Market structure

Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets.

The main body of the market is composed of suppliers and demanders. Both parties are equal and indispensable. The market structure determines the price formation method of the market. Suppliers and Demanders (sellers and buyers) will aim to find a price that both parties can accept creating a equilibrium quantity.

Market definition is an important issue for regulators facing changes in market structure, which needs to be determined.^[1] The relationship between buyers and sellers as the main body of the market includes three situations: the relationship between sellers (enterprises and enterprises), the relationship between buyers (enterprises or consumers) and the relationship between buyers and sellers. The relationship between the buyer and seller of the market and the buyer and seller entering the market. These relationships are the market competition and monopoly relationships reflected in economics.

Perfect competition

[3]

a type of imperfect competition where there are many sellers, selling products that are closely related but differentiated from one another (e.g. quality of products may differentiate) and hence they are not perfect substitutes. This market structure exists when there are multiple sellers who attempt to seem different from one another. Examples: toothpaste, soft drinks, clothing as they are all heterogeneous products with many buyers and sellers, no to low entry barriers but are different from each other due to quality, taste, or branding. Firms have partial control over the price as they are not price takers (due to differentiated products) or Price Makers (as there are many buyers and sellers).^[5]

Monopolistic competition

Oligopoly

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Monopoly

[9]

Based on the factors that decide the structure of the market, the main forms of market structure are as follows:

Importance of Market Structure[edit]

Market structure is important for a firms use as it motivations, decision making, opportunities. This will incur changes to current market standings affecting: market outcomes, price, availability and variety.^[16]

Market structure provides indication on potential opportunities and threats which can influence business to adapt there processes and operations in order to meet market structure requirements in order to stay competitive. For example being able to understand market structure will help to identify any product substitutability a foundation element of market structure analysis to then determine the best course of action.

N-firm concentration ratio, N-firm concentration ratio is a common measure of market structure. This gives the combined market share of the N largest firms in the market. For example, if the 5-firm concentration ratio in the United States smart phone industry is about .8, which indicates that the combined market share of the five largest smart phone sellers in the United states is about 80 percent.

[9]

The Herfindahl index defined as the sum of the squared market shares of all the firms in the market. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, vice versal. Generally, the Herfindahl index conveys more information than the N-firm concentration ratio.In general, this index can also measure the market concentration of the top n companies, and the impact of corporate mergers and acquisitions on the market structure. And although any relationship between Herfindahl index and concentration ratio can only provide a rough approximation, the estimation (prediction) of Herfindahl index becomes rapidly more accurate when given some of the largest market shares.^[17]

Herfindahl index

Besides market structure, many factors contribute to conduct and market performance. Market pressures are similarly evolving therefore when decision making based on market performance it is essential to assess all the circumstances affecting competition rather than rely solely on measures of market structure. Using a single measurement of market share can be misleading or inconclusive as only indicators are taken into account.^[18]

Different aspects that have been taken into account to measures the innovative advantage within particular market structures are: the size distribution of firms, the existence of certain barriers to entry, and the stage of industry in the product lifecycle.^[19] Creating another measure to determine the current market structure that can be used as evidence or to evaluate current market performance thus it can be used to forecast and determine future trends.

Industrial organization

Microeconomics

Economics

Structure-conduct-performance paradigm

Business economics

Stackelberg competition

Competition (economics)

Porter's five forces analysis

Media related to Market structure at Wikimedia Commons

by Elmer G. Wiens: Online Interactive Models of Oligopoly, Differentiated Oligopoly, and Monopolistic Competition