Market structure
Market structure is best defined as the organisational and other characteristics of a
market.1 They dictate the degree of risk to business operations; a business needs to
understand their market structure to be able to strategically plan.
Perfect competition is the market structure in which firms are price takers from a
homogenous product. It describes a market structure whose assumptions are strong
and therefore unlikely to exist in most real-world markets.2
Imperfect competition occurs in a market when one of the conditions in a perfectly
competitive market is left unmet. This type of market is very common. 3
Oligopoly is the state of limited competition in when a market is differentiated by a
small number of producers or sellers. Examples of oligopolies are the tobacco
market or the wireless telecommunication services.4
An oligopoly is an industry which is dominated by a few firms. In this market, there
are a few firms which sell homogeneous or heterogenous products. A homogeneous
product is one that cannot be distinguished from competing products from different
suppliers. Whereas heterogenous products are products with attributes that are
significantly different from each other, which makes it difficult to substitute
one product for another. Firms under oligopoly are interdependent.
Interdependence means that the actions of one firm affect the actions of other
firms. A firm considers the action and reaction of the rival firms while determining
its price and output levels. A change in output or price by one firm evokes a reaction
from other firms operating in the market. As there is complete interdependence
amongst firms, instead of independent price and output strategy, oligopoly firms
prefer group decisions that will protect the interest of all the firms. Group
Behaviour means that firms tend to behave as if they were a single firm even
though individually, they retain their independence. Due to severe competition and
interdependence of the firms, various sales promotion techniques are used to
promote sales of the product. A firm under oligopoly relies more on non-price
competition. It is guaranteed that with a few players in the market there will always
be intense competition amongst sellers. Any action taken by a firm will have a
considerable impact on its rivals. Therefore, every seller must keep an eye on over
its rivals and be ready with a counter back. Selling costs are more important under
oligopoly than under monopolistic competition. Under oligopoly, there are few large
firms. Each firm produces a significant portion of the total output. There exists
competition among different firms and each firm tries to manipulate both prices and
volume of production to outsmart each other. There is a lack of uniformity among
the firms in terms of their size, some are big, and some are small. Since there is a
1 Geoff Riley. (2019). Key Summary on Market Structures. Available: https://www.tutor2u.net/economics/reference/key-summary-on-market-structures. Last accessed 25-11-2019.
2 Geoff Riley. (2019). Perfect Competition. Available: https://www.tutor2u.net/economics/reference/perfect-competition-revision-presentation. Last accessed 25-11-2019.
3 GREG DEPERSIO. (2019). Perfect vs. Imperfect Competition: What's the Difference?. Available: https://www.investopedia.com/ask/answers/032515/what-difference-between-perfect-and-imperfect-
competition.asp. Last accessed 25-11-2019.
4 Investopedia. (2019). Oligopoly. Available: https://www.investopedia.com/terms/o/oligopoly.asp. Last accessed 02-12-2019.
,smaller number of firms, any action taken by one firm has a considerable effect on
the other. In addition to that the firms can easily exit the industry whenever it wants
but must face certain barriers to entering it. These barriers could be Government
license, Patent and large firm’s economies of scale.
Number of firms
Market share represents the percentage of an industry, or a market's total sales that
is earned by a company over a specified time period. Market share is calculated by
taking the company's sales over the period and dividing it by the total sales of the
industry over the same period. 5
The UK supermarket sector is increasingly progressing. It is mainly dominated by
four firms, known as the big four. The big four consists of Tesco’s, Sainsbury’s,
Morrison and Asda. The supermarket sector is oligopolistic.
The market share compares the sales against the total market.
The chart above represents Tesco, Asda, Sainsbury’s and Morrison’s as the top for
market leaders in this market. Tesco’s is the market leader; market leader refers to
a business that has the highest market share. My business, Sainsbury’s comes joint
in second with Asda, they wouldn’t be described as a market leader as they don’t
have majority of the shares.
5 ADAM HAYES. (2019). Market Share. Available: https://www.investopedia.com/terms/m/marketshare.asp. Last accessed 28-11-2019.
, From January 2015 to August 2019 there has been a decline in trend for all four
businesses whilst the decrease doesn’t appear to be large it is a big. This decrease
shows a declining in sales. A decline in sales means there is a decline in profits.
In 2014-2015 Sainsbury’s underlying profit was £681 million however in 2018-2019
there was a 6.75% decrease putting their underlying profit to £635 million. 6 As
Tesco’s market share is decreasing their power and influence is also declining.
