AE_Notes #5:

Differentiating Market Structures

Competition is part of life! You take part in school competitions, you play games with your friends
and family, or even join national and international tournaments. The experience can have different
outcomes and effects to you physically, mentally and even spiritually. The same is true when you choose
to become an entrepreneur. You will be experiencing different levels of competition that will make you and
your community better in all aspects of life.

Competition in economics means a rivalry among sellers or businesses in the market to obtain
more customers and earn more profit. Sellers or businesses create ways to encourage consumers to use
their purchasing power to buy the goods and services. Purchasing power is the ability of consumers to
buy products depending on their available money to spend. As long as you have money and you are
willing to spend it to buy whatever you desire, you have that purchasing power.

In the business world, there are different degrees or categories of competition and other market
characteristics that influence economic decisions. This is referred to as market structures. Learning about
market structures will help you understand how sellers and buyers behave. These market structures will be
characterized by the number of buyers and sellers, type of products being sold, entry and exit to market,
pricing power, and the access of buyers to product information.

Products in the market can be homogeneous or heterogeneous. Homogeneous products are

goods or services that are similar and have the same purpose which give the same satisfaction to
consumers. These products are perfect substitutes of one another. When you go to the Baguio public
market, you can find saba bananas sold by many sellers. This product is a homogeneous product because
it is the same product sold by many fruit and vegetable sellers. The saba sold by Aling Maria is the same
saba sold by Aling Teresa, Mang Pedro, Mang Kanor and so on. Heterogeneous products, on the other
hand, are products that are differentiated or made with a unique attribute which distinguishes them from
other competitors’ products. For example, when Aling Maria, Aling Teres, Mang Pedro and Mang Kanor
decided to make toron out of the saba they were selling, each of them thought of a unique toron filling to
compete with one another. Aling Maria made toron with kamote, Aling Teresa made toron with langka,
Mang Pedro made toron with malagkit, while Mang Kanor made toron with cheese. This time they sold
differentiated products because their toron are made with distinct fillings, allowing their customers to
choose the toron of their liking.

In the market, entrepreneurs may find it easy to start, operate and end businesses, but there are
also circumstances when it can be very difficult. This depends on the presence or absence of barriers to
the entry and exit to a market. Examples of barriers to entry to a market are high taxes, customer
loyalty—when buyers have product preferences even when new or better products are introduced, strong
brand identity—when existing brands are very popular, and high switching cost—when changing from one
product to a new product is more expensive. Examples of barriers to exit are difficulty to sell or relocate
the business because of the uniqueness of the business, high cost of leaving the market—costs that go
with closing, selling or relocating a business, and loss of trust and confidence from customers.

Another factor that differentiates businesses in the market is called pricing power or the ability of
businesses or sellers to influence changes in the price of products. A business or seller can be a price
taker or a price searcher. Price takers are those that accept and follow the existing market price. They
are those who sell homogeneous products and basic commodities like rice and wheat. Price searchers are
those that have the power to set or identify the price. They are usually makers or sellers of differentiated
products.

Here are now the market structures to be differentiated based on the categories discussed above:
 Perfect competition is identified to be the ideal and most competitive market structure because it
many sellers with more opportunities to maximize profit, and at the same time, many buyers with more
opportunities to increase satisfaction. The table below will show you the characteristics of perfect
competition in the different categories:
Categories Characteristics of Perfect Competition
Number of buyers many
Number of sellers many
Type of product homogeneous
Barriers to entry/ exit low or none
Pricing power price taker
Product information of buyers much or complete information about the product/s

A perfect example for perfect competition is the existence of on-line sellers. In social media alone,
there are many “ukay-ukay” retailers where the same kinds of second-hand items are being sold such
as clothes, shoes, bags, and appliances. There are many buyers of ukay-ukay items, and they are able to
have information about the products based on what they read in the posts. If you would want to become
an on-line seller, it would be easy to start the business. There will also be no difficulty if you decide to
stop. But since there are many sellers and products are homogeneous, your prices are almost similar
which means that you will be a price taker. You would have to accept and follow the existing price in the
on-line selling business of “ukay-ukay.”

Next is monopolistic competition. It is the second most competitive market structure where
businesses or sellers offer differentiated products. Non-price competition is undertaken where
differentiation is done. Sellers may attract buyers through creative advertising strategies or unique
packaging. They may use names of popular personalities in their ads or only reveal the positive
attributes of the product. They could also make packaging that can be re-used. Sellers or manufacturers
may also add special features to an existing product like adding flashlights to ballpens or personal
protective equipment gears (PPEs) made in fashionable designs. Because these are improvised and
differentiated products, sellers or manufacturers may influence or dictate the price making them price
searchers. The table below will show you the characteristics of monopolistic competition in the different
categories:
Categories Characteristics of Monopolistic Competition
Number of buyers many, but lesser than in perfect competition
Number of sellers many
Type of product heterogeneous or differentiated
Barriers to entry/ exit low or none
Pricing power price searcher
Product information of buyers few or limited information about the product/s for advertising to
become effective

