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Market structure is identified by how the market is made up of the certain factors like the number of firms operating, the nature of the product being produced, the level of profit, the degree of monopoly that each firm enjoys, the firms’ behavior, the pricing strategy, the level of output and the efficiency of the market and the entry and exit into the market. All these factors are collectively called as the market structure. The two extreme conditions of markets are (1) Monopoly and (2) Perfect competition. In between these two extremes there are different market structures like oligopoly and monopolistic competition.
The two extreme market conditions namely, Monopoly and Perfect competition. When these two markets are compared, we can observe that when a market is inclined towards perfect competition, there are few imperfections. When the market is inclined towards monopoly, there is a greater degree of imperfection.
The study of market structures is important because of the fact that the above mentioned markets are seen more or less in our daily life. Their study is important as we can predict what a firm does under given conditions and apply in the real world. They offer us a benchmark. For ex: if competitors enter into a monopoly market what might happen. What will be the impact on the price of the product? How much consumer surplus can the consumers expect with the fall in prices? Etc., All these kind of things can be predicted by studying these market conditions.
The different market structures are dependent on the model of economy.
A perfectly competitive market is characterized by a large number of firms. All these firms produce identical goods so there is no reason for consumers to express preference or choice. There is freedom of entry an exit into the industry. Firms are price takers and they have no control over the price of the products. Each producer supplies a very small quantity of goods into the market. Both the consumers and producers have a perfect knowledge of the market conditions.
Where the conditions of perfect competition do not hold, imperfect competition exists. Monopolistic competitions Is one of them. A large number of firms exist in the market. They may have some or little control over the price due to product differentiation that exists between them. The products are close but not perfect substitutes. Entry and exit from the industry Is relatively easy with few barriers to entry and exit. Both consumers and producers do not have absolute knowledge about the market conditions.
It is a market condition where there are only few producers and they dominate the industry or the market. They are price makers and not price takers. In oligopoly, there is a possibility that the firms may collude and they try to price control the price of the products.
Monopoly: is characterized by a single seller who is the price-maker and not the price taker. The monopoly also controls the supply of the product into the market. He enjoys full control on the market and factors. No question of consumer surplus. Price of the product is the price of the market. It is the highest degree of imperfection of a market structure.
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