Skip Nav

5 Major Factors which Determine the Market Structure of an Industry

Working Papers & Publications

❶Column 1 of Table


The availability of credit to the consumer also determines the demand for a product. The credit extended by sellers, banks, friends, relatives or from other sources induces a consumer to buy more than what would have not been possible in the absence of the credit. Thus, the consumers with more borrowing capacity consumes more than the ones who borrow less. Population of the Country: The population of the country also determines the total domestic demand for a product of mass consumption.

For a given level of per capita income, tastes and preferences, price, income, etc. Distribution of National Income: The national income is one of the basic determinants of the market demand for a product, such as the higher the national income, the higher the demand for all the normal goods. Apart from its level, the distribution pattern of the national income also determines the overall demand for a product.

Such as, if the national income is unevenly distributed, i. Thus, the demand for a commodity can be estimated or analyzed by studying the determinants of market demand and the nature of the relationship between the demand and its determinants.

Your email address will not be published. Business Jargons A Business Encyclopedia. Accounting Banking Business Business Statistics. I agree with the answer,it match my question. Leave a Reply Cancel reply Your email address will not be published. The policy implications of the paradigm are of great significance. One major facet of the paradigm that bears real significance is the relationship, if any, between concentration and profits. If the conduct of concentrated industries resembles closely that of a monopolist, such industries would be expected to earn excess or super-normal profits.

Thus, the monopoly profits are likely to be reduced, if not completely eroded, by structural changes. This view gets ample support from both the proponents and opponents of monopoly. But this view has to be evaluated critically. However, one final point may be noted before we proceed further; the relationship between pure size and pricing behaviour is tenuous at best. It is well known that in most markets we have situations which lie between the two extremes of perfect competition and monopoly.

But in the in-between cases, how do we measure the degree of imperfection of the market, i. Market concentration provides an answer to this question. Hazari did for the private corporate sector in India as a whole. In general, the size of a firm may be measured by the volume of its output or sales, the number of people employed in the firm, its share capital, its assets etc. However, this type of measure of market concentration suffers from the defect that it only provides us with a rough and ready measure of the degree of monopoly power.

Column 1 of Table For example, 10 percent of the total number of firms whose sales varied between 0 and 5, rupees, constituted 5 percent of the total sales of the industry etc. At the two extremes, zero per cent of firms make zero per cent of the total sales, and per cent of the firms sell per cent of the total output.

If the cumulative percent of sales is plotted against the cumulative percent of firms we get a curve like the one shown in Figure This curve is called the Lorenz curve.

Along this line, the distribution of the total sales of the industry among the firms would be perfectly equal. The smallest 10 per cent of the firms would account for exactly 10 percent of the total sales, the smallest 50 percent for 50 per cent of the total sales, etc. The divergence of the Lorenz curve from the egalitarian line shows that the actual distribution is unequal. The Gini coefficient which serves the same purpose is the ratio between the area of concentration and the area between the egalitarian line and the axes.

For instance, if we had drawn Figure The Gini coefficient varies between 0 and 1. The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole.

The demand of individual buyer relative to the total demand is so small that he cannot influence the price of the product by his individual action.

Similarly, the supply of an individual seller is so small a fraction of the total output that he cannot influence the price of the product by his action alone. In other words, the individual seller is unable to influence the price of the product by increasing or decreasing its supply.

Rather, he adjusts his supply to the price of the product. Thus no buyer or seller can alter the price by his individual action. He has to accept the price for the product as fixed for the whole industry. The next condition is that the firms should be free to enter or leave the industry.

It implies that whenever the industry is earning excess profits, attracted by these profits some new firms enter the industry. In case of loss being sustained by the industry, some firms leave it. Each firm produces and sells a homogeneous product so that no buyer has any preference for the product of any individual seller over others. This is only possible if units of the same product produced by different sellers are perfect substitutes.

In other words, the cross elasticity of the products of sellers is infinite. No seller has an independent price policy. He cannot raise the price of his product. If he does so, his customers would leave him and buy the product from other sellers at the ruling lower price. The above two conditions between themselves make the average revenue curve of the individual seller or firm perfectly elastic, horizontal to the X-axis. It means that a firm can sell more or less at the ruling market price but cannot influence the price as the product is homogeneous and the number of sellers very large.

