Market Structure and Pricing Decision under Competition

Market Structure and Pricing Decision under Competition 

In economic sense, a market is a system by which buyers and sellers bargain for the price of a product, settle the price and transact their business- buy and sell a product. Personal contact between the buyers and sellers is not necessary. Market does not necessarily mean a place.

Therefore, Market can be defined as the interaction between sellers and buyers of a good (or service) at a mutually agreed upon price.

What makes a market is a set of buyers, a set of sellers and commodity. While buyers are willing to buy and sellers are willing to sell, and there is a price for the commodity.

The nature of competition that a firm’s products face is perhaps the most important factor governing the price of that product. The competition is an indication of the relative positioning of a product in the market in relation to its competitive products. It is an aggregate of the number of buyers, number of sellers, degrees of product differentiation and entry exit barriers. Different combinations of these characteristics yield different types of market structures. Some important market structure are perfect competition, monopolistic competition, monopoly, oligopoly, monopsony, oligopsony etc. The first four structures are most commonly used.

Market Morphology

Markets may be characterized on the basis of the following parameters:

1) Nature of Competition

This refers to number, size and distribution of sellers in any market. There can be market in which very large number of sellers exist and size of an individual seller is very small, whereas there can be another market with only one very large player, without any competitor. These are two extremes, while there can be various combinations between these two levels.

2) Nature of Product

This refers to whether the product is homogeneous or differentiated . A homogeneous product is one that cannot be distinguished from competing products from different suppliers. In other words, the products has essentially the same physical characteristics and quality as similar products from other suppliers. Fruits and vegetables are prime examples of homogeneous substance. Many suppliers offer fruits and vegetables for sale, but regardless of company all brands offer the same end product. There can be a market with large number of sellers selling similar yet somewhat different products like cosmetics, medicines and banking. These products are differentiated products. As is obvious, decisions related to price, output etc. in each such market would be different for these situations.

3) Nature and size of buyers

Any market has two players, a buyer and a seller. Markets can also be categorized on the basis of number and size of buyers. If number of buyers is very large but the size of individual buyer is small, the market will be evenly balanced between buyers and sellers. However, when  number of buyers is small and their size is large, the market is driven by buyer’s preferences.

4) Freedom to enter into or exit from the Market

Some markets may be very difficult to enter, there may be financial restrictions, legal compulsions and technological constraints on entry. At the other extreme, entering a market may be very easy, without any such restriction. In agricultural and allied industries a person or a group of persons may enter with a motive of making profits through farming, without legal, financial or technological constraints. In such  situation, a perfect competition or a monopolistic competition form of market arises.

Types of Market Structure


Type of market

Number of firms

Nature of product

Number of buyers

Freedom of entry and exit


Perfect competition Large no. of firms with identical products Homogeneous (undifferentiated) Very large Unrestricted

Agricultural commodities, shares, unskilled labour

Monopolistic competition

Many firms with real or perceived product differentiation Differentiated Many Unrestricted Retail stores, detergents, tea, toothpaste, T.V. sets etc.
Oligopoly Little or no product differentiation Undifferentiated or Differentiated Few Restricted

Cars, computers,Aluminium, steel universities


A single producer, without close substitute Unique Many Restricted Indian Railways, Microsoft, Electricity etc.
Monopsony Many Undifferentiated or differentiated Single Not applicable

Indian defense industry


  1. Perfect Competition
  2.  Monopolistic Competition
  3. Oligopoly
  4. Monopoly
  5. Monopsony

This is the market situation where there is (a) a single buyer and (b) a large number of sellers. This is common in case of the input market, for example a large number of ancillary units producing giant buyer or a large number of agricultural raw material producers such as those of sugarcane supplying to a single mill (sugar mill) in the area. The term was first introduced by Joan Robinson in her influential book, The Economics of Imperfect Competition, published in 1933.

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