Part One. Market Structure: From Monopolies to Competition. Who Can Sell What to Whom?

• Author: Scott Hempling
• Pages: 11-12

11

A market is a place where sellers and buyers meet to exchange goods or services for value.

A market is dened by geography and product, viewed from the customer’s perspective:

vegetarian restaurants in downtown Baltimore, non-rm wholesale electricity in New

England, rm transportation of wholesale gas in the Midwest, wireless service in Wis-

consin. A market can also have a time element, when time is essential to the consumer:

restaurants serving Sunday brunch, taxi service available after extra-inning baseball, rm

gas transportation needed for winter weekdays.

Market structure, in turn, describes (a) the geographic area in which transactions

occur; (b) the products and services being sold in that geographic area; (c) the identities,

characteristics and market shares of the sellers and buyers of those products and services

in that geographic area; and (d) the entry costs and entry barriers, including any “bottle-

neck facilities”—assets essential for competition, controlled by one competitor but not

economically duplicable by other competitors.

In the abstract, there are three types of market structures: perfect competition (many

sellers, with none able to inuence price or supply because customers can freely shop);

monopoly (single seller able to control price and supply); and oligopoly (small number of

sellers able to inuence price and supply). The same concepts exist from the buyer side:

Monopsony and oligopsony are markets with a single buyer or few buyers, respectively.

In reality, the spectrum from perfect competition to monopoly or monopsony has many

possible points. A given market’s location on that spectrum depends on facts: the num-

ber of buyers and sellers, their relative shares of the sales made, their control of resources

essential to competitive viability (such as raw materials and transportation), buyers’ access

to alternatives, and the ease with which sellers can enter and exit.

Given this range of possibilities, policymakers use law to shape market structures to their

preferences. If they prefer a monopoly structure, they enact laws and rules that determine

its features: the process for granting the franchise; the franchisee’s powers, responsibilities

PART ONE

Market Structure

From Monopolies to Competition—

Who Can Sell What to Whom?

ENV Hempling Pub Util Final.indd 11 8/7/13 4:37 PM