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In economics, markets can be categorised into different structures based on various characteristics. Understanding these market structures is essential for comprehending how different markets operate and affect the economy.
Below, we will explain competitive and concentrated markets, helping students to understand the range of market structures and the factors that define them. Plus, we’ll talk about the operation of the labour market, including factors that determine wages
What Are Market Structures?
Market structures refer to the organisational and other characteristics of a market and how firms are differentiated and categorised based on their goods/services and how they are affected by external factors and elements.
These include the number of producers and the degree of product differentiation.
There is a spectrum of market structures ranging from highly competitive to highly concentrated markets. At one end of the spectrum are competitive markets, where many firms compete against each other, and at the other end are concentrated markets, where a few firms dominate.
Competitive Markets
A competitive market, also known as a perfectly competitive market, has a large number of companies producing identical or very similar products. No single firm has significant market power, and all firms are price takers, meaning they cannot influence the market price of their products. Instead, the price is determined by the overall supply and demand in the market.
The following are usually true of the industry:
- There are many producers, each contributing a small fraction of the total market supply.
- Products are identical or very similar, making them perfect substitutes for consumers.
- Firms can freely enter or exit the market without significant barriers, ensuring that the market remains competitive.
In the ideal version of a competitive market, consumers benefit from lower prices and higher quality due to the high level of competition among firms. Producers must operate efficiently and look after staff and customers to survive, as any inefficiency or failure can result in losing market share to more efficient competitors.
Concentrated Markets
Concentrated markets, or imperfectly competitive markets, include monopolies, oligopolies, and monopolistic competition. These markets see fewer firms, higher barriers to entry, and varying degrees of product differentiation. The structure of the markets is open to manipulation.
Monopolies
A monopoly exists when a single firm controls the entire market for a product or service. This firm is the sole producer and can influence the market price. Monopolies happen due to high barriers to entry, such as high startup costs, control over essential resources, or legal protections like patents.
Monopolies can lead to higher prices and reduced output compared to competitive markets, as the monopolist maximises profit by setting prices above marginal cost.
The US Justice Department recently sued Apple for 'having illegal monopoly on smartphones', which is an example of a potential monopoly that has been created in a market.
Oligopolies
An oligopoly is a market structure with a few large firms dominating the market. These firms produce similar or differentiated products and have significant market power.
Oligopolies often arise in industries with high barriers to entry, such as the automobile or airline industries. Not everybody can start a competitor to Ryanair!
Firms in an oligopoly may use strategic behaviour, such as collusion, to set prices and output levels that maximise joint profits. However, collusion is illegal in many countries, including the UK and the US.
Monopolistic Competition
This market structure features many firms producing differentiated products. Each firm has some degree of market power, but there is still competition due to the large number of firms.
Examples include the market for some chain restaurants or clothing brands. Historically, this has also been the case with banks, which are not easy to open!
In many industries, firms compete on factors like quality, price, and branding. While there is some market power, the ease of entry and exit ensures that long-term profits are normalised.
What Determines Market Competition?
The following factors should be considered when working out market competition:
- Number of Producers: Competitive markets have many small firms, while concentrated markets have fewer, larger firms.
- Degree of Product Differentiation: In competitive markets, products are identical or very similar. In concentrated markets, products can be similar or highly differentiated, depending on the specific structure.
- Ease of Entry and Exit: Competitive markets have low barriers to entry and exit, allowing firms to enter or leave the market easily. Concentrated markets often have high barriers, making it difficult for new companies to enter.
The Labour Market
The labour market is where workers offer their labour and employers hire workers. The operation of the labour market is influenced by factors such as supply and demand and of course, whether it is a competitive or concentrated market.
Wages in the labour market are primarily determined by the interaction of demand and supply. Employers demand labour, and workers supply labour. The equilibrium wage, where the quantity of labour demanded equals the quantity supplied, is determined by this interaction.
Employers demand labour based on the productivity of workers and the value of the output they produce. If workers are highly productive and produce valuable goods or services, employers are willing to pay higher wages. The demand for labour is downward sloping, meaning that as wages increase, the quantity of labour demanded decreases.
Of course, within the labour market, occupations requiring higher skills and education levels generally offer higher wages. For example, doctors and engineers typically earn more than clerical workers due to the higher skill requirements and longer training periods, and there are fewer people who have been through this process.
In competitive markets, staff may have more options to move to another company or even set up their own, and in monopoly markets, there are few other companies with opportunities. This means that in some specialised industries, monopolies may be able to manipulate what they pay staff, too.
Revision Questions
Which types of markets have lots of competition?
Markets with lots of competition are typically perfect competition and monopolistic competition markets.
Perfect Competition: This market type features many small firms, none of which can control the market price. Products are homogenous (identical), and there are no barriers to entry or exit. An example is the agricultural market, where many farmers sell similar products like wheat or corn.
Monopolistic Competition: In this market structure, there are many firms selling similar but not identical products. Firms have some degree of market power to set prices because of product differentiation. Examples include the market for restaurants, clothing brands, or hairdressers.
What is it called when one company dominates a whole market?
When one company dominates a whole market, it is called a monopoly. A monopoly exists when a single firm is the sole producer and seller of a product or service, and there are high barriers to entry that prevent other firms from entering the market. An example of a monopoly could be a local utility company providing water or electricity, where it is the only provider in that area.
How does the degree of product differentiation impact the type of market?
The degree of product differentiation significantly impacts the type of market:
High Product Differentiation: When products are highly differentiated, meaning they are seen as distinct in terms of quality, features, branding, or customer service, the market tends to be more monopolistically competitive. Firms can set their prices above marginal cost due to brand loyalty and perceived differences. Examples include consumer electronics (like smartphones), fashion, and personal care products.
Low or No Product Differentiation: In markets with little to no product differentiation, products are viewed as homogenous or identical. This is characteristic of perfect competition, where no single firm can influence the market price because consumers see all products as interchangeable. An example is the market for basic agricultural products such as wheat or milk.
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