is a price maker, meaning it sets its own prices.
 Since there are no competitors, consumers must either pay the price set by the monopoly or go without.
However, demand still matters—if prices are too high, consumers may stop buying altogether.

Example:
 De Beers (Diamond Industry): De Beers controlled the diamond supply, allowing it to control
prices worldwide.
 Amazon Web Services (AWS): AWS dominates cloud computing, letting it set competitive prices
with little fear of major competition.
COMPARING MARKET STRUCTURES: TABLE
MARKET NUMBER OF TYPE OF BARRIERS TO CONTROL OVER
STRUCTURES FIRMS PRODUCTS ENTRY PRICE
None (firms are
Perfect Many (hundreds or Homogeneous Low (anyone can price takers; market
Competition thousands) (identical products) enter or exit freely) sets the price)

Low to moderate
Monopolistic Many (but fewer (brand loyalty, Some (due to
Differentiated
Competition than perfect (branding, design, advertising may branding and
competition) quality variations) create some product
barriers) differentiation)

Either High (large capital Significant (firms

Oligopoly A few large firms homogeneous or investment, brand may set prices
(typically 2–10 differentiated. dominance, strategically,
dominate) economies of scale) considering rivals)

Very high (legal

Monopoly Many (hundreds or Unique product (no restrictions,
Complete (firm is a
thousands) close substitutes) patents, natural price maker, setting
prices based on
monopolies, high
demand)
costs)

REFERENCES:
https://www.marketing91.com/market-structure/
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