Market Structure is defined as follows:
The term market structure refers to the number of firms in an industry. There are several types of market structures; there is perfect competition, imperfect competition, oligopolies, duopolies, and monopolies. In perfect competition, there are a large number of small firms in the industry, each producing identical products, there are a large number of buyers, there is complete freedom of entry, and the firms often have perfect knowledge of market conditions. In an imperfect competition, there are quite a large number of firms but each firm can provide different products, there is complete of entry and profit can be abnormal. Oligopolies and duopolies feature only a few firms that dominate their market and entry is often difficult but achievable. In a monopoly, one firm supplies 25 per cent or more of a market and entry is almost impossible.
The degree to which a market or industry can be described as competitive depends on how many suppliers are seeking the demand of consumers and the freedom with which new businesses can enter and exit the market. The competition ranges from highly competitive markets where there are many sellers, each of whom has little control over the market price, to a situation of pure monopoly where a market or an industry is dominated by one single supplier who enjoys considerable control over setting prices, unless subject to some form of regulation by the government. These monopolised markets are often described as having imperfect competition, part of what makes them so successful is the fact that they show economies of scale. These occur when mass producing a good, results in lower average cost. There are two types of economies of scale, internal and external. Internal being economies made within a firm as a result of mass production. As the firm produces more and more goods, the average cost begins to fall. This could be due to technical economies i.e. large companies can use expensive machinery intensively, managerial economies made in the administration of a large firm, i.e. employing specialist people for jobs like accountants etc. The larger companies also have the benefit of financial economies as they can borrow money at lower rates and they can often source supplies etc at lower costs due to bulk buying. External economies are made outside the firm as a result of its location, for example, the area contains a skilled work force or has a good transport network.
Monopolies or imperfect competition markets often achieve abnormal profit margins and due to this, there is often competition waiting around the corner. Competition is encouraged as problems occur when the market structure within an industry becomes monopolistic. Due to these problems, these markets are often regulated. Regulation means that rules are set by the government or agencies that seek to control the operation of firms who may have monopoly power in their own industry. The regulation is designed to deal with the problem of market failure. Monopoly power may lead to consumers being exploited i.e. high prices charged due to their being no other alternative, leading to excess profits being made by suppliers in the market. In terms of regulation of monopoly, the government attempts to prevent operations that are against the public interest or anti-competitive practices.
To make competition fair, the European Union introduced The Competition Commission (CC), a public body established by the Competition Act of 1998, formerly known as the Monopolies and Mergers Commission; it came into being on 1st April 1999. The Competition Commission has two main roles, reporting on referrals made by the Director General of Fair Trading, the Department of Trade and Industry and the main utility regulators and hearing appeals against prohibitions under the Competition Act 1998. The Prohibitions of the CC fall into two categories, the anti competitive agreements, fixing purchasing and selling prices, limiting production and sharing supply sources etc and the abuse of dominant market position which is where a firm has over 40% of the market and could impose unfairly high selling or purchasing prices.
The utilities market is the largest market to be regulated, for example gas or telephone supplies. Take British Gas, the company was privatised in 1986 which created a substantial monopoly power. To regulate the utility it was necessary to set up the Office of Gas Supply (OFGAS). To try to combat the monopoly power OFGAS introduced regulations such as the gas release program, which required British Gas to sell to other shippers at a price determined by costs. They also introduced structure to price increases, they set the rule that they could only increase prices, if the RPI increases but only by a fraction of this, prices can go up in line with gas costs, minus a factor or prices can go up in line with costs of improvement in energy efficiency. The introduction of regulation on the gas market has meant, overall competition in the gas supply market is developing well. Ninety six percent of customers are aware of their ability to choose an alternative gas supplier and twenty five percent have switched supplier. The levels of customers switching is increasing weekly. The number of rival suppliers to British Gas is well in excess of that required for competition and discounts for switching or duel fuel discounts are widely available now reducing price for the consumer. Stephen Byers, Secretary of State at the Department Of Trade and Industry said in November 1999, "The Government's policies are designed to put more power in the hands of consumers. For energy competition to work properly, markets must be genuinely open with strong, well-informed customers. We have already secured for the UK the most open energy markets in the world. Five million households have switched gas supplier, saving around £65 each, while in electricity, four million have switched, saving around £20 a year each”. This example set by OFGAS shows that the regulation of the utilities market is necessary and beneficial for the consumer and for freedom of competition within the market.
To conclude, the main aim of EU competition policy is to increase economic well-being by promoting competition and creating a deeper European single market which exceeds national boundaries. The potential gains from increased market competition are lower prices for consumers, a greater discipline on producers/suppliers to keep their costs down, improvements in technology, with positive effects on production methods and costs, a greater variety products or choice, and improvements to the quality of service for consumers. Without the Competition policy in place who knows how companies would take advantage of the power they hold in their market and how much profit they would demand frpm their production or profit.
Bibliography
Begg David and colleagues (2001) Foundations Of Economics, Berkshire: McGraw-Hill Publishing