The next condition is that there is complete openness in buying and selling of goods. Sellers are free to sell their goods to any buyers and the buyers are free to buy from any sellers. In other words, there is no discrimination on the part of buyers or sellers. There are no efforts on the part of the producers, the government and other agencies to control the supply, demand or price of the products. The movement of prices is unfettered. Another requirement of perfect competition is the perfect mobility of goods and factors between industries.

Goods are free to move to those places where they can fetch the highest price. Factors can also move from a low-paid to a high-paid industry.

This condition implies a close contact between buyers and sellers. Buyers and sellers possess complete knowledge about the prices at which goods are being bought and sold, and of the prices at which others are prepared to buy and sell. They have also perfect knowledge of the place where the transactions are being carried on. Such perfect knowledge of market conditions forces the sellers to sell their product at the prevailing market price and the buyers to buy at that price.

If transport costs are added to the price of the product, even a homogeneous commodity will have different prices depending upon transport costs from the place of supply. Under perfect competition, the costs of advertising, sales-promotion, etc. Perfect competition is often distinguished from pure competition, but they differ only in degree.

The first five conditions relate to pure competition while the remaining four conditions are also required for the existence of perfect competition. That is why, Chamberlin says that perfect competition is a rare phenomenon. A hypothetical model of a perfectly competitive industry provides the basis for appraising the actual working of economic institutions and organisations in any economy. Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others.

The product has no close substitutes. The cross elasticity of demand with every other product is very low. This means that no other firms produce a similar product. The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes, and incomes of his customers.

It means that more of the product can be sold at a lower price than at a higher price. He is a price-maker who can set the price to his maximum advantage. However, it does not mean that he can set both price and output.

He can do either of the two things. His price is determined by his demand curve, once he selects his output level. Or, once he sets the price for his product, his output is determined by what consumers will take at that price.

In any situation, the ultimate aim of the monopolist is to have maximum profits. Under monopoly a firm itself is an industry. A monopolist has full control on the supply of a product.

Hence, under monopoly, the cross elasticity of demand for a monopoly product with some other good is very low. That is why, a monopolist can increase his sales only by decreasing the price of his product and thereby maximise his profit.

The marginal revenue curve of a monopolist is below the average revenue curve and it falls faster than the average revenue curve. This is because a monopolist has to cut down the price of his product to sell an additional unit. Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both the sellers are completely independent and no agreement exists between them.

A seller may, however, assume that his rival is unaffected by what he does, in that case he takes only his own direct influence on the price. If, on the other hand, each seller takes into account the effect of his policy on that of his rival and the reaction of the rival on himself again, then he considers both the direct and the indirect influences upon the price. Thus the duopoly problem can be considered as either ignoring mutual dependence or recognising it. An oligopoly industry produces either a homogeneous product or heterogeneous products.

Main Topics

Privacy Policy

The main factors, which determine the market structure, are: 1. Number of Buyers and Sellers: Number of buyers and sellers of a commodity in the market indicates the influence exercised by them on the price of .

Privacy FAQs

In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors.

About Our Ads

Determinants of market structure 1. Determinants of Market Structure ECONOMICS 2. 1. Government laws andpolicies In some industries, the government controls the degree of competition in the interest of the economy and the consumers. 3. 2. The determinants of market structure are: Number of firms (N), Size of Market (s) and Intensity of Price Competition (t). Before we analyse how each factor affects the market structure, we have to distinguish between the two main types of market. Industries in an economy falls into either one of .

Cookie Info

Although most of this research has dealt with the United States economy, at least some of these structure-performance hypotheses have been confirmed for several other industrial countries as well, indeed, in one test the structure of these relations proved to be identical between two countries, the United Kingdom and United States (Khalilzadeh-Shirazi, , chapter 3). Request PDF on ResearchGate | Determinants of Market Structure | Our findings, as well as the review of previous studies, demonstrate that explaining concentration by number of firms, relative.