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Market Structures and Their Real

Life Examples in Bangladesh


Submitted To:
Professor M. Nasiruddin
Department of Finance
Faculty of Business Studies
University of Dhaka

Submitted By:
Md. Tabshir Kabir # 29053
Syed Ahasanur Karim Antor # 29079
Mahamudhul Kabir # 29092

Course ID: F-505-A


Course Name: Managerial Economics
MBA (Evening) Program
Semester: Spring 2015

Date of Submission: 26th April 2015

What is a Market?

F505 Report - Market Structures and Their Real Life Examples in Bangladesh

Businesses sell their products to customers in markets. A market is any place where buyers
and sellers meet to trade products - it could really be any place such as a street shop, shops in
a well decorated shopping mall or even a web site. Any business in a marketplace is likely to
be in competition with other firms offering similar products. Some markets are very
competitive, with a number of vendors selling the same kinds of products or services.
Conversely, some markets have low or no competition. The number of buyers and sellers
involved will have a direct bearing on the price of the good or service to be sold, and has
become known as the law of supply and demand. Where there are more sellers than buyers,
the availability of supply will push down prices. If there are more buyers than sellers, the
increased demand will push up prices. The process by which price and output are determined
in the real world is strongly affected by structure of the market.

Market Structure
Market structure refers to the competitive environment in which buyers and sellers of the
product operate. Market structure is best defined as the organizational and other
characteristics of a market. We focus on those characteristics which affect the nature of
competition and pricing. The concept of a market structure is therefore understood as those
characteristics of a market that influence the behavior and results of the firms working in that
market. The main aspects that determine market structures are: the number of agents in the
market, both sellers and buyers; their relative negotiation strength, in terms of ability to set
prices; the degree of concentration among them; the degree of differentiation and uniqueness
of products; and the ease, or not, of entering and exiting the market. There are four basic
types of market structures. They are (1) Perfect competition: many buyers and sellers, none
being able to influence prices. (2) Monopolistic competition: many buyers and sellers who
sell differentiated products. (3) Oligopoly: a few large sellers who have some control over the
prices. And (4) Monopoly: single seller with considerable control over supply and prices.

Figure: Four basic types of market structure

Perfect Competition

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F505 Report - Market Structures and Their Real Life Examples in Bangladesh

Perfect competition is characterized by many buyers and sellers, many products that are
similar in nature and, as a result, many substitutes. The firms that operate in this market are
very many and will sell closely related products. The consumers will be able to differentiate
the different products and their supplier hence it is hard to overcharge consumers. Firms in a
competitive industry produce the socially optimal output level at the minimum possible cost
per unit. Perfect competition means there are few, if any, barriers to entry for new companies,
and prices are determined by supply and demand. Thus, producers in a perfectly competitive
market are subject to the prices determined by the market and do not have any leverage. For
example, in a perfectly competitive market if a single firm decides to increase its selling price
of a good the consumers can just move towards the nearest competitor for a better price,
causing the firm that increases its prices, to lose market share and profits.
Real life example in Bangladesh: A Bangladeshi vegetable market might be an example of
Perfect Competition (though real "perfect competition" doesn't really exist). At the vegetable
market, lots of sellers gather together to try to sell the same wares, and lots of customers try
to buy them with a good knowledge of what
they are buying.

There is little to prevent

someone from joining in on the selling or


quitting the market altogether. If one single
seller changes the price it would not affect the
market as a whole therefore more or less a
single price prevails throughout the market for a
specific vegetable. There is no barrier to enter
or exit the market therefore anyone could enter
into and leave from the market at any time.

Monopolistic Competition
Monopolistic competition is a form of market structure in which there are a large number of
firms that are selling similar but differentiated (by branding or quality) products to the
consumers and therefore are not perfect substitutes. Firms operating under monopolistic
competition usually have to engage in advertising. Firms are often in fierce competition with
other firms and may need to advertise aggressively to let customers know their differences.
Since each monopolistically competitive firm makes a unique product, it is the price maker

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F505 Report - Market Structures and Their Real Life Examples in Bangladesh

and can charge a higher or lower price than its rivals. There are a few barriers to entry for the
new entrants in the market which distinguishes it from monopoly.
Real life example in Bangladesh: Restaurants in Bangladesh is an example of Monopolistic
competitive industry. Every restaurant make their own decisions about pricing and output,
consumers might have knowledge about the restaurants but cannot be sure about it being
perfect matching the knowledge until he/she dines in the restaurant. There is freedom to enter
or exit the market as there are a large number of businesses in this industry. Restaurants are
often in competition with each other offering a similar product or service, and may need to
advertise on a local basis, to let customers know their differences. In the short run super
normal profits maybe possible, but in the long run new similar restaurants would be attracted
towards the industry, because of low barriers to entry, good knowledge and an opportunity to
differentiate. Other examples of monopolistic competition include the banking, tobacco,
saloons, beauty parlor industry etc.

Oligopoly
Oligopoly is the form of market structure where there are only a few firms that make up an
industry. This group of firms has control over the price and like monopoly; an oligopoly has
high barriers to entry. The products that the oligopolistic firms produce are often nearly
identical and therefore the companies which are competing for market share are
interdependent as a result of market forces. For example let us assume that an economy
needs only 1000 products. Company A produces 500 and its competitor Company B produces
the other 500. The prices of the two brands will be interdependent and therefore similar. So if
Company X starts selling the product at a lower price, it will get a greater market share
thereby forcing Company Y to lower its prices as well.
Real life example in Bangladesh: Telecom industry of
Bangladesh is Oligopoly. There are only a few
companies in Bangladesh operating in this sector
therefore even a slight change in pricing of one company
forces other companies to change their profit in order to
retain their market share. There is a sense of
interdependence in this industry the companies give identical services like same features with
almost the same input. New companies can enter the industry but that would be very tough.

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F505 Report - Market Structures and Their Real Life Examples in Bangladesh

Monopoly
Monopoly is a market structure in which there is only one producer or seller for a product. In
other words, the single business is the industry and as a result there are no close substitutes
for the monopolists market offering. Entry into such a market is restricted due to high costs
or other factors which may be economic, social or political. Another reason for the barriers
against entry into a monopolistic industry is that oftentimes one entity has the exclusive rights
to a natural resource. For example, a government can create a monopoly over an industry that
it wants to control, such as electricity, water and other utility services. Therefore the one in
monopoly is the price maker. The price of the commodity is decided by the monopolist.
However the general perception is that the marginal revenue should be equal to the marginal
cost.
Real life example in Bangladesh: In the context of Bangladesh there are a large number of
sectors which can be characterized as monopoly market structure. These are Water supply
(WASA), Railways, Electricity supply etc. For
the purpose of this report the railways will be
discussed. Firstly railway service in Bangladesh
has the monopoly in the market because of the
support of the government. Thus there is single
seller in the market for the services. Secondly
the price maker for the railways is the
government. Thus the government decides what
the prices are to be set. Railways have their own segment in the transportation thus it does not
have any close substitutes when the prices and facilities are to be considered. Thus the
railways are not having any close substitutes.
Lastly the entry is restricted. There can be no
competition to the railways in Bangladesh. The
new entrants are not allowed. This is because if
the government loses control over this segment
the public might be exploited. Thus to protect
the public from increased burden of fares the
government

has

maintained

monopoly of

railways by having full control over it and not allowing new entrants in the market.

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