Therefore, this means that they are in control in supplier’s prices and it’s difficult to
negotiate prices down. If they’re buying prices aren’t kept to minimum business to
customer prices will increase as they want to maintain high profits. Companies like
Sainsbury’s will do this through sales revenue so instead of increasing the quantity
sold they will increase the selling price.
Sainsbury’s will be charged by suppliers more than Tesco’s. Therefore, they won’t
benefit from both buys and there will be a huge decrease in volume. They also won’t
have much power and influence.
However, as Tesco’s and Sainsbury’s oligopolistic businesses overall the customers
will be charged the same as if each business fluctuates the prices the other business
will do the same.
A cartel is a grouping of producers that work together to protect their interest.
Cartels are created when a few large producers decide to cooperate with respect to
aspects of the market. 7
Once these cartels are formed, they can fix prices for members so that competition
on price is avoided. However, cartels have negative effects on its consumers.
All members can raise prices together which reduces the elasticity for any single
demand. There is also a lack of transparency, members may agree to high prices or
withhold information such as hidden charges in credit card transactions.
Price leadership occurs when a Pre-eminent farm set the prices of goods and
services in its markets. This control can leave the leading firms rivals with little
choice but to follow its lead and match the prices if they are to hold on their market
share price leadership is common in oligopoly is such as supermarket industries in
which dominant company set the prices and other supermarkets feel compelled to
adjust the prices to match. 8
A price taker is an individual company that must accept prevailing prices in a
market, lacking to market share to influence market price on its own. All participants
are priced takers in a market a perfect competition or one in which all companies
sell an identical product; there are no barriers of entry. 9
6 Sainsbury’s. (2019). Group measures. Available: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/annual-reports/sainsburys-ar2019.pdf. Last
accessed 02-12-2019
7 economics online. (2019). Cartels. Available: https://www.economicsonline.co.uk/Business_economics/Cartels.html. Last accessed 02-12-2019.
8 CARLA TARDI. (2019). Price Leadership. Available: https://www.investopedia.com/terms/p/price-leadership.asp. Last accessed 02-12-2019.
9 ADAM HAYE. (2019). Price-Taker. Available: https://www.investopedia.com/terms/p/pricetaker.asp. Last accessed 02-12-2019.
Market structure is best defined as the organisational and other characteristics of a
market.1 They dictate the degree of risk to business operations; a business needs to
understand their market structure to be able to strategically plan.
Perfect competition is the market structure in which firms are price takers from a
homogenous product. It describes a market structure whose assumptions are strong
and therefore unlikely to exist in most real-world markets.2
Imperfect competition occurs in a market when one of the conditions in a perfectly
competitive market is left unmet. This type of market is very common. 3
Oligopoly is the state of limited competition in when a market is differentiated by a
small number of producers or sellers. Examples of oligopolies are the tobacco
market or the wireless telecommunication services.4
An oligopoly is an industry which is dominated by a few firms. In this market, there
are a few firms which sell homogeneous or heterogenous products. A homogeneous
product is one that cannot be distinguished from competing products from different
suppliers. Whereas heterogenous products are products with attributes that are
significantly different from each other, which makes it difficult to substitute
one product for another. Firms under oligopoly are interdependent.
Interdependence means that the actions of one firm affect the actions of other
firms. A firm considers the action and reaction of the rival firms while determining
its price and output levels. A change in output or price by one firm evokes a reaction
from other firms operating in the market. As there is complete interdependence
amongst firms, instead of independent price and output strategy, oligopoly firms
prefer group decisions that will protect the interest of all the firms. Group
Behaviour means that firms tend to behave as if they were a single firm even
though individually, they retain their independence. Due to severe competition and
interdependence of the firms, various sales promotion techniques are used to
promote sales of the product. A firm under oligopoly relies more on non-price
competition. It is guaranteed that with a few players in the market there will always
be intense competition amongst sellers. Any action taken by a firm will have a
considerable impact on its rivals. Therefore, every seller must keep an eye on over
its rivals and be ready with a counter back. Selling costs are more important under
oligopoly than under monopolistic competition. Under oligopoly, there are few large
firms. Each firm produces a significant portion of the total output. There exists
competition among different firms and each firm tries to manipulate both prices and
volume of production to outsmart each other. There is a lack of uniformity among
the firms in terms of their size, some are big, and some are small. Since there is a
1 Geoff Riley. (2019). Key Summary on Market Structures. Available: https://www.tutor2u.net/economics/reference/key-summary-on-market-structures. Last accessed 25-11-2019.