Another market structure is the contestable market where the number of sellers is not important,
but the barriers to entry and exit to the market. Regardless of the number of sellers, in a contestable
market there must be an ease to start a business and compete, and the absence of sunk costs. Sunk
costs are expenses in opening and operating a business which cannot be recovered. The absence of
sunk costs will make it easier for the entry and exit of a business in a market. Business should also have
access to the best available production technology. The table below will show you the characteristics of
contestable market in the different categories:

Categories Characteristics of Contestable Market

Number of buyers few or many
Number of sellers few or many (NOT IMPORTANT)
Type of product homogeneous or heterogeneous
Barriers to entry/ exit low or none
Pricing power price taker or price searcher
Information about suppliers and full or complete information
technology
 An example of a contestable market in Baguio City is the transient house/ room business. If you
have a house with spare rooms or living spaces, you may enter the transient business where you rent out
your place to people at a given period of time. You do not have any sunk cost because you just made profit
from what you already have. You also have an idea when business will be at its peak which will lead you to
improve your facilities or divert to other source of income when business is slow. You also have the option
to accept and follow the existing rent rates, or you may set a competitive price if you have other facilities
that renters may use like a swimming pool or a garage for their vehicles.

Aside from perfect competition, monopolistic competition, and contestable market, there are three
(3) other market structures you need to understand: monopoly, duopoly, and oligopoly. Like in lesson 1,
these will be differentiated according to the number of buyers and sellers, type of product, pricing power,
barriers to entry/ exit to the market, and knowledge about the product or business.

A monopoly is the least competitive market structure because there is only one (1) seller of a
product that has no close or perfect substitutes. Prices of these products are usually dictated by
monopolies. The reasons why monopolies exist are the following: (1) the company has the only access to
resources needed to make the product, which can be expensive for other companies to produce; (2) the
company has the technology to produce more of the product at a less per unit cost, or each unit of the
product costs lesser to make when a company produces more of it which is referred to economies of
scale; and (3) the company has the legal right or the patent to produce or sell the product. These are also
the conditions that make it difficult for other companies to enter the market. Monopolies can be problematic
because there is a tendency for prices to increase above and beyond what buyers can afford. This is
especially true when the product or service is a necessity. The table below will show you the
characteristics of a monopoly in the different categories:

Categories Characteristics of a Monopoly

Number of buyers many
Number of sellers one
Type of product highly differentiated/ unique; public utilities
Barriers to entry/ exit high
Pricing power price searcher
Buyer information of the product limited

An oligopoly market structure is dominated by a few sellers or companies. These companies work
interdependently to achieve maximum profits. Collusion happens among these companies to agree on a
price levels, which can be a disadvantage to consumers because prices are set higher than expected. And
because products of oligopolies are necessities, people have no choice but to buy them. Take for example
oil companies. Producers of oil from around the world agree on the price of oil and impose the price on
consumers. The table below will show you the characteristics of an oligopoly in the different categories:

Categories Characteristics of an Oligopoly

Number of buyers many
Number of sellers few
Type of product homogeneous or slightly differentiated
Barriers to entry/ exit high
Pricing power price searcher
Buyer information of the product limited

Finally, duopoly is a market structure with only two (2) sellers or companies, but in reality, these are
the two (2) biggest companies offering the product. Collusions also happen in a duopoly where the two
companies agree on the price to impose on buyers to achieve maximum profit. The best example of a
duopoly is the two very popular brand of carbonated drinks or softdrinks in the Philippines. Even with the
existence of other small companies, these two giants of softdrinks dominate the market. The table below
will show you the characteristics of an oligopoly in the different categories:
 Categories Characteristics of a Duopoly
Number of buyers many
Number of sellers two dominating companies
Type of product homogeneous or slightly differentiated
Barriers to entry/ exit high
Pricing power price searcher
Buyer information of the product limited

SUMMARY: Types of Market Structures

Characteristics of…
Categories
Perfect Monopolistic Contestable Monopoly Oligopoly Duopoly
Competition Competition Market

Number of many many, but few or many many many many

buyers lesser than in
perfect
competition
Number of many many few or many one few two
sellers (NOT dominating dominating
IMPORTANT) seller/ companies
company
Type of homogeneou heterogeneou homogeneous highly homogeneou homogeneou
product s s or or differentiated s or slightly s or slightly
differentiated heterogeneou / unique; differentiated differentiated
s public
utilities
Barriers to low or none low or none low or none high high high
entry/ exit
Pricing price taker price searcher price taker or price price price
power price searcher searcher searcher searcher
Buyer much or few or limited full or limited limited limited
informatio complete information complete
n of the information about the information
product about the product/s for
product/s advertising to
become
effective