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.
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
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 |
The growth of any business depends on its ability to compete effectively within its respective sector. Consequently, this dictates the type of market structure that exists in the industry.
Understanding market structures is important as you navigate through your business operations and development, whichever sector it may belong to. The market can be complicated to understand, but these basic concepts can help simplify your appreciation of the subject.
Below are the four types of market structures and what you need to know about them:
1. Perfect Competition
A perfectly competitive market type refers to a structure where no single business entity commands the market share. This market structure is characterized by small businesses engaged in fair competition. Instead of one company being able to dictate prices, the dynamics of supply and demand exclusively influence the type and price of the goods and services offered in the market.
In theory, this setup is based on the following premise:
- Goods and services can freely enter the market
- All businesses are able to maximize profits by keeping production costs low
- Firms sell similar goods with comparable quality
- Consumers don’t have specific brand preferences
Despite being the most ideal market structure, not one sector can boast of having this type of competition. Perhaps only the stock market or the foreign exchange market may be a close consideration.
2. Monopolistic Competition
In monopolistic competition, it’s assumed that various companies may offer goods that are technically the same, but leading brands offer them with slight advantages. These often-improved product versions are the main basis for firms to dictate higher products costs or command a slightly bigger market share compared to their competitors.
The basis for this market structure is almost similar to the assumptions for the perfect competition type, except for the minimal changes in product offerings, resulting in consumers preferring one brand over the other. Consequently, supply and demand are no longer the main elements that influence market prices. Companies that get the lion’s share of the market can impact the prices to a certain level.
A good example would be real estate companies that sell technically similar properties but have different offers. Personal care products may also fall under this market type, as well as the retail market and service sectors.
3. Monopoly Competition
This is perhaps the market structure that’s most common across several industries. This market structure is created when only one company stands out from the rest, therefore becoming the major product supplier.
When only one firm leads the market, the leading brand will have enough power to dictate much of the movements in the market. With the monopoly competition market structure, the leading brand can minimize production cost and maximize profit, leading to unfair competition and limited choices for consumers. One of the subtle ways leading firms can strengthen their hold on the market is by offering low cost franchises to enterprising individuals.
In theory, a monopoly competition isn’t an ideal setup because the leading brand can deliberately pull outputs down just to maximize profits. From unabated price increases to barring product entries and minimizing the supply volume, there are many unfavorable market movements associated with this type of market structure.
4. Oligopoly Competition
Taking a slightly different route to monopoly is the oligopoly competition market structure. In a monopoly, only one company dominates the market. Comparatively, an oligopoly happens when a few firms compete or collaborate with each other to dominate the market.
A ‘supergroup’ can be composed of small firms partnering with large corporations. These can also be major industry players that work together to enhance their foothold in the market and inhibit the entry of new competitors. The goods produced by these leading companies may be the same or slightly different from each other.
Whether working harmoniously or in competition with other major brands, these firms can earn profit by pushing prices higher. As a result, this market setup may have been slightly immune to unexpected events like the severe impact of pandemic lockdowns on businesses. In this market structure, companies can maximize profits by setting prices and imposing restrictions on the entry and exit of goods in the market.
Oligopoly competition may exist in major industries such as the media, smartphone, automobile, and energy sector—industries where major players often engage in fierce competitions or mergers.
The Bottom Line
Market structures aren’t only impacted by supply and demand. They’re also affected by multiple factors such as the number of producers, sellers, consumers, the type of product or services available, the influence of the supplier over the product’s price, and the barriers imposed on the entry of new players and their products.
A good analysis of these conditions can help a business owner position their organization better in the highly competitive business sector.