Market Structures (AQA A Level Economics)

Characteristics of Market Structures

• Market structures are the characteristics of the market in which a firm or industry operates

  • These characteristics typically include:

    • The number of buyers

    • The number and size of firms

    • The type of product in the market (homogenous or differentiated)

    • The types of barriers to entry and exit

    • The degree of competition between the firms in the market
      

• Market structures can be separated into perfect competition and imperfect competition
  

• Imperfect competition includes the following market structures:

1. Monopolistic

• A market structure is one in which there are many firms offering a similar product but with some product differentiation, e.g nail salons

2. Oligopoly

• A market structure in which a few large firms dominate the industry, with each firm having significant market power

3. Monopoly

• A market structure in which there is a single supplier of a particular product and has the power to influence the market supply and price

The Spectrum of Competition

• Market failure can be caused through the abuse of market power
   

• Signs of market failure include

  • The ability of suppliers to have control of prices

  • The ability of suppliers to restrict output in a market so as to raise prices

  • A lack of allocative efficiency

  • A lack of productive efficiency

• Governments often regulate markets and intervene to prevent or reduce the abuse of market power through antitrust laws (anti-monopoly) or competition policy

• Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables

• Market power allows a firm to set prices above the competitive level or restrict output

• Market power can be measured using indicators like market share, concentration ratios, or barriers to entry

  • A higher market share or concentration ratio suggests a greater degree of market power
     

The level of market power changes for each market structure
 

• The closer a firm is to being a monopoly, the higher the concentration ratio, market share and market power

  • Competition is greatly diminished and the benefits of competition are likely to be lost

• The closer a firm is to being perfectly competitive, the lower the concentration ratio, market share and market power

  • Competition is enhanced and the significant benefits of competition are likely to be gained

• It is important to distinguish between market power and market competition

  • In competitive markets, no single firm has substantial market power, and prices and outputs are determined by the forces of supply and demand

  • In markets with limited competition or where firms have significant market power, market outcomes can deviate from the ideal of perfect competition