TYPES OF MARKET STRUCTURES

TYPES OF MARKET STRUCTURES

• For a consumer, a market consists of those firms from which he can buy a well-defined product; for a producer, a market consists of those buyers to whom he can sell a single well-defined product. If a firm knows precisely the demand curve it faces, it would know its potential revenue. 
• If it also knows its costs, it can readily discover the profit that would be associated with diuerent levels of output and therefore can choose the output level that maximizes profit. But, suppose the firm knows its costs and the market demand curve for the product but does not know its own demand curve. 
• In other words, it does not know its own total sales. In order to find this, the firm needs to answer the following questions. How many competitors are there in the market selling similar products? If one firm changes its price, will its market share change? If it reduces its price, will other firms follow it or not? There are many other related questions that need to be answered.Answers to questions of this type will be diuerent in diuerent circumstances.
•  For example, if there is only one firm in the market, the whole of the market demand will be satisfied by this particular firm. But, if there are two large firms in the industry, they will share the market demand in some proportion. A firm has to be very cautious of the reactions of the other firm to every decision it makes. But if there are, say, more than 5,000 small firms in an industry, each firm will be less worried about the reactions of other firms to its decisions because each firm sells only a small proportion of the market. Thus, we find that the market behaviour is greatly auected by the structure of the market. 
• We can conceive of more than thousand types of market structures, but we shall focus on a few theoretical market types which mostly cover a high proportion of cases actually found in the real world. These are:

Perfect Competition: Perfect competition is characterised by many sellers selling identical products to many buyers.

Monopolistic Competition: It diuers in only one respect, namely, there are many sellers ouering diuerentiated products to many buyers.

Monopoly: It is a situation where there is a single seller producing for many buyers. Its product is necessarily extremelydiuerentiatedsincetherearenocompetingsellers producingproducts whichareclosesubstitutes.

Oligopoly: There are a few sellers selling competing products to many buyers.