Market Structures : Meaning and Types

Introduction: Market Structures

A market structure is a system of classified goods and services that are exchanged between buyers and sellers. It can be defined as the way in which an economy allocates resources to satisfy the wants of consumers. We can also see that there are various factors that determine the type of market structure. These factors include product differentiation, costs, economies of scale, economies of scope and barriers to entry.

Types of Market Structure

• Perfect Market or Pure Market
  • Perfect Competition Market
• Imperfect Market
  • Monopoly Market
  • Oligopoly Market
  • Monopolistic Competition Market

Perfect Market Structure

The perfect market is a market in which the demand for a product or service is always greater than the supply. A perfect market is one where there are no barriers to entry, so that anyone can sell their product or service.

Perfect Competition Market

The perfect competition market is a type of market in which there are many competitors, but no one dominates. A perfect competition market also eliminates the uncertainty of demand, which means that it’s easier for companies to plan their production and marketing strategies. Perfect competition markets are highly competitive markets where there are many sellers competing to sell their product.

Characteristics of Perfect Competition

1. There is generally a large number of buyers and sellers.
2. Buyers and sellers sell identical products.
3. Each buyer and seller acts independently.
4. Sellers and buyers are reasonably well-informed about products and prices.
5. Competitors are free to enter into the market, conduct business or leave the market
6. Firms are “price-takers”.
7. Market demand and market supply determine the market price and quantity.

Imperfect Market Structure

An imperfect market refers to any economic market that does not meet the rigorous standards of the hypothetical perfectly or purely competitive market. Imperfect market structure is a competitive market situation where there are many sellers but they are selling heterogeneously.There are three forms of imperfect market structure:

• Monopoly Market
• Oligopoly Market
• Monopolistic Competition Market

Monopoly Market

“Mono” indicates single, hence monopoly market is a market where there is only one seller. In such markets, sellers have a good control as they can set prices and control the supply of goods in the market. Such markets are created when barriers to entry are very high and it is difficult or impossible for new companies to enter and compete in the market.

Characteristics of Monopoly Market

1. There is one seller of a particular product.
2. There are barriers to entry of the market to prevent competition.
3. Such markets have high barriers to entry.
4. This market has high profit due to no competition.
5. As there is only one player in the market, it is easy to achieve economies of scale.
6. Here, sellers are market price makers.
7. There are no substitute products in a monopoly market.

Types of Monopolies

1. Natural Monopoly: Market situation where the costs of production are minimized by having a single firm produce the product.
2. Legal Monopoly: It is called a de jure monopoly. It is a form of monopoly where the government owns and operate the monopoly
3. Technological Monopoly: It is based on ownership of a manufacturing method, process or other scientific advance.
   1. Patent: Exclusive right to manufacture
   2. Copyright: Author and Art
4. Geographic Monopoly: The monopoly due to the geographic advantage i.e. either presence in any geographic area or absence in any geographic area.

Oligopoly Market

The term oligopoly is derived from the Greek words “oligos” meaning “few” and “poly” meaning “many”. In this market, there is a large number of sellers but only two or three companies are really dominant.

Oligopolies are most often found in highly competitive markets where there are few large firms that can afford to take on the high costs of research and development.

Characteristics of Oligopoly Market

1. There are very large sellers that dominate the industry and compete with one another.
2. When one firm acts, others tend to follow. Actions of competitors are highly interdependent.
3. Firms are “ price-makers”
4. Entry barrier in such a market is high.
5. Oligopoly market is a highly efficient market.

Monopolistic Competition Market

Monopolistic competition is a market circumstance in which many vendors compete for similar products which are not a perfect substitute. It is the combination of a monopoly market plus a perfect competition.

Characteristics of Monopolistic Competition Market

1. There are a large number of sellers sharing a small portion of market share.
2. A firm can enter and exit in the industry easily.
3. Each seller/manufacturer tries to produce differentiated products to make their approach unique.
4. Beside  price competition, there are some other factors where sellers compete i.e. advertising, product development, features, services etc.

Overview of Market Structure

	Perfect Competition	Monopoly	Oligopoly	Monopolistic Competition
# of firms	Many	One	2 or more	Many
Average size of firms	Small	Very Large	Large	Small to Medium
Nature of product	Same	Unique	Identical/Differentiated	Differentiated
Barriers to Entry	None	Significant	Significant	Few
Government Intervention	No	Yes	Some	No
Output Decisions	No output restriction	Most output restriction	Output restricted	Output restricted
Interdependence	Each firm is independent	No competitors	Interdependent decisions	Each firm is dependent
Profit making possibility	Low	High	High	Medium
Price and Marginal Cost	P=MC	P > MC	P > MC	P > MC
Information Cost	No	High	High	Low
Implication for demand curve	Horizontal	Downward Sloping ; Inelastic	Kinked/Downward sloping; inelastic	Downward sloping; elastic
Price Decision	MC=MR=P	MC=MR	Strategic Pricing	MC=MR
Product Differentiation	No	Yes	Yes, but less	Yes
P = Price MC = Marginal Cost MR = Marginal Revenue

References

• Vedantu
• George Brown