Types of Market Structures

Types of Market Structures

Competition, consumer preferences and entry barriers invariably form different market structures. These sectoral structures are the starting point for assessing business or economic environments. It provides a deep insight into an industry with important factors like market news, legislation, policy changes and very curiously, how the current state of the economy (market structures) shapes important decisions than vice-versa.

What Are Market Structures?

Different market characteristics which lead to mutually beneficial relations between buyers and sellers and sellers to sellers bring about various market setups. These are referred to as ‘Market structures’ and let’s look at some characteristics,

1. Products or services offered and the variations / features

2. The ease and the barriers for entering and exiting the markets

3. Market share of the largest firms

4. Total companies in the market or a particular sector

5. Relationship between the buyers and how they function with or against the seller to decide price and quantity

6. Relationship between sellers (companies)

• Let’s look at the 4 major market types,

Perfect Competition

What is a Perfect Competition?

This is an ‘Ideal’ market type where multiple firms manufacture the same product, and no firm holds a dominant market share.

· Perfect for consumers

· No entry or exit barriers

· Firms cannot influence the price of product

?This type of market is a rarity in the real world. It is a theoretical model and is useful for looking at industries with similar traits, so it works as a reference point for other market structures.

Perfect Competition Market Type in India

Top Mineral Water Brands in India are a great example; it’s the closest one can get to explain perfect competition.

· The Top 5 brands hold more than half the market share

· ?Rest divided between niche and regional players

Top 5 Mineral Water Brands in India

1.?Bisleri

2.?Kinley

3.?Aquafina

4.?Bailey

5.?Himalayan?

Monopolistic Competition

What is Monopolistic Competition?

This is an imperfect market structure wherein a large number of companies produce similar products.

It exists in every market and is seen as a cross between ‘Perfect Competition’ and ‘Monopoly’.

Characteristics of Monopolistic Competition

· Large Number of Companies: Many companies vie for a market share with none cornering the market.

· Product Differentiation: Similar products with different quality, pricing, marketing strategies and branding.

· Low Entry Barriers: Companies can enter or exit with relative ease.

· Pricing: Existing firms act as price makers.

Examples of Monopolistic Competition

· Clothing and Apparel

· Hotels and Restaurants

· Sportswear

· Grocery Stores

· Hairdressers

· PC manufacturers

Pros and Cons of Monopolistic Competition

Pros

1.?Consistent Quality of products

2.?Multiple choices for consumers

Cons

1.?Firms experience Zero or normal profit in the long run

2.?Close substitutes lead to waste and inefficiency

Oligopoly

What is an Oligopoly?

An ‘Oligopoly’ or an Oligopolistic market exists when few firms dominate the market with none being a leader. Entry barriers are high for new firms and actions of one firm influence the others.

Example: India’s Telecom sector is an Oligopoly with Jio, Airtel and Vodafone Idea being the major players.

How does an Oligopoly function?

· Oligopoly is similar to a monopoly and duopoly

· Companies create ‘Perfect Competition’ which benefits them

· If 1 firm makes a price change other follow suit

· Price changes are not a result of market conditions?

How does an Oligopolistic market affect the consumer?

1. Lack of innovation and fewer product choices

2. Lack of companies

3. The prices are higher

Monopoly

What is a Monopoly?

Monopoly exists when there is exclusive possession of the market or sector by a single company.

The solitary firm decides the price of the product, without any fear of competition.

What are the characteristics of a Monopoly?

1.?The idea is to maximize profits

2.?The company decides the prices

3.? High entry barriers

4.?The company is the sole supplier

5.?Price discrimination

How Monopolies put consumers at a disadvantage?

· Higher prices and no choice in terms of products

· No consumer sovereignty

· No innovation and inefficient services

Top 6 Monopoly Stocks in India

1. IRCTC

2. CDSL

3.?CAMS

4.?IEX

5.?Concor

6.?Multi Commodity Exchange (MCX)

So there you have it! These 4 market types should enable one to not only understand a market or sector but also to invest effectively.