Types of Market Structures

Four Types of Market Structures

The purpose is to build an understanding of the importance of market structure. Such market structures refer to the level of competition in a market. Four types of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. 

One thing we should remember is that not all these types of market structures exist. Some of them are just theoretical concepts. There are other determinants of market structures such as the nature of the goods and products, the number of sellers, the number of consumers, the nature of the product or service, economies of scale, etc.

Explain Different Types of Market Structures

The different types of market structures are explained as follows:

  1. Perfect competition market structure: In a perfectly competitive market, the forces of supply and demand determine the number of goods and services produced as well as market prices set by the companies in the market.

  2. Monopolistic competition market structure: Unlike perfect competition, monopolistic competition does not assume the lowest possible cost production. That little difference in the definition leaves room for huge differences in how the companies operate in the market. The companies under a monopolistic competition structure sell very similar products with slight differences they use as the basis of their marketing and advertising.

  3. Monopoly competition market structure: Monopolies and completely competitive markets sit at either end of market structure extremes. However, both minimize cost and maximize profit. Where there are many competitors in perfect competition, in monopolistic markets, there's just one supplier. High barriers to entry into the monopoly market leave a "mono-" or lone company standing so there is no price competition. The supplier is the price-maker, setting a price that increases profits.

  4. Oligopoly competition market structure: Not all companies aim to sit as a single building in a city. Oligopolies have companies that collaborate, or work together, to limit competition and dominate a different market or industry. The companies under oligopoly market structures can be small or large. However, the most powerful firms often have patents, finance, physical resources which control over raw materials that create barriers to entry for new firms.

Four Types of Market Structure and Examples

As we learnt the four types of market structure and examples above, now we are going to know their examples.

Examples of Perfect Competition Market Structure:

  • Foreign exchange markets.

  • Agricultural markets.

  • Internet-related industries.

Examples of Monopolistic Competition Market Structure:

  • Restaurants

  • Hairdressers

  • Clothing

  • TV programmes

Examples of Monopoly Competition Market Structure:

  • Microsoft and Windows

  • DeBeers and diamonds

  • Your local natural gas company.

Examples of Oligopolies Competition Market Structure:

  • Steel industry

  • Aluminium

  • Film

  • Television

  • Cell phone

  • Gas

So, these were the four types of market structure and examples.

Types of Market Structure Economics

The four types of market structure economics differ because of the following characteristics: 

  • The number of producers is huge in the perfect and monopolistic competition.

  • There are only few in oligopoly, and one in monopoly. 

  • The degree of product differentiation.

  • The barriers to entry of new producers

  • The pricing power of the producer 

  • The level of non-price competition (e.g., advertising) are all low in perfect competition, highest in monopoly, moderate in monopolistic competition and high in oligopoly.

Types of Market Structure With Diagram

Here we will be learning types of market structure with a diagram:

1. Perfect competition market structure

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2. Monopolistic competition market structure

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3. Monopoly Market Structure

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4. Oligopolies competition market structure

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Solved Examples

Question: Give an Example for Oligopoly Market Structure?

Answer: The cellular industry is an example of an oligopoly market structure. In the cellular industry, there are 3-5 dominant firms (Airtel, Vodafone, Jio, etc.). These are the price-setters and consumers have a finite choice between these few choices.

Fun Facts

The market structure explains the state of a market concerning competition. Most market forms talk about a homogeneous product. This means that they all make the same kind of product (like sugar, or soap) and that the individual consumer does not care where others buy from. They want to get the cheapest one since all kinds of sugars (or soaps) look the same anyway.

FAQs (Frequently Asked Questions)

Question 1: What are the Elements of Market Structure?

Answer: The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation. These elements somewhat extract concerns that tend to determine some but not all details of a specific concrete market system where buyers and sellers meet and commit to trading. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that customers want, typically subject to the seller's financial need to cover its costs. In other words, competition can place the seller's interests with the buyer's interests and can make the seller reveal his true costs and other private information.

Question 2: How will you Define Market Structures in Economics?

Answer: The 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, but it is important not to place too much force simply on the market share of the existing firms in an industry. Generally, the term "market" refers to a particular place where goods are purchased and sold, but, in economics, the market is used in a wide perspective. Market structure in economics refers to the degree and nature of competition in the market for goods and services. The structures of the market both for goods and services are determined by the nature of competition prevailing in a particular market.