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 an equilibrium quantity.
Market definition is an important issue for regulators facing changes in market structure, which needs to be determined. 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.
Market structure has been a topic of discussion for many economists like Adam Smith and Karl Marx, who have strong conflicting viewpoints on how the market operates in presence of political influence. Adam Smith, in his writing on economics stressed the importance of laissez-faire principles outlining the operation of the market in the absence of dominant political mechanisms of control, while Karl Marx discussed the working of the market in the presence of a controlled economy sometimes referred to as a command economy in the literature. Both types of market structure have been in historical evidence throughout the twentieth century and twenty-first century.
Market structure has been apparent throughout history due to its natural influence it has on markets, this can be based on the different contributing factors that market up each type of market structure.
Based on the factors that decide the structure of the market, the main forms of market structure are as follows:
The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size of sellers, entry and exit barriers, nature of product, price, selling costs. Market structure can alter based on the new external factors, such as technology, consumer preferences and new entrants. Therefore, elements of Market Structure always stay the same but the importance of a single element may change making it more influential on the current structure.
Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller's financial need to cover its costs. In other words, competition can align the seller's interests with the buyer's interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.
The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.
The main criteria by which one can distinguish between different market structures are: the number and size of firms and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely. In today's time, Karl Marx's theory about political influence on market makes sense as firms and industry are affected strongly by the regulation, taxes, tariffs, patents imposed by the government. These affect the barriers to entry and exit for the firms in the market.
There are a large number of enterprises, there are no restrictions on entering and exiting the market, and they sell different products of the same kind, and enterprises have a certain ability to control prices. Monopolies have complete market control as the barriers to entry are high and the threat of new entrants is low; therefore they can price set to their preference.
The number of enterprises is small, entry and exit from the market are restricted, product attributes are different, and the demand curve is downward sloping and relatively inelastic. Oligopolies are usually found in industries in which initial capital requirements are high and existing companies have strong foothold in market share.
The number of enterprises is only one, access is restricted or completely blocked, and the products produced and sold are unique and cannot be replaced by other products. The company has strong control and influence over the price of the entire market.
Different market structures will also lead to different levels of social welfare. Generally speaking, as the degree of competition increases, the total social welfare measured by producer surplus plus consumer surplus will rise. The total surplus of perfect competition market is the highest. And the total surplus of imperfect competition market is lower. In the monopoly market, if the monopoly firm can adopt first-level price discrimination, the consumer surplus is zero and the monopoly firm obtains all the benefits in the market.
Platform markets are a type of oligopolistic competition that differs from the traditional model in anticipated aspects because of the existence of indirect network effects. In traditional oligopoly analysis, companies are competing by price and quantity, designed to sell to one group of buyers with the interaction of strategies being dictated by product differentiation and capacity limitations. Platform markets are distinguished by being two-sided or multi-sided and involving two sets of users who mutually depend on each other so that the value to participants on one side is necessary in an amount determined by the level of participation on the other side.
This network effect causes these markets to change the competitive logic of platform markets in multiple ways. First, the platform markets pricing strategies should take into consideration the price structure, the manner in which the aggregate prices are allocated among the various sides to the market as well as the level of prices. It has been shown that platforms often subsidize or make one side of the market free in the first place (that produces stronger cross-group externalities) and charge the other side, a price structure that would not be observed in conventional single-sided markets. This skewed pricing is a way of enticing and integrating the efforts of several groups of users at the same time, as opposed to merely maximising the income of one group of customers.
Second, network effects produce coordination issues and tipping effects that make the competition between platforms different than typical oligopoly models. Since the value of using a platform augments with the count of users on the other significant faces of the market, platforms may be characterized by strong positive feedback in which early adoption advantages rise over time. In some situations, especially where users incur the costs of multi-homing (using more than one platform) or where network effects are strong enough, markets can switch to concentration where one platform takes most of the users despite initially having many platforms competing with each other of the same type invitation rotates around the market motive, as these additional platforms cost the users more than the original single platform does. This predisposition to market tipping generates first-mover benefits and increases barriers to entry of prospective entrants in manners that were not reflected in classical models of economies of scale or product differentiation.
Third, the analysis of welfare in platform markets demands the heed of pricing and market structure implications on the decisions to participate on both platforms of the marketplace. In platform markets, the welfare effects are normally analyzed by weighing the prices and output against those of competitive markets, in standard oligopoly models ,though a typical consideration is to balance the externalities generated by one side on the other. Literature evidence indicates that socially efficient pricing in platform markets can entail a significant level of cross-subsidisation, and that platform competition does not guarantee efficiency in the case of high network effects, and in cases where decisions to remain on the platform are interdependent.
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.
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.
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.
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. 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.