Market structure refers to the characteristics or structural variables of the market.
- They differ based on the number of firms in the market, the type of products sold, and the ease of entry and exit.
The factors determining market structure are:
- Numbers of firm in the industry
- Size of the firm
- Industry concentration
- Technology used to produce goods and services
- Demand and market conditions
- Potential for entry
1.) Numbers of firm in the industry
The number of firms operating in a market significantly influences competition. Fewer firms typically lead to greater market power for each, while more firms result in competitive pricing and behavior.
2.) Size of the firm
The relative size of firms affects their market power and ability to influence prices.
- Larger firms in concentrated industries often act as price makers.
- Smaller firms in competitive markets are price takers.
3.) Industry concentration
- It refers to the size distribution of firms within an industry i.e. extent of the market share held by top firms. It is measure by concentration ratio.
- The monopoly has high degree of concentration followed by oligopoly.
- The monopolistic and perfect competition have low degree of concentration.
4.) Technology used to produce goods and services
- Technology used by industries are different from one another. Some industries are very labour intensive, requiring much labour to produce goods or services. Some industries are very technology intensive, requiring upto date technologies to produce goods or services. The firms with superior technology will have advantages over other.
5.) Demand and marker conditions
- The nature of consumer demand and market dynamics influence the behavior of firms and the competition level. Stable and high demand may encourage large-scale firms, creating oligopolies or monopolies. Fluctuating demand can lead to more competitive markets as firms strive to capture market share.
6.) Potential for entry
- The ease or difficulty with which new firms can enter the market determines the level of competition. High entry barriers (e.g., legal restrictions, high capital requirements) result in monopolies or oligopolies. Low entry barriers promote perfect or monopolistic competition.
