UNIT 10

MARKET STRUCTURE AND Barriers to Entry BARRIERS TO ENTRY

CLASSIFICATION OF MARKET STRUCTURES

The term ‘market structure’ refers to the degree of competition prevailing in that particular market. The power of an individual firm to control the market price by changing its own output determines the degree of competition and this power varies inversely with the degree of competition. The higher the degree of competition, the less market power the firm has and vice-versa. Market power is generally thought to be the ability of the firm to influence price.

The four characteristics used to classify market structures are:

 i) Number and size distribution of sellers,

 ii) Number and size distribution of buyers

iii) Product differentiation and

iv) Conditions of entry and exit

Based on the above characteristics markets are traditionally classified into four basic types.

These are Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition

Perfect competition is characterized by a large number of buyers and sellers of an essentially identical product. Each member of the market, whether buyer or seller, is so small in relation to the total industry volume that he is unable to influence the price of the product. Individual buyers and sellers are essentially price takers. At the ruling price a firm can sell any quantity. Since there is free entry and exit, no firm can earn excessive profits in the long run.

Monopoly is a market situation in which there is just one producer of a product. The firm has substantial control over the price. Further, if product is differentiated and if there are no threats of new firms entering the same business, a monopoly firm can manage to earn excessive profits over a long period

Monopolistic competition a term coined by E. M. Chamberlin implies a market structure with a large number of firms selling differentiated products. The differentiation may be real or is perceived so by the customers. Two brands of soaps may just be identical but perceived by the customers as different on some fancy dimension like freshness. Firms in such a market structure have some control over price. By and large they are unable to earn excessive profits in the long run.

Oligopoly is a market structure in which a small number of firms account for the whole industry’s output. The product may or may not be differentiated.

 

FACTORS DETERMINING THE NATURE OF COMPETITION

Effect of Buyers

Production Characteristics

Product Characteristics

Conflict between physical characteristics and minimum economic size

Factors determining conditions of entry

· Legal barriers

· Initial capital cost

· Vertical integration

· Optimum scale of production

· Product differentiation

 

Barrier to entry

 A barrier to entry exists when new firms cannot enter a market. There are many types of barriers, which become sources of market power for firms. Entry barriers can be broadly classified as:

 Natural barriers

 Legal Barriers and

Strategic Barriers

Building Excess Capacity: Another way to restrict the entry is to build and maintain excess capacity over and above the required amount.

Producing Multiple Products: Economies of scope arise when cost of producing two or more goods together is less costly than producing the two goods separately.

New Product Development: Producing substitutes for its own product in the market can discourage the entry for the new firms. For example a consumer good company producing different types of soaps targeted to different customer base.

The pricing analysis of markets helps to understand how the equilibrium price is determined by the interaction of demand and supply. This forms the basis for analyzing the price-output decisions of firms under different competitive situations.