What is a market structure in which many companies sell products that are similar but not identical

When analysing a market, we first need to understand what we see as a market and which characteristics define a market structure. A market refers to buyers and sellers who through their association, both in reality and potentially build the cost of a good or service. A market structure could then be seen as the characteristics of a market that impact the behaviour and results of the organizations working in that market.

The main characteristics that determine a market structure are: the number of organizations in the market (selling and buying), their relative negotiation power in relation to the price setting, the degree of concentration among them; the level product of differentiation and uniqueness; and the entry and exit barriers in a particular market. So, the structure of the market affects how firm price and supply their goods and services, the entry and exit barriers, and how efficiently a seller carries out its business operations.

A mix of the above-mentioned characteristics determine several market structures, from which we feature the most important ones:

Perfect competition

An efficient market where goods are produced using the most efficient techniques and the least number of factors.

The market is characterized by the following aspects:

• All sellers offer an identical product
• Sellers can’t affect the price
• Sellers have a relatively small market share
• Buyers know the nature of the product being sold and the prices charged by each firm
• The industry is characterized by freedom of entry and exit (no barriers)

Monopoly

Represents the opposite of a perfect competition. This market is composed of a single seller who will therefore in full control to set the prices.

Oligopoly

Products are offered by a small number of sellers were actions of one firm significantly influence the others.

Important characteristics are:

• A limited number of sellers collude, either explicitly or silently, to limit output and/or fix prices, so as to realize above normal market revenues
• Economic, legal, and technological factors can contribute to the formation and maintenance, or dissolution, of oligopolies
• The major difficulty that oligopolies face is the prisoner's dilemma that each member faces, which encourages each member to cheat
• Government policy influence oligopolistic behaviour, and sellers in mixed economies often seek government support for ways to limit competition

Monopolistic competition

The market is formed by a high number of sellers with similar products or services, but differ due to differentiation, that will allow prices. Entry and exit barriers in a monopolistic competitive industry are low, and the decisions do not directly affect those of its competitors. Monopolistic competition is closely related to the business strategy of brand differentiation.

Important characteristics are:

• Monopolistic competition occurs when an industry has many firms offering products that are similar but not identical
• Unlike a monopoly, these firms have little power to set curtail supply or raise prices to increase profits
• Firms in monopolistic competition typically try to differentiate their product in order to achieve in order to capture above market returns
• Heavy advertising and marketing is common among firms in monopolistic competition and some economists criticize this as wasteful

Monopsony

It’s similar to a monopoly, but in this case, there are many sellers with only one buyer, the monopsonist, who will have full power whit price negotiations.

Important characteristics are:

• A monopsony refers to a market with a single buyer
• In a monopsony, a single buyer generally has a controlling advantage that drives its consumption price levels down
• Monopsonies usually experience low prices from wholesalers and an advantage in paid fees

Oligopsony

It's similar to monopsony, but with a few buyers. Sellers will have to deal with the increased negotiating power of the oligopsonists. Oligopsony occurs when a few firms dominate the purchase of product or services. This means that the few buyers have considerable market power and therefore control over the sellers in driving down prices.

Option 3 : Monopolistic competition

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10 Questions 10 Marks 10 Mins

• A market condition where a large number of firms selling similar but not identical products are termed as Monopolistic Competition.
• Oligopoly and Monopolistic are the two imperfectly competitive types of market.
• An oligopoly is a market situation where only a few sellers selling products similar or identical to the others.
• In a monopolistic competitive market, each firm has a monopoly over the product it produces, but many other firms make similar products that compete for the same customers.

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Learning Objective

1. Describe monopolistic competition, oligopoly, and monopoly.

Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.

In monopolistic competitionMarket in which many sellers supply differentiated products., we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).

How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

OligopolyMarket in which a few sellers supply a large portion of all the products sold in the marketplace. means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.

Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopolyMarket in which there is only one seller supplying products at regulated prices., however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.

There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal. Natural monopoliesMonopoly in which, because of the industry’s importance to society, one seller is permitted to supply products without competition. include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

A legal monopolyMonopoly in which one seller supplies a product or technology to which it holds a patent. arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years. During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology. Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.

Key Takeaways

• There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
• Under monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
• In an oligopoly, a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
• In a monopoly, there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
• Most monopolies fall into one of two categories: natural and legal.
• Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
• A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)