Market structures

What is a market structure?

A market structure is the characteristics of a
market, usually on the supply side, including how many
firms compete for the market, the degree of
competition or collusion between them, the extent of
their product differentiation, and the ease with which
new firms can enter the market to compete with them.

Types of Market structures

1.Perfect competition
2.Monopoly
3.Oligopoly
4.Monopolistic competition

Perfect competition
● Perfect competition occurs when there are many
sellers, there is easy entry and exiting of firms,
products are identical from one seller to another,
and sellers are price takers
 ● Firms are said to be in perfect competition when
the following conditions occur:
● Many firms produce identical products.
● Many buyers are available to buy the product, and
many sellers are available to sell the product.
● Sellers and buyers have all relevant information
to make rational decisions about the product
being bought and sold.
● Firms can enter and leave the market without any
restrictions—in other words, there is free entry
and exit into and out of the market.

Monopoly
A monopoly market is characterized by the profit
maximizer, price maker, high barriers to entry, single
seller, and price discrimination.
● Monopoly characteristics include profit

maximizer, price maker, high barriers to entry,

single seller, and price discrimination.

● Sources of monopoly power include economies

of scale, capital requirements, technological

superiority, no substitute goods, control of

natural resources, legal barriers, and

deliberate actions.

● There are a few similarities between a

monopoly and competitive market: the cost

functions are the same, both minimize cost and

maximize profit, the shutdown decisions are

the same, and both are assumed to have

perfectly competitive market factors.

Oligopoly
An oligopoly is a market dominated by a
few producers

1. Product branding: Each firm in the market is selling a

branded product.

2. Entry barriers: Entry barriers maintain supernormal

profits for the dominant firms. It is possible for many
smaller firms to operate on the periphery of an
oligopolistic market, but none of them is large enough
to have any significant effect on prices and output

3. Inter-dependent decision-making: Inter-dependence

means that firms must take into account the likely
reactions of their rivals to any change in price, output
or forms of non-price competition.

4. Non-price competition: Non-price competition is a

consistent feature of the competitive strategies of
oligopolistic firms.
 Monopolistic Competition

Monopolistic competition is a market structure which

combines elements of monopoly and competitive
markets A
monopolistic competitive industry has the following
features:

● Many firms.
● Freedom of entry and exit.
● Firms produce differentiated products.
● Firms have price inelastic demand; they are
price makers because the good is highly
differentiated
● Firms make normal profits in the long run but
could make supernormal profits in the short
term
● Firms are allocatively and productively
inefficient.