NABM5
Market Structure
Learning Objectives:
At the end of this session, students will be
able to:
 Define what is market structure;
 Define the different market
structures: perfect competition,
monopolistic competition,
monopoly, oligopoly; and
 Explain the developments of
market structure.
Market Structure
 Market structure is best defined
as the organizational and other
characteristics of a market. 
 These characteristics affect the
nature of competition and
pricing.
 The elements of market
structure include the number
and size distribution of firms,
entry conditions, and the extent
of differentiation.
Basic Types of Market
Structures
 Perfect competition;
 Monopolistic competition;
 Monopoly; and
 Oligopoly.
 Perfect competition
- Perfect competition is a market
structure with many well-
informed sellers and buyers of an
identical product and no barriers
to entering or leaving the market.
- Large number of small firms. It
is composed of many firms and
buyers, which means there is a
large number of independently-
acting firms and buyers. Both of
which are being sufficiently small
to be unable to influence the price
of product transacted in the
market.
- Homogenous or identical
product. The products offered by
the competing firms are identical
not only in physical attributes but
are also regarded as identical by
buyers who have no preference
between the products of various
producers.
- Very easy entry and exit. This
means that there are no barriers to
entry of new sellers or
impediments to the exit of existing
sellers. New firms do not have
barriers to entry while existing
firms can readily leave the market
without difficulty.
 Monopolistic competition
- It is a type of market structure
characterized by (1) many small
firms, (2) differentiated products,
and (3) easy market entry and
exit.
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- This market structure allow prices
to go higher than marginal costs.
- This means that each producer
will be considered as a monopoly
but the whole market is considered
competitive because the degree of
differentiation still considers the
possibility of having substitution
effect.
- Many small sellers. It is
comprised of a large number of
independently-acting firms and
buyers. Monopolistic competitors
do have some influence over price,
but it is a ‘small’ influence.
- Differentiated product. A
differentiated product has close,
but not perfect, substitutes.
Although the products of each firm
are highly similar, the consumer
views them as somewhat different
or distinct.
- Easy entry and exit. There are no
barriers to entry preventing new
firms entering the market or
obstacles in the way of existing
firms leaving the market.
 Monopoly
- Monopoly refers to a market
situation where there is only one
seller or producer supplying
unique goods and services. It is a
single seller that has a complete
control over a specific industry.
Thus, there is nobody else selling
anything like what the monopolist
is producing.
- Single seller or producer. A
monopoly market is comprised of
a single supplier selling to a
multitude of small, independently-
acting buyers.
- Unique product. A unique
product means that there are no
close substitutes for the
monopolist’s product. As such, the
monopolist faces little or no
competition.
o A monopoly may also
form when a company
has a copyright or patent
on that prevents others
from entering the market.
- Impossible entry. Barriers to
entry are so severe in a monopoly
so that it is impossible for new
firms to enter the market.
Extremely high barriers make it
very difficult or impossible for
new firms to enter an industry.
Barriers to entry include (1) sole
ownership of a vital resource,
and (2) legal barriers like
government franchises and
licenses.
Examples:
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In Saudi Arabia the government include exclusive financial
has sole control over the oil requirements, control over
industry. essential resource, patent rights,
and other legal barriers. But the
most significant barriers to entry
in an oligopoly market is
economies of scale. 
- Participants in oligopolies are
 Oligopoly often able to set prices, rather
than take them. For this reason,
- Oligopoly is characterized by (1) oligopolies are considered to be
few sellers, (2) either a able to increase profit margins
homogenous or a differentiated above what a truly free market
product, and (3) difficult market would allow.
entry.
- Because of their ‘fewness’,
oligopolists have considerable
control over their prices, but Important Developments of
each must consider the possible Market Structures
reaction of rivals to its own
pricing, output, and advertising  Increasingly most innovation is
decisions.
done by smaller firms.
- Few sellers. Under oligopoly, the
bulk of market supply is in the  Innovation is now a continuous
hands of a relatively few large process.
firms who sell their products to
 Innovation is not something left to
many small buyers. Oligopoly is a
competition ‘among the few’. chance.
- Homogenous or differentiated  Demand innovation is becoming
products. The products offered more important.
by suppliers may be identical, or
more commonly differentiated  Globalization.
from each other in one or more
respects. These differences may be Basic Types of Market Structures
of physical nature, involving
functional features; it may
otherwise be purely ‘imaginary’
in the sense that artificial
differences are created through
advertising and sales promotion
- Difficult entry. High barriers to
entry in an oligopoly protect firms
from new entrants. These barriers  Perfect competition;
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 Monopolistic competition;
 Monopoly; and
 Oligopoly.