Types of Market Structure

What does Market Structure Mean?

Market structure means how firms are differentiated and categorized based on the type of goods they sell (homogeneous/heterogeneous) and how their functions and operations are affected by external factors and elements. Market structure makes it easier to understand the different characteristics of diverse markets. In this article, we will discuss the four different types of market structures namely perfect competition, monopolistic competition, monopoly, and oligopoly.

 

Types of Market Structure

The four different types of market structure are discussed below:

  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 of 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.


Types of Market Structure Examples

The examples of four different types of market structure are discussed below:

Perfect Competition Examples

  • Foreign exchange markets.

  • Agricultural markets.

  • Internet-related industries.

 

Monopolistic Competition Examples

  • Restaurants

  • Hairdressers

  • Clothing

  • TV programs

 

Monopoly Competition Examples

  • Microsoft and Windows

  • DeBeers and diamonds

  • Your local natural gas company.

 

Oligopoly Competition Examples

  • Steel industry

  • Aluminum 

  • Film

  • Television

  • Cell phone

  • Gas


Characteristics of Types of Market Structure

The different characteristics of four types of market structure are as follows:

Perfect Competition

  • Under perfect competition, there are a large number of buyers and sellers in the market.

  • Uner competition, the firms have no control over the price. They have to sell the products at a price predetermined by the industry.

  • Under perfect competition, firms are free to exit and enter the market at any point in time. This means that there is no obstruction for a new firm to produce a similar product produced by the existing firms in the market

  • Under perfect competition, firms can't charge high prices as both sellers and buyers have perfect knowledge about the goods and their prices.

  • Under perfect competition, The products offered by different firms are homogeneous. This implies that buyers do not have any basis to prefer the goods of one seller over the goods of another seller. The goods are similar in terms of quality, size, packing, etc.


Monopoly Competition

  • Under Monopoly competition, there is only one firm producing the product. Being a single firm, there is complete control over the supply and price of the product.

  • There is no substitute for the products produced by monopolistic firms.

  • Under Monopoly competition, there is a strong barrier for the other firms to enter the market. Also, once a monopoly firm starts producing the product, no other firms produce the same.

  • Being a single seller of the product, the monopolistic firm has full control over the price of the product.

  • The monopolist firm can sell different quantities of a similar product to a consumer at different prices or the same quantity to different consumers at different prices by judging the standard of living of the consumer.


Monopolistic Competition

  • Under monopolistic competition, a large number of firms sell closely related products.

  • Product Differentiation is an important characteristic of Monopolistic Competition. This differentiation could be based on quality, packaging, color, etc. For example, you must have seen different brands of shampoos. Even if they look different and have different fragrances, the product has the same use.

  • Under monopolistic competition, firms spend large amounts of money on advertisements of their product to attract more and more customers. Every firm tries to promote its product through an advertisement for which it bears some extra cost over and above its cost of production. 

  • Under Monopolistic Competition, firms compete with each other without changing prices. They may initiate different program schemes, gift schemes, or promotional schemes Thus, firms compete in every possible way to attract a large number of customers and gain maximum possible market share.


Oligopoly Competition

  • In the oligopoly market, once prices of the products are fixed by the firms it is normally not changeable. Hence, the price of the products is rigid.

  • As there are very few firms in the oligopoly market, there is a tendency among them to collaborate to avoid competition. They secretly meet each other to negotiate price and quantity. The aim behind this is to maximize profit.

  • In the oligopoly market, selling costs such as advertisement, promotion, sales, etc to sell the product are determined by the firms.

  • Interdependence is an important feature of the oligopoly market. As the number of firms in this market is few, any strategy regarding the change in price, output, or quality of a product depends on the rival’s reaction to its success. Thus, the success of a price reduction policy by one company) will depend on the reaction of its rival. For example, if the company decides to lower the price per bottle from Rs 12 to Rs 10, the effect of this step on demand for Pepsi will depend on the counter-strategy of the other company i.e. Coke. If Coke decides to lower the price from Rs 12 per bottle to Rs. 8 per bottle, demand for Pepsi may decrease even below its initial level.


Comparison of Types of Market Structure

Points of Comparison

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of firms in the market

Many

Many, but lesser than perfect competition

Few

One

Product Characteristics

Homogeneous

Differentiated

Differentiated

Single

Barriers To Entry

None

Slight

High

Very High

Firms Ability To Control Price

None

Slight

Slight

High

Examples

Farm products such as corns and wheat

Retail stores specifically clothing centers



Steel, airlines, automobiles, aircraft manufacturers 

Utilities such as water, gas, cable television, etc


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FAQs (Frequently Asked Questions)

1. What are the Elements of Market Structure?

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.

2. How will you Define Market Structures in Economics?

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.

3. What does the term oligopoly mean?

The term Oligopoly is derived from the two Greek words namely Oligoi and Poly. The ‘oligos’ means few and ‘poly’ means control. Therefore, oligopoly refers to a market structure in which few sellers are dealing either with homogeneous or differentiated products. The aviation and telecommunication industries are the perfect example of an oligopoly market structure.

4. What are the different factors that determine the market structure?

The different factors that determine the market structure include the following:

  • The number of buyers and sellers in the market.

  • The pricing power of the sellers

  • The degree of product differentiation

  • The relative strength of the firm to enter and exit the market.

  • The degree of non-price competition

5. How does the government regulate market structure?

The government regulates the market structure in different ways, namely removing barriers to entry in the market, restrictions on industry concentration, and vertical integration. Governments may also regulate market conduct, which includes controlling firms' pricing and production policies or providing incentives for appropriate conduct.

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