Market Structures

Market Structures
•Market structure refers to how different industries are classified and differentiated based on their
degree and nature of competition for services and goods.
•The four popular types of market structures include perfect competition, oligopoly market,
monopoly market, and monopolistic competition.
•Market structures show the relations between sellers and other sellers, sellers to buyers, or more.
Types of Market Structures

1. Perfect Competition
Perfect competition occurs when there is a large number of small companies competing against
each other. They sell similar products (homogeneous), lack price influence over the commodities,
and are free to enter or exit the market.
Consumers in this type of market have full knowledge of the goods being sold. They are aware of
the prices charged on them and the product branding. In the real world, the pure form of this type of
market structure rarely exists. However, it is useful when comparing companies with similar
features. This market is unrealistic as it faces some significant criticisms described below.
•No incentive for innovation: In the real world, if competition exists and a company holds a
dominant market share, there is a tendency to increase innovation to beat the competitors and
maintain the status quo. However, in a perfectly competitive market, the profit margin is fixed, and
sellers cannot increase prices, or they will lose their customers.
•There are very few barriers to entry: Any company can enter the market and start selling the
product. Therefore, incumbents must stay proactive to maintain market share.
2. Monopolistic Competition
Monopolistic competition refers to an imperfectly competitive market with the traits of both the
monopoly and competitive market. Sellers compete among themselves and can differentiate their
goods in terms of quality and branding to look different. In this type of competition, sellers consider
the price charged by their competitors and ignore the impact of their own prices on their
competition.
When comparing monopolistic competition in the short term and long term, there are two distinct
aspects that are observed. In the short term, the monopolistic company maximizes its profits and
enjoys all the benefits as a monopoly.
The company initially produces many products as the demand is high. Therefore, its Marginal
Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as new
companies enter the market with differentiated products affecting demand, leading to less profit.
3. Oligopoly
An oligopoly market consists of a small number of large companies that sell differentiated or
identical products. Since there are few players in the market, their competitive strategies are
dependent on each other.
For example, if one of the actors decides to reduce the price of its products, the action will trigger
other actors to lower their prices, too. On the other hand, a price increase may influence others not
to take any action in the anticipation consumers will opt for their products. Therefore, strategic
planning by these types of players is a must.
In a situation where companies mutually compete, they may create agreements to share the market
by restricting production, leading to supernormal profits. This holds if either party honors the Nash
equilibrium state and neither is tempted to engage in the prisoner’s dilemma. In such an agreement,
they work like monopolies. The collusion is referred to as cartels.
4. Monopoly
In a monopoly market, a single company represents the whole industry. It has no competitor, and it
is the sole seller of products in the entire market. This type of market is characterized by factors
such as the sole claim to ownership of resources, patent and copyright, licenses issued by the
government, or high initial setup costs.
All the above characteristics associated with monopoly restrict other companies from entering the
market. The company, therefore, remains a single seller because it has the power to control the
market and set prices for its goods.

Market Structures

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Market Structures

Types of Market Structures

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