Market Structure

Market Structure is a term used to describe the conditions in the market. 

Competitive markets

1. Many buyers and sellers.
2. Each firm has a small market share. 
3. Change in supply of a firm does not affect the market price.
4. Relatively free entry and exit from the market.
5. Products are likely to be close substitutes.
6. High competition promotes efficiency.
7. Firms are price takers.

Monopoly

1. The firm is the industry [100% market share].
2. High entry and exit barriers.
3. Monopoly is a price maker [change in supply from firms will affect the market price].

Why do monopolies arise?

1. Develop naturally over time: monopolies may form over time if a firm is successful in cutting costs and responding to changes in consumer tastes. 
2. Firms merge to form a monopoly
3. Might exist from the start: Certain monopolies may have been the result of a government act.
4. Patent holding: A firm may be a monopoly because it holds a patent that prevents other firms from producing that product/service. 

Why do monopolies continue?

1. Legal barriers to entry: new firms find it extremely difficult to enter the market due to the high entry barriers. 
2. Economies of scale: smaller firms will find it difficult to survive in a market where a firm producing at a large scale can offer products at a lower price due to economies of scale. 
3. Monopoly’s access to resources and retail outlets: A monopoly has increased access to resources and retail outlets, achieving economies of scale and hence providing lower prices.
4. Barriers to exit: A monopoly is bound by long-term contracts with suppliers not making it possible for it to leave the market.
5. Sunk costs: A monopoly needs to be present in the market to recover sunk costs, this also prevents competitors from entering the market.

Performance of monopolies

Monopolies are criticised because:

1. The absence of competition may lead to a lack of efficiency 
2. Restrict supply to push up prices
3. May produce poor-quality products, knowing consumers have no substitutes. 
4. May fail to respond to changes in consumer tastes and preferences. 

Monopolies can benefit consumers  as well-

1. Unit costs may be lower due to economies of scale and can provide lower prices.
2. Can prevent wasteful duplication of capital.
3. High profits could lead to a higher expenditure in the R&D of new products.
4. The need to overcome barriers to entry and break a monopoly would encourage firms outside the industry to innovate.