There are different kinds of markets in different economies/sectors/goods. Accordingly, there are different kinds of output and pricing decisions which take place. Usually, output and pricing decisions are interdependent except for the case of perfectly competitive markets. In perfectly competitive markets, a single firm is so small compared to the market that it cannot affect the prices. In that case, it must take the price as given, and then decide the quantity to be supplied. Price in this market is equal to the marginal cost of production. In monopoly, however, things are different. The monopolist can change the prices, as it is the sole provider of the good and thus has the market power. But here also, if the price increases quantity demanded decreases. Therefore, the monopolist must take under consideration both the positive and negative effects of increase in prices. In another market oligopoly, pricing is a bit more complicated and it depends upon the strategic interaction among the firms. Market structure is the number of buyers and sellers in a market.
There are several different market structures in which organizations can operate. The type of structure will influence a company’s behavior and the level of profits it can generate. The structure of a market refers to the number of businesses in a market, their market shares and other features which affect the level of competition in the market. Structures are classified in term of the presence or absence of competition. When there is no competition, the market is said to be concentrated. A scale from perfect competition to monopoly can be found below.
? Perfect Competition: It is the market where there are large number of buyers and large number of sellers selling similar products. In this market all the organizations remain equally capable and no organization dominates the industry for long period of time. Similar products are produced by all the organizations having very less variation in the quality and price of the products. Perfect competition could be seen majorly in agricultural firms. Reason behind it is that agricultural products cannot be differentiated by the buyers and are of standard nature. Brand value does not much impact on the sale of agricultural products. Reason behind no company dominate the industry is because entry and exit of the company is free in perfect competition.
? Monopoly: It is the market in which there is a single seller selling the product and large number of buyers. In monopoly market top players of the industry restricts the entry of other companies. Industries selling differentiated products get affected due to the monopoly in the market. Price of the products and services are decided by the firm leading in the market in which prices are kept slightly lower than the average cost of the new entries so that entries could get restricted in the market. Organizations which patent their product fall in this industry because by patenting the product they restrict the entry of the other firms in the same industry. Example for the company falling in monopoly market is Linux as it owns UNIX and has the copyright on that which restricts other software developing companies to avail similar product in the market.
? Oligopoly: The market in which very few firms dominate the industry is oligopoly. Partial competition occurs in this type of market because there are very few sellers and very few buyers of the product. Coming to the grocery market of UK there are very few organizations like ASDA, Sainsbury and TESCO that dominates the industry. There are certain small scale organizations that provide same products and services but the companies having strong value in the market are not letting these companies grow. Oligopoly is a situation where few firms are in the competition in the market for a particular good. In this competition consumer is not fully aware about the product. Every seller has some specification in the product. Aircraft manufacturing, wireless communication, media and banking are some of the example of oligopoly market competition. There are no barriers in entry but it is difficult for new entrant to enter in the market. A sudden change in prices and outcome decisions of one business affect its rivals. In oligopoly competition enterprises are interdependent on each other so each organization formulates its own pricing policy taking consideration in the pricing policies of the existing competitors. In oligopoly market structure, the sellers have the ability to set the price. The set the prices at a higher level and output at a lower level. The structure basically helps to achieve economies of scale.
? Duopoly: The market in which two companies dominates the industry is known as duopoly. In the market structure, the existence of existence of price leadership by the large firm of the two companies. In this case, the smaller one follows the price leader of the large firms. Competition between two organizations only exists. Competition is held between the organizations either on the basis of the quality and quantity of the product in the same prices. There are only two giant firms working under duopoly competition. In this each selling identical products having fifty percent of total market. These two firms may agree on a certain price or they can divide their market share. They can go for merge themselves into one unit and form monopoly. They can also try to differentiate their products in features. If sellers in duopoly market will produce perfect substitutes to the customers, then they will engage in price competition. If goods of producer having differentiation in their product, then each business company have a close watch on the pricing and output policy of rivalry firm. Classical model of edge worth, Spatial equilibrium model, Stake berg’s model, Modern game theory model are used for determination of price and outcome decisions in duopoly competition. One of the best examples for duopoly is Pizza Hut and Dominos. Both the firms are delivering similar products to the market i.e. pizza for which they compete on the quantity as well as quality of the product. Larger market share is covered by both the players present in the industry. In the same industry market share of other small companies have least effect on the top leading companies.