Market Structure: Introduction, Characteristics, and Types

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What is a market?

A medium that allows the buyers and sellers of a particular good or a service to communicate with the purpose of exchange, is known as a market. The market may either be a physical marketplace, where people come together to exchange goods and services in person, or a virtual market, where there is no physical interaction, for instance: online marketing.

What is a market structure?

The nature and degree of competition in the market for various goods and services are known as a market structure. The market structures for both the goods market and the service market are determined by the nature of completion prevailing in a particular market. Thus, the concept of market structure is understood as those of the market characteristics of a market that help in influencing the behavior and the results of the firms that are working in that particular market.

Types of Market Structures

An economy can be characterized by a variety of market structures. such market structures refer to the degree of competition in the market. Market structure can be determined by various factors; nature of goods and products, the number of sellers, number of consumers, economies of scale etc. being the important ones. There are four basic types of market structures:

  • Perfect competition
  • Monopolistic competition
  • Oligopoly
  • Monopoly
  1. Perfect Competition

A large number of buyers and sellers are involved in this type of market structure. All the sellers of the market are small sellers in competition with one another. No big seller in involved with any significant influence on the market. Thus, all the firms in such a market are price takers.

While discussing the perfect competition, there are certain assumptions that need to be made. Because of this reason, perfect competition is much of a theoretical concept. Some of the assumptions are as follows:

  • The products in the market are identical i.e. they are homogeneous.
  • The only motive of all the firms is to maximize profits.
  • The entry and exit from the market are free i.e. it is free from all the barriers.
  • Also, there is no such concept of consumer preference.
  1. Monopolistic Competition

Even in the monopolistic competition, there are a lot of buyers and sellers. But, all of them don’t sell identical products or services. The products are of the same nature but sellers sell slightly variant products. This gives the consumers a choice to choose one product over the other. The sellers can charge a higher price to some extent as they enjoy some market power. Hence, the sellers set the prices of the products to some extent.

  1. Oligopoly

In an oligopoly, only a few firms are present in the market. The number of firms is not clear; 3-5 prevailing firms are considered the norm. thus, in the case of an oligopoly, the buyers are greater than that of the sellers. in this type of market structure, there are a lot of hindrances for entry into the market, thus, it becomes difficult for new firms to establish themselves.

  1. Monopoly

In the monopoly type of market structure, only one seller is involved, thus, a single firm will be controlling the whole market. The seller can set the price of his/her own wish since the whole market is under the control of the seller. The consumers don’t have any alternative and have to pay the price that is set by the seller.

Monopolies are very undesirable. Here, all the powers of the consumers are lost and the market forces become irrelevant. Thus, a pure monopoly is very rare.

Following are the characteristics of the market structure

  • Number of firms in the market

When the ordering of the market structures is done on the basis of the number of sellers, from a very large number to just one seller is pure competition, monopolistic competition, oligopoly, and pure monopoly.

  • The degree of standardization of product

In an oligopoly, the selling of the products by the firms may either be standardized or differentiated. Standardized products are sold in pure competition and pure monopoly and differentiated products in case of monopolistic competition.

  • Market share of largest firms

In a pure monopoly, the entire market is under the control of the single firm. In an oligopoly, there are a few firms that have the majority of the market share. Next is the monopolistic competition, in which the firms have a lower market share and in case of pure competition, a single firm has negligible market share.

  • Entry barriers

The market structures when put in the sequential order by the harshness of entry barriers from the strictest to the most lenient are as follows: pure monopoly, oligopoly, monopolistic competition, and pure competition.

  • Pricing

The price of the product varies from firm to firm according to the market structure. There are the highest prices in a pure monopoly, those in the pure competition have the lowest control over the price. In the monopolistic competition, there is slight control over the price by the firms due to the variation in the product. Lastly, in case of an oligopolistic market structure, the price depends on whether the firm is selling a standardized product or a differentiated product. Thus, price controls in oligopolies are relatively rigid.