MARKET STRUCTURES: tum gaye ho kyuWho can trust you prisoner?

You beat your wings Against the lifeless bars So wasting feathers You keep alive the bruises, Never let the red smears dry And yet when the master comes With a handful of seeds You bow and kiss his palm. Who would trust you? The manner in which markets or industries are organized, based largely on the nu mber of participants in the market or industry and the extent of market control of each participant. Perfect competition represents the benchmark market structu re that contains a large number of participants on both sides of the market, and no market control by any firm. Three market structure models with varying degre es of market control on the supply side of the market are: monopoly, monopolisti c competition, and oligopoly. Three lesser known market structures with varying degrees of market control on the demand side of the market are: monopsony, oligo psony, and monopsonistic competition. The structure of a market primarily depends on the number of firms operating in the market. Perfect competition is the theoretical benchmark of efficiency achie ved because the large number of participants in the market give neither buyers n or sellers market control. Other market structures have different amounts of mar ket control due to different numbers of competitors. In general, more competitio n means less market control. Perfect Competition: The Benchmark Perfect competition is an ideal market structure characterized by a large number of participants on both sides of the market. The product sold by each firm in t he market is identical to that sold by every other firm. Buyers and sellers have complete freedom of entry into and exit out of the industry, and perfect knowle dge of prices and technology. Perfect competition is an idealized market structu re that is not observed in its purest form in the real world. While unrealistic, its primary function is to provide a benchmark that can be used to analyze real world market structures. In particular, perfect competition efficiently allocates resources. It does this by exchanging the quantity of goods that equate price and marginal cost. With a large number of participants, both buyers and sellers are price takers. Individ ual participants must exchange goods at the market price and none can influence the market in any way. For this reason, the demand price buyers are willing to p ay, based on the satisfaction received, is equal to the supply price that seller s are willing to accept, based on the opportunity cost of production. Selling-Side Market Structures Market Structure Continuum Varying degrees of market control among sellers generate three alternative marke t structures. These three market structures, along with perfect competition are illustrated by the market structure continuum presented in the exhibit to the ri ght. Moving from right to left, the number of participants on the supply side of the market increases resulting in less market control. Moving from left to righ t, the market control possessed by each seller increases, due to fewer sellers. At the far left is perfect competition. At the far right of the continuum is mon opoly. Monopolistic competition resides in the middle of the continuum close to perfect competition. Oligopoly is also in the middle of the continuum close to m onopoly. Monopoly: To the far right of the market structure continuum is monopoly, charac

terized by a single competitor and complete control rket. Monopoly contains a single seller of a unique tutes. The demand for monopoly output is THE market t case scenario of inefficiency on the selling side ten subject to government regulation.

of the supply side of the ma product with no close substi demand. Monopoly is the wors of the market and thus is of

Monopolistic Competition: In the middle of the market structure continuum, resid ing closer to perfect competition, is monopolistic competition, characterized by a large number of relatively small competitors, each with a modest degree of ma rket control on the supply side. A key feature of monopolistic competition is pr oduct differentiation. The output of each producer is a close but not identical substitute to that of every other firm, which helps satisfy diverse consumer wan ts and needs. While market control always means inefficiency, monopolistic compe tition is not a serious offender. Oligopoly: Also in the middle of the market structure continuum, but residing cl oser to monopoly, is oligopoly, characterized by a small number of relatively la rge competitors, each with substantial market control. Oligopoly sellers exhibit interdependent decision making which can lead to intense competition and the mo tivation to cooperate through mergers and collusion. Oligopoly tends to have ser ious inefficiency problems, but also provides the benefits of innovation and lar ge scale production.