Market Structure: De nition, Types, Features

and Fluctuation
https://www.simplilearn.com/market-structures-rar188-article

What Is Market Structure?

Market structure refers to the way that various industries are

classi ed and differentiated in accordance with their degree and
nature of competition for products and services. It consists of four
types: perfect competition, oligopolistic markets, monopolistic
markets, and monopolistic competition

Types of Market Structure

According to economic theory, market structure describes how
rms are differentiated and categorized by the types of products
they sell and how those items in uence their operations. A
market structure helps us to understand what differentiates
markets from one another

In economics, market structure is the number of rms producing

identical products which are homogeneous. The types of market
structures include the following

1. Monopolistic competition, also called competitive market,

where there is a large number of rms, each having a small
proportion of the market share and slightly differentiated
products.

2. Oligopoly, in which a market is by a small number of rms

that together control the majority of the market share.
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 3. Duopoly, a special case of an oligopoly with two rms.

4. Monopsony, when there is only one buyer in a market.

5. Oligopsony, a market in which many sellers can be present

but meet only a few buyers.

6. Monopoly, in which there is only one provider of a product or

service.

7. Natural monopoly, a monopoly in which economies of scale

cause ef ciency to increase continuously with the size of the
rm. A rm is a natural monopoly if it is able to serve the entire
market demand at a lower cost than any combination of two or
more smaller, more specialized rms.

8. Perfect competition, a theoretical market structure that

features no barriers to entry, an unlimited number of
producers and consumers, and a perfectly elastic demand
curve

The imperfectly competitive structure is quite identical to the

realistic market conditions where some monopolistic competitors,
monopolists, oligopolists and duopolists exist and dominate the
market conditions. The elements of Market Structure include the
number and size distribution of rms, entry conditions, and the
extent of differentiation

These somewhat abstract concerns tend to determine some but

not all details of a speci c concrete market system where buyers
and sellers actually meet and commit to trade. Competition is
useful because it reveals actual customer demand and induces
the seller (operator) to provide service quality levels and price
levels that buyers (customers) want, typically subject to the
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 seller’s nancial need to cover its costs. In other words,
competition can align the seller’s interests with the buyer’s
interests and can cause the seller to reveal his true costs and
other private information. In the absence of perfect competition,
three basic approaches can be adopted to deal with problems
related to the control of market power and an asymmetry between
the government and the operator with respect to objectives and
information: (a) subjecting the operator to competitive pressures,
(b) gathering information on the operator and the market, and (c)
applying incentive regulation

Monopolistic Markets Characteristic

Monopolistically competitive markets have the following
characteristics

• There are many producers and many consumers in the market,

and no business has total control over the market price.

• Consumers perceive that there are non-price differences among

the competitors' products.

• There are few barriers to entry and exit.

• Producers have a degree of control over price

The long-run characteristics of a monopolistically competitive

market are almost the same as a perfectly competitive market.
Two differences between the two are that monopolistic
competition produces heterogeneous products and that
monopolistic competition involves a great deal of non-price
competition, which is based on subtle product differentiation. A
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 rm making pro ts in the short run will nonetheless only break

even in the long run because demand will decrease and average
total cost will increase. This means in the long run, a
monopolistically competitive rm will make zero economic pro t.
This illustrates the amount of in uence the rm has over the
market; because of brand loyalty, it can raise its prices without
losing all of its customers. This means that an individual rm's
demand curve is downward sloping, in contrast to perfect
competition, which has a perfectly elastic demand schedule

Oligopoly Characteristic

• Pro t maximization conditions: An oligopoly maximizes

pro ts by producing where marginal revenue equals marginal
costs.

• Ability to set price: Oligopolies are price setters rather than

price takers.

• Entry and exit: Barriers to entry are high. The most important
barriers are economies of scale, patents, access to expensive
and complex technology, and strategic actions by incumbent
rms designed to discourage or destroy nascent rms.
Additional sources of barriers to entry often result from
government regulation favoring existing rms making it dif cult
for new rms to enter the market.

• Number of rms: "Few" – a "handful" of sellers. There are so

few rms that the actions of one rm can in uence the actions
of the other rms.
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 • Long run pro ts: Oligopolies can retain long run abnormal
pro ts. High barriers of entry prevent sideline rms from
entering the market to capture excess pro ts.

• Product differentiation: Product may be homogeneous (steel)

or differentiated (automobiles).

• Perfect knowledge: Assumptions about perfect knowledge

vary but the knowledge of various economic factors can be
generally described as selective. Oligopolies have perfect
knowledge of their own cost and demand functions but their
inter- rm information may be incomplete. Buyers have only
imperfect knowledge as to price, cost and product quality.

• Interdependence: The distinctive feature of an oligopoly is

interdependence. Oligopolies are typically composed of a few
large rms. Each rm is so large that its actions affect market
conditions. Therefore the competing rms will be aware of a
rm's market actions and will respond appropriately. This means
that in contemplating a market action, a rm must take into
consideration the possible reactions of all competing rms and
the rm's countermoves. It is very much like a game of chess or
pool in which a player must anticipate a whole sequence of
moves and countermoves in determining how to achieve his or
her objectives. For example, an oligopoly considering a price
reduction may wish to estimate the likelihood that competing
rms would also lower their prices and possibly trigger a ruinous
price war. Or if the rm is considering a price increase, it may
want to know whether other rms will also increase prices or
hold existing prices constant. This high degree of
interdependence and need to be aware of what other rms are
doing or might do is to be contrasted with lack of
interdependence in other market structures. In a perfectly
competitive (PC) market there is zero interdependence because
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 no rm is large enough to affect market price. All rms in a PC
market are price takers, as current market selling price can be
followed predictably to maximize short-term pro ts. In a
monopoly, there are no competitors to be concerned about. In a
monopolistically-competitive market, each rm's effects on
market conditions is so negligible as to be safely ignored by
competitors.

• Non-Price Competition: Oligopolies tend to compete on terms

other than price. Loyalty schemes, advertisement, and product
differentiation are all examples of non-price competitio

Perfectly Competitive Market Characteristics

• In nite buyers and sellers – An in nite number of consumers

with the willingness and ability to buy the product at a certain
price, and in nite producers with the willingness and ability to
supply the product at a certain price.

• Zero entry and exit barriers – A lack of entry and exit barriers
makes it extremely easy to enter or exit a perfectly competitive
market.

• Perfect factor mobility – In the long run factors of production

are perfectly mobile, allowing free long term adjustments to
changing market conditions.

• Perfect information - All consumers and producers are

assumed to have perfect knowledge of price, utility, quality and
production methods of products.
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 • Zero transaction costs - Buyers and sellers do not incur costs

in making an exchange of goods in a perfectly competitive
market.

• Pro t maximizing - Firms are assumed to sell where marginal

costs meet marginal revenue, where the most pro t is
generated.

• Homogenous products - The qualities and characteristics of a

market good or service do not vary between different suppliers.

• Non-increasing returns to scale - The lack of increasing

returns to scale (or economies of scale) ensures that there will
always be a suf cient number of rms in the industry.

• Property rights - Well de ned property rights determine what

may be sold, as well as what rights are conferred on the buyer

Final Though
The correct sequence of the market structure from most to least
competitive is perfect competition, imperfect competition,
oligopoly and pure monopoly. The main criteria by which one can
distinguish between different market structures are the number
and size of producers and consumers in the market, the type of
goods and services being traded and the degree to which
information can ow freely.
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