Market structure is best defined as the organisational and other characteristics of a

market. We focus on those characteristics which affect the nature of competition and
pricing – but it is important not to place too much emphasis simply on the market share
of the existing firms in an industry.

Traditionally, the most important features of market structure are:

1. The number of firms (including the scale and extent of foreign competition)

2. The market share of the largest firms (measured by the concentration ratio –
see below)
3. The nature of costs (including the potential for firms to exploit economies of
scale and also the presence of sunk costs which affects market contestability in
the long term)
4. The degree to which the industry is vertically integrated - vertical integration
explains the process by which different stages in production and distribution of a
product are under the ownership and control of a single enterprise. A good
example of vertical integration is the oil industry, where the major oil companies
own the rights to extract from oilfields, they run a fleet of tankers, operate
refineries and have control of sales at their own filling stations.
5. The extent of product differentiation (which affects cross-price elasticity of
demand)
6. The structure of buyers in the industry (including the possibility of monopsony
power)
7. The turnover of customers (sometimes known as "market churn") – i.e. how
many customers are prepared to switch their supplier over a given time period
when market conditions change. The rate of customer churn is affected by the
degree of consumer or brand loyalty and the influence of persuasive advertising
and marketing.

1. Perfect competition – Many firms, freedom of entry,

homogeneous product, normal profit.
2. Monopoly – One firm dominates the market, barriers to entry,
possibly supernormal profit.
1. Monopoly diagram
3. Oligopoly – An industry dominated by a few firms, e.g. 5 firm
concentration ratio of > 50%. Interdependence of firms
1. Oligopoly diagram
2. Collusive behaviour – firms seek to form agreement to
increase prices.
4. Monopolistic competition – Freedom of entry and exit, but firms
have differentiated products. Likelihood of normal profits in the long
term.
5. Contestable markets – An industry with freedom of entry and
exit, low sunk costs. The theory of contestability suggests the number
of firms is not so important, but the threat of competition.
6. The interconnected characteristics of a market, such as the number and
relative strength of buyers and sellers and degree of collusion among them, level
and forms of competition, extent of product differentiation, and ease of entry into
and exit from the market
7. Four basic types of market structure are (1) Perfect competition: many buyers
and sellers, none being able to influence prices. (2) Oligopoly: several large
sellers who have some control over the prices. (3) Monopoly: single seller with
considerable control over supply and prices. (4) Monopsony: single buyer with
considerable control over demand and prices.

The Market Structure refers to the characteristics of the market either

organizational or competitive, that describes the nature of competition and
the pricing policy followed in the market.
Thus, the market structure can be defined as, the number of firms producing
the identical goods and services in the market and whose structure is
determined on the basis of the competition prevailing in that market.

The term “ market” refers to a place where sellers and buyers meet and
facilitate the selling and buying of goods and services. But in economics, it is
much wider than just a place, It is a gamut of all the buyers and sellers, who
are spread out to perform the marketing activities.

The major determinants of the market structure are:

1. The number of sellers operating in the market.

2. The number of buyers in the market.
3. The nature of goods and services offered by the firms.
4. The concentration ratio of the company, which shows the largest market
shares held by the companies.
5. The entry and exit barriers in a particular market.
6. The economies of scale, i.e. how cost efficient a firm is in producing the
goods and services at a low cost. Also the sunk cost, the cost that has already
been spent on the business operations.
7. The degree of vertical integration, i.e. the combining of different stages of
production and distribution, managed by a single firm.
8. The level of product and service differentiation, i.e. how the company’s
offerings differ from the other company’s offerings.
9. The customer turnover, i.e. the number of customers willing to change
their choice with respect to the goods and services at the time of adverse
market conditions.

Thus, the structure of the market affects how firm price and supply their
goods and services, how they handle the exit and entry barriers, and how
efficiently a firm carry out its business operations