The market is a process where sellers and buyers interact with each other to set the equilibrium price. In the economy, we know the market as a place where companies produce goods on a small scale which must face many competitors who have interests on a large scale.
On the other hand, there is also a market where companies make goods on a large scale, which must face many competitors with the production of goods on a small scale.
Differences in the number and scale of production of various companies in one place are the market structure.
What is Market Structure?
Market structure refers to the characteristics of market organizations that determine the behavior of companies in an industry.
This determines the nature of competition and prices and has implications for the market share and profits earned by the company.
Market structure is important because it affects market outcomes, mainly profits.
It involves the opportunities, motivations, and strategic decisions of economic actors participating in the market. Companies analyze it to explain and predict market results, mainly profits.
For governments, it tells them how to regulate markets, ensures fair competition, and mitigate the harmful effects of cartel-like unfair competition on the economy.
Types of Market Structure
Categorization in the market can take various forms, depending on the factors that support it.
In the book Case & Fair (2008), market structure forms can be grouped into four types: perfect competition market, monopoly market, monopolistic competition market, and oligopoly market. The following is an explanation, along with other styles:
1. Perfect Competition Market
This type of perfect competition market is devoted to competing at the most significant level. It is said to be perfect because the sellers are selling similar goods in the market, and there is no price competition in it.
In addition, sellers can freely enter and exit the market because there are no barriers.
Pure market prices are determined by market mechanisms or levels of supply and demand. An example of a perfectly competitive market is a rice company.
2. Monopoly Market
Unlike perfect competition, a monopoly market has only one seller of a particular item.
it can be understood that these producers will earn profits beyond the ordinary due to barriers to entry into the market and at the same time as price makers.
Imagine an individual company that controls everything, from quotas to prices; that’s the power they enter in a monopoly market. For example, electricity is managed by PT PLN (Persero).
3. Monopolistic Market
This type of market collects many sellers who produce or sell different products, making it a position between perfect competition and monopoly.
The characteristics of this market are the absence of product homogeneity and the freedom for new companies to enter the market. An example of this type of market is fried chicken fast food restaurants such as KFC, Mcdonald’s, and so on.
4. Oligopoly Market
An oligopsony market is dominated by a small number of companies competing with each other. Each player in an oligopoly market has considerable power to influence market prices.
Usually, several giant companies control 70 to 80 percent of all production. An example of an oligopoly market is the smartphone industry.
5. Monopsoni Market
If a monopsony market has only one seller, then a monopsony market has only a single buyer, namely the business actor who automatically controls the demand for the commodity being purchased. An example of this market is a vegetable market in a remote area.
6. Oligopsoni Market
This last type of market has two or more buyers (generally business actors) who control the market in terms of receiving goods or act as the sole buyer for the production of a commodity market.
Typically, raw material is purchased and then resold to the end consumer. Here the buyer has a significant role in determining the price of goods in the market. An example of an oligopsony market is the market for carrots or chilies from village farmers and sold to cities.
Market Structure Factor
The term market structure is a market condition that provides clues about aspects that influence business behavior and market performance.
The factors include the number of sellers and buyers, barriers to entry and exit, product diversity, the distribution system, and market share control.
Simply put, there are categorizations in the market to make it easier to study the market itself. To make it easier, here are some essential factors in market structure:
- Several companies in the market.
- Types of goods traded.
- Is it easy for the company to enter the market?
- The ability of sellers and buyers to influence the market.
- Information and knowledge of sellers and buyers of the market they face.
Market Structure Elements
There are three main elements in the market structure, as follows:
1. Market share
Market share is part of the total demand for an item that reflects consumer groups according to their characteristics, such as income level, age, gender, education, and social status.
Each company has its own market share, and the size ranges from 0 to 100% of the total sellers of the entire market. According to Neo-Classical, the cornerstone of a company’s market position is its market share.
Market share in business practice is the company’s goal/motivation. Companies with a better market share will benefit from product sales and an increase in share price.
2. Concentration
Concentration or centralization is a combination of the market share of oligopoly companies where they are aware of interdependence. This group of companies consists of 2 to 8 companies.
The mixture of market share forms a degree of Concentration in the market. Industry concentration is used to determine the degree of oligopoly structure that occurs.
When the industrial market is more concentrated, relatively the industrial market can create more significant income and faster growth so that the relationship between the concentration ratio and company growth is positive.
Conversely, if the Concentration ratio decreases, revenue growth tends to decrease. However, this does not mean highly concentrated industries have high revenue growth.
c. Barriers to entry
Barriers to entry include the ways or efforts of companies or industry players to enter the market, including everything that allows a decrease in the speed of new competitors.
Barriers to entry are closely related to more potential competition by newcomer competitors. Potential competitors are companies outside the market but have the power to enter and become actual competitors.
Anything that could allow for a decline, opportunity, or speed of entry for a new competitor is a barrier to entry. These barriers cover all legitimate ways of using specific devices