4 DETERMINANTS OF MARKET STRUCTURE

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Market structure can be defined as the way and manner in which the supply of goods is organized in a market.

Four factors determine the market structure, namely, the number of buyers, the number of sellers, the degree of product differentiation, and ease of entry.

1. Number of sellers: This is one of the most important determinants of market structure.

If there are a large number of sellers in a market, then each seller is not in a position to influence the market price. 

Such a market is either a perfectly competitive market or a monopolistic competitive market.

On the other hand, if there are few sellers, then each seller can exert control over the market supply and such a market is an oligopoly.

If there is only one seller in the market, then the market is a monopoly.

2. Degree of product differentiation: The degree of product differentiation determines whether the products sold in a market are identical or different, as well as the price at which they will be sold.

Businesses cannot charge higher prices than competitors if the goods provided in a market are identical and homogeneous because they risk losing customers to rivals.

The market is therefore perfectly competitive.

On the other hand, if the goods in a market are slightly differentiated, then each firm is free to set prices that are higher or lower than rivals.

Most markets with slightly differentiated goods are monopolistic competitive.

Furthermore, a company can charge higher prices to customers and is considered a monopoly if the products it sells in the market have no close substitutes.

3. Ease of entry: Another factor to consider when determining market structure is how easy or difficult it is to enter the market.

If it is simple to enter a market, for example, this indicates that perfect competition exists.

Where it is very difficult to enter a market, then an imperfectly competitive market exists.

4. Numbers of buyers: If there is only one buyer of a good, then such a market is a monopsony.

A duopsony exists when two buyers exert large control over a market price of goods.

When few buyers exert great control over the market price, such as an oligopsony.

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