Market Structures

Date: 2023-02-06

A market is said to exist when buyers and sellers exchange goods and services or resources. A market consists of three important elements:

• Buyers (demand)
• Sellers (supply)
• Something to exchange (a good, service or resource)

There are two types of markets. Product markets and factor markets.

Product Markets

• Product markets deal with the buying and selling of goods and services
• In a product market, consumers represent the demand side of the market, while firms represent the supply side of the market.
• Firms produce goods and services and sell them to households (consumers)

  Factor Market

• Factor markets deal in the buying and selling of factors of production or resources such as the labour market, the capital market and natural resource markets.
• In a factor market, households sell their resources to firms.
• In a factor market (e.g. Labour market), households represent the supply side of the market, while firms represent the demand side.

Markets can also be classified according to the intensity of competition in the market. A competitive market is characterised by:

• A large number of buyers and sellers
• Firms are price takers
• Very similar (homogenous) products
• Easy entry into market (no barriers to entry or exit)

In a competitive market, price is determined by the interaction between buyers and sellers. No individual buyer or seller can influence the market price — this means that there is no market power. Firms are called price takers because they must take the price that is established by the market.

There are many examples of competitive markets.

• Agricultural markets, fruit and vegetables, cafes and hair dressing salons.
• The small business sector satisfies many of the assumptions of a competitive market
• Any market with a large with a large number relatively small firms selling very similar goods and/or services and with easy entry conditions is a competitive market.

A market that is not competitive is called an imperfect or non-competitive market. An imperfect market is characterised by:

• A small number of firms
• Product differentiation
• Firms are price setters — they have market power
• Entry into market is restricted (barriers to entry)

There are many examples of imperfect markets

• A monopoly market is an extreme type of imperfect market with just one dominant firm
• An oligopoly is a market with a few dominant firms

• Firms with market power can set their own price — they are called price setters

• An imperfect market is characterised by product differentiation where firms try to make their products ‘look different’ in the eyes of consumers and use barriers to entry to make it difficult for new firms to enter the market.
• In Australia, there are many examples of imperfect markets
• Coles and Woolworths are a virtual duopoly in the grocery market
• The mobile phone services market is a classic oligopoly dominated by three firms Telstra, Optus and Vodafone.