Types of Market Structures

Types of Market Structures

Subject – Economy

Context – Last week, the Competition Commission of India found that three beer companies had colluded to fix beer prices for a full decade — between 2009 and 2018. As a result, the CCI slapped a penalty for cartelisation in the sale and supply of beer in 10 states and Union Territories.

Concept –

1. Perfect Competition
   • In a perfect competition market structure, there are a large number of buyers and sellers.
   • All the sellers of the market are small sellers in competition with each other.
   • There is no one big seller with any significant influence on the market. So all the firms in such a market are price takers.

2. Monopolistic Competition
   • This is a more realistic scenario that actually occurs in the real world.
   • In monopolistic competition, there are still a large number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar but all sellers sell slightly differentiated products.
   • Now the consumers have the preference of choosing one product over another.
   • The sellers can also charge a marginally higher price since they may enjoy some market power. So the sellers become the price setters to a certain extent.

3. Oligopoly
   • In an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5 dominant firms are considered the norm.
   • So in the case of an oligopoly, the buyers are far greater than the sellers.
   • The firms in this case either compete with another to collaborate together. They use their market influence to set the prices and in turn maximize their profits.
   • So the consumers become the price takers.
   • In an oligopoly, there are various barriers to entry in the market, and new firms find it difficult to establish themselves.

4. Monopoly
   • In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set any price it wishes since it has all the market power. Consumers do not have any alternative and must pay the price set by the seller.
   • Monopolies are extremely undesirable. Here the consumer loose all their power and market forces become irrelevant. However, a pure monopoly is very rare in reality.

What is a Cartel?

• A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in order to regulate or manipulate prices.
• According to Competition Commission of India, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
• The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition. The three common components of a cartel are:
  • an agreement;
  • between competitors;
  • to restrict competition.
• The agreement that forms a cartel need not be formal or written. Cartels almost invariably involve secret conspiracies.
• Cartels are competitors in the same industry and seek to reduce that competition by controlling the price in agreement with one another.
• Tactics used by cartels include reduction of supply, price-fixing, collusive bidding, and market carving.
• In the majority of regions, cartels are considered illegal and promoters of anti-competitive practices.
• The actions of cartels hurt consumers primarily through increased prices and lack of transparency.
• According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
  • price-fixing;
  • output restrictions;
  • market allocation and
  • bid-rigging
• By artificially holding back the supply or raising prices in a coordinated manner, companies either force some consumers out of the market by making the commodity (say, beer) more scarce or by earning profits that free competition would not have allowed.

Why cartels can be even worse than monopolies?

• It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large. That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.
• Unlike a monopolist, who may be forced to undertake product innovation — lest some new firm figures out a more efficient way of providing the good/service — members of a cartel sit pretty because they know that while none of them may be individually dominant in the market, by synching their pricing or productive actions they not only act as a monopolist but also rule out the possibility of allowing some new firm from upstaging the whole arrangement.
• Apart from the whole issue of charging higher prices, cartels (as against monopolists) neither have any incentive to invest in research aimed at improving their product nor do they see any reason why they should boost investments towards making the methods of production more efficient.
• The end result is that both the individual consumer as well as the society at large suffers.