Market refers to a mechanism or an arrangement that facilitates contact between buyers and sellers for the sale and purchase of goods and services. In this article, you are going to read about the Nature and Structure of Markets.
Structure of markets
A market structure refers to the number of firms operating in the industry, the nature of competition between them and the nature of the product. Factors determining the structure of markets:
- Number of buyers and sellers: Its significance lies in the fact whether a buyer or a seller by her/his own independent action influences the price of the commodity in the market.
- Nature of commodity: The prices of homogeneous and standardised commodities will be the same, whereas the prices of differentiated commodities of different sellers of the same commodity will be different.
- Mobility of goods and services: The freedom of movement of goods and factors of production enable sellers to charge the same prices.
- Perfect knowledge: Uniform price of the commodity will emerge because buyers and sellers of a commodity have perfect knowledge about prices and costs in different parts of the market.
On the basis of the given factors, there are two main forms of market. They are
- Perfect Competition
- Imperfect Competition
- Monopolistic Competition
Perfect competition is a form of market where there are a large number of buyers and sellers of a commodity. A homogeneous product is sold in the market. An individual firm has no control over the price. It is a price taker.
A monopoly is a form of market where there is a single seller of a good with no close substitutes.
Monopolistic competition is a form of market in which there are many sellers of the product, but the product of each seller is different from the other.
A monopolistic firm has partial control over price only through product differentiation. Products are differentiated through designs and the color of the packing of the product. It attracts consumers to buy the product at a higher price. As there are many rivals and close substitutes of products in the market, a monopolistic firm cannot have full control over the price.
In an oligopoly market, each firm is huge enough to control a significant portion of the market. Output quotas and the price have a direct bearing on the output and the price of rival firms in the market. So, there is no unique demand curve for an oligopoly firm. They form a collusive agreement among the firms to fix the price and output in the market. It is to avoid price competition and earn monopoly profits.
As there is a high degree of interdependence between the firms, the firm’s demand curve is indeterminate under oligopoly. The price and output policy of one firm has a significant impact on those of the rival firm in the market. It is hard to estimate a change in a firm’s sales caused by a change in the price. A clear relationship between the price and the sales cannot be established in the market.
Monopsony refers to a market where there is a single buyer of a commodity or service but there are many sellers. The monopsonist is capable of influencing the supply price of his purchases by the amount he buys. He can bring down the price of the product or factor service by reducing the number of purchases. However, he purchases more quantities of the product and so has to pay more. He regulates his purchases in a way that marginal costs equal marginal utility.
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