Market Structures

This document covers the Five Basic Market Structures and Their Definitions.
Five factors that helps to determine market structure

Numbers of firms and their sizes

Degree to which competitors products are similar (homogeneity of products)
The firms control over price
Ease with entering and leaving the market for a firm
The amount of non-price competition

Four basic market structures

Perfect competition

Many producers and a uniform product

Many buyers and Suppliers, Individuals cannot influence the market
Products are relatively same(Homogeneous)
Price takers firm have no control over the price they charge for their product.
Easy entry and exit barriers
Little non-price competition

Monopolistic competition

Large number of firms in industry

Similar but not identical product
Firms are large enough to influence total supply Firms can control over the price up to an
extent since their products are differentiated from other products (Some price influences)
Easy for a new firm to startup (easy entry and exit barriers)
None price competition is significant

Oligopoly

Dominated by a few very large companies

Some differentiation of products depending on the industry
Freedom to set the price from low to high
Higher barriers to entry
Non-price competition can be intense

Duopoly

Industry is dominated by two large producers

Conspiracy between two companies
Smaller firm leads the price lead of the larger firm
Highly Independent
Higher entry barriers

Monopoly

Industry is dominated by a single firm where firm has the complete control over the production
or supply
Firm produces unique products and no substitute products
Price Maker can set the price to destroy the competition (price discrimination possible)
Major entry barriers
No direct competition at all and doesnt engage in non-price competition
Usually firm becomes monopoly when market share exceeds over 25%
Could be inefficient due to lack of competition or could be higher due to availability of higher
profits
Innovation could be high due to target of high profit as well as R&D
Conspiracy is possible to maintain by the power of firm

Firm turns to monopoly by

Growth of the firm

Amalgamation (Take over other firms or merge other firm)
Through acquiring patent or license

Natural Monopoly - Products with high fixed costs are efficiently produced by monopoly