The Market Structure

The market is a medium which gathers sellers and buyers together to help them interacting with each other and facilitating exchanges (Pindyck and Rubinfeld, pp32, 2015). It could be a physical place, such as shopping mall; or a virtual place, such as an online store. An Area, one commodity, buyers and sellers, free competition, and one price are essential characteristics of market (Chand, 2014). The structure of a market is the market’s organisational and other features. There are five basic types of market structure, which are: monopoly, monopsony, monopolistic competition, oligopoly and perfect competition. This essay will illustrate how the structure of a market affects the behaviour and performance of a firm within it.

The market structure determines the way that sellers and buyers interact with each other, the change of the price, and the level of interaction of production and selling processes (InvestorWords, 2016). The major parts that affect the structure of the market are how many sellers and buyers in the market; how powerful their negotiation skills, which mostly link with the ability of setting prices, are; how deep the concentration among them is; how unique their products are; and whether a firm can enter a market easily or not (Policonomics, 2016). Market structures are depended on the nature of competition that exists in a certain market. Furthermore, market structure has a couple of determinants (Hansen & Wernerfelt, 1989). The first determinant is the number and nature of sellers, to illustrate, a single sellers in pure monopoly, a small number of sellers in oligopoly and a large number of sellers in perfect competition. The second determinant is the number and nature of buyers. If there is only one buyer, this situation is monopoly for the buyer, which is called monopsony. The third determinant is the nature of product. If there is no single products that are similar to a product, the product is pure monopoly in the market. Conversely, if there are a large range of products and so many similar goods, this is monopolistic competition (Acharyya, 1998). The fourth determinant is the entry and exit conditions. It is free to entry or exit in a perfect competition market. However, limits exist when entering a monopoly or oligopoly market. Because of product differentiation, there are no limits for entering and exiting in monopolistic competition. The fifth determinant is the economies of scale. If one firm can reach the economies of scale to a large extent, and it can satisfy all the market demand; this is monopoly. On the other hand, if there are many firms that reach large economies of scale, a number of firms would be eliminated so that the rest firms can compete with each other; this situation tend to be oligopoly. Five determinants were discussed as above. Next, five forms of market structures will be discussed.

The first market structure is monopoly. There is only one seller selling a product, which does