2 Geoff Riley. (2019). Perfect Competition. Available: https://www.tutor2u.net/economics/reference/perfect-competition-revision-presentation. Last accessed 25-11-2019.
3 GREG DEPERSIO. (2019). Perfect vs. Imperfect Competition: What's the Difference?. Available: https://www.investopedia.com/ask/answers/032515/what-difference-between-perfect-and-imperfect-
competition.asp. Last accessed 25-11-2019.
4 Investopedia. (2019). Oligopoly. Available: https://www.investopedia.com/terms/o/oligopoly.asp. Last accessed 02-12-2019.
,smaller number of firms, any action taken by one firm has a considerable effect on
the other. In addition to that the firms can easily exit the industry whenever it wants
but must face certain barriers to entering it. These barriers could be Government
license, Patent and large firm’s economies of scale.
Number of firms
Market share represents the percentage of an industry, or a market's total sales that
is earned by a company over a specified time period. Market share is calculated by
taking the company's sales over the period and dividing it by the total sales of the
industry over the same period. 5
The UK supermarket sector is increasingly progressing. It is mainly dominated by
four firms, known as the big four. The big four consists of Tesco’s, Sainsbury’s,
Morrison and Asda. The supermarket sector is oligopolistic.
The market share compares the sales against the total market.
The chart above represents Tesco, Asda, Sainsbury’s and Morrison’s as the top for
market leaders in this market. Tesco’s is the market leader; market leader refers to
a business that has the highest market share. My business, Sainsbury’s comes joint
in second with Asda, they wouldn’t be described as a market leader as they don’t
have majority of the shares.
5 ADAM HAYES. (2019). Market Share. Available: https://www.investopedia.com/terms/m/marketshare.asp. Last accessed 28-11-2019.
, From January 2015 to August 2019 there has been a decline in trend for all four
businesses whilst the decrease doesn’t appear to be large it is a big. This decrease
shows a declining in sales. A decline in sales means there is a decline in profits.
In 2014-2015 Sainsbury’s underlying profit was £681 million however in 2018-2019
there was a 6.75% decrease putting their underlying profit to £635 million. 6 As
Tesco’s market share is decreasing their power and influence is also declining.
Therefore, this means that they are in control in supplier’s prices and it’s difficult to
negotiate prices down. If they’re buying prices aren’t kept to minimum business to
customer prices will increase as they want to maintain high profits. Companies like
Sainsbury’s will do this through sales revenue so instead of increasing the quantity
sold they will increase the selling price.
Sainsbury’s will be charged by suppliers more than Tesco’s. Therefore, they won’t
benefit from both buys and there will be a huge decrease in volume. They also won’t
have much power and influence.
However, as Tesco’s and Sainsbury’s oligopolistic businesses overall the customers
will be charged the same as if each business fluctuates the prices the other business
will do the same.
A cartel is a grouping of producers that work together to protect their interest.
Cartels are created when a few large producers decide to cooperate with respect to
aspects of the market. 7
Once these cartels are formed, they can fix prices for members so that competition
on price is avoided. However, cartels have negative effects on its consumers.
All members can raise prices together which reduces the elasticity for any single
demand. There is also a lack of transparency, members may agree to high prices or
withhold information such as hidden charges in credit card transactions.
Price leadership occurs when a Pre-eminent farm set the prices of goods and
services in its markets. This control can leave the leading firms rivals with little
choice but to follow its lead and match the prices if they are to hold on their market
share price leadership is common in oligopoly is such as supermarket industries in
which dominant company set the prices and other supermarkets feel compelled to
adjust the prices to match. 8
A price taker is an individual company that must accept prevailing prices in a
market, lacking to market share to influence market price on its own. All participants
are priced takers in a market a perfect competition or one in which all companies
sell an identical product; there are no barriers of entry. 9
6 Sainsbury’s. (2019). Group measures. Available: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/annual-reports/sainsburys-ar2019.pdf. Last
accessed 02-12-2019
7 economics online. (2019). Cartels. Available: https://www.economicsonline.co.uk/Business_economics/Cartels.html. Last accessed 02-12-2019.
8 CARLA TARDI. (2019). Price Leadership. Available: https://www.investopedia.com/terms/p/price-leadership.asp. Last accessed 02-12-2019.
9 ADAM HAYE. (2019). Price-Taker. Available: https://www.investopedia.com/terms/p/pricetaker.asp. Last accessed 02-12-2019.
