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Market Structure

Market Structure

In this article, you will find everything you want to know about the concept of market structure, its types, and comparisons.
Ishani Chatterjee Shukla
In economics, a market structure is composed of various economic dynamics and variables, such as the seller, the buyer, the price, product (s), the existence of competition, and the level thereof or the complete absence of it. Judging by the various permutations and combinations of the interrelationship of these variables, there are precisely four major types of market structures - Perfect Competition, Monopoly, Oligopoly, and Monopolistic Competition. With relation to all of these, especially the two extreme, hypothetical market forms of perfect competition and monopoly, the products that form the basis of all transactions may either be homogeneous or heterogeneous. Let's proceed to towards a comprehensive overview of the major different types to understand their characteristics and difference from each other.
Different Types
Perfect Competition
A perfect competition market is characterized by the presence of an infinite number of buyers of homogeneous products and an equally infinite number of sellers. The price of such a product is decided by the automatic demand-supply mechanism. The price of the product would be fixed at such a price at which the buyer can willingly afford to purchase the product and the seller is willing to supply the product. Therefore, the point of intersection of the demand and supply curves that denotes the point of equilibrium between the two is taken as the price of the product.
Monopoly
This is characterized by the presence of a single seller or manufacturing enterprise for a single product that lacks any close substitute, thereby ruling out any sort of competition. The number of buyers is large, and due to the fact that a single seller holds monopoly of production and supply of a particular product, which has no close substitute, the price of such a product is determined by the seller, and the buyers have no other option but to agree to pay such a price if they wish to procure that product. Chief among all characteristics of monopoly is the absence of an alternative product or supplier for the buyer. Present day examples include SAQ (Société des alcools du Québec) and LIPA (Long Island Power Authority).
Monopolistic Competition
This is a form of imperfect competition where there are many sellers and many buyers but the product in question is neither homogeneous nor heterogeneous - each seller differentiates the same product a bit, say, add or remove a feature, so as to influence the price. This is where customized products come into picture. Say, for instance, there are 5 firms selling bathing soap. Firm #1 sells a moisturizing soap for dry skin, Firm #2 sells astringent soap for oily skin, Firm #3 sells antiseptic soap, Firm #4 sells anti-pimple soap and Firm #5 sells exfoliating soap. Each of these firms uses the same basic material that is used for soap in their products, but each adds a different feature to it in order to suit the needs of different customers. This way, although the price of each firm's offering differs from the others, each firm manages to have its own share of customers in the market.
Oligopoly
An oligopoly market is characterized by the presence of a few suppliers or sellers to fulfill the demands of a large number of buyers. In this setup, we can see various competitive tactics by these few suppliers to attract maximum customers towards their product. Such tactics, the visible oligopoly characteristics, may include manipulating the marketing mix in such a way as to outstrip the marketing efforts and revenue earnings of the other competitors. Price wars and promotional battles are common in an oligopolistic market structure.
Comparison Table
The following table would help you to compare the above four types and identify their mutual differences.
Market Structure Number of Suppliers Price Influencing Power Product Type Market Entry Barriers Basis of Competition
Perfect
Competition
Infinite None Homogeneous None Price
Monopoly One Absolute Unique Product,
No Close Substitutes
Extremely High No Competition
Monopolistic
Competition
Many Somewhat Differentiated Somewhat Low Product Attributes
Oligopoly Few Limited Owing
to Competition
Homogeneous/
Differentiated
Somewhat High Price, Product Attributes,
Promotion, etc.
That was a simplified overview of the major types of market structure, complete with a comparative analysis of their mutual differences. While perfectly competitive set ups (also known as pure competition) do not exit in reality and it is indeed a hypothetical situation, examples of the other three forms can be seen all around the world. For instance, newspaper, gas, electricity and other public utility vendors exercise absolute monopoly in small towns. Similarly, the automobile, soft drinks, computers and cereal industries fall under oligopoly. Fast food and retail chains make up the monopolistically competitive segment. Hope this concluding example helps you in grasping the essence of each of these market structures.