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:
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.
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.
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.
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
FAQs on Types of Market Structures: Features and Examples
1. What is a market structure in economics and what are its key features?
In economics, a market structure refers to how different industries are classified and differentiated based on the degree and nature of competition for goods and services. It describes the characteristics of a market that influence the behaviour and outcomes of the firms operating within it. The key features that determine a market structure are:
- The number and size of buyers and sellers.
- The degree of product differentiation (whether products are identical or unique).
- The ease or difficulty for new firms to enter or exit the market (barriers to entry).
- The extent of control firms have over the price.
- The level of non-price competition, such as advertising and branding.
2. What are the four main types of market structures with examples?
The four primary market structures are:
- Perfect Competition: A market with many buyers and sellers, identical products, and no barriers to entry. Example: Agricultural markets, like for wheat or corn, where individual farmers cannot influence the market price.
- Monopolistic Competition: A market with many sellers offering differentiated products. Example: Restaurants, hair salons, and clothing stores, where brands compete on quality, style, and service.
- Oligopoly: A market dominated by a few large firms. Example: The telecommunications industry (Airtel, Jio, Vi) or the airline industry.
- Monopoly: A market with a single seller of a unique product with high barriers to entry. Example: Your local natural gas company or Indian Railways.
3. Why is a firm in a perfectly competitive market considered a 'price taker'?
A firm in a perfectly competitive market is a 'price taker' because it has no power to influence the price of the product it sells. This is due to two main reasons: first, there are a very large number of sellers, so the output of any single firm is a negligible fraction of the total market supply. Second, all firms sell a homogeneous (identical) product. If one firm tries to charge a higher price, buyers will simply switch to another seller, causing the first firm to lose all its customers.
4. How does product differentiation give firms in monopolistic competition some control over price?
Product differentiation is the key factor that gives firms in monopolistic competition some degree of market power. Unlike in perfect competition, products are not identical. Firms differentiate their offerings through:
- Branding and advertising
- Physical differences (quality, design, features)
- Customer service
- Location
5. What is the role of 'interdependence' in an oligopoly market structure?
Interdependence is the most significant feature of an oligopoly. Since the market is dominated by only a few large firms, the actions of one firm (regarding price, output, or advertising) directly and significantly impact its rivals. Therefore, each firm must carefully consider the potential reactions of its competitors before making any strategic decision. This mutual interdependence often leads to price rigidity, where firms are hesitant to change prices, or strategic behaviours like price wars or collusion.
6. How do high barriers to entry allow a monopoly to earn supernormal profits in the long run?
A monopoly can earn supernormal profits (profits above the normal rate of return) in the long run primarily because of high barriers to entry. These barriers prevent new competitors from entering the market and competing away the excess profits. Common barriers include:
- Patents and copyrights that grant exclusive rights.
- Control over a crucial natural resource.
- Government licenses and regulations.
- Extremely high initial setup costs (natural monopoly).
7. What is the main difference between a monopoly and monopolistic competition?
The main differences lie in the number of sellers and the nature of the product. A monopoly consists of a single seller offering a unique product with no close substitutes. In contrast, monopolistic competition involves a large number of sellers offering differentiated products that are close substitutes for one another. Consequently, a monopolist has significant control over price, while a firm in monopolistic competition has only limited control.
