The most comprehensive educational resources for finance

Types of Market Structures

There are four basic market structures: perfect competition, monopoly, monopolistic competition and oligopoly.

In a perfect competition market structure several firms are present who all produce identical products and are all sold at market price. The entry barriers to this market are low and the only factor determining sales is price. Since no one producer can affect prices, the demand curve for such a market is horizontal i.e. perfectly elastic. An example of this could be onions produced from a certain region.

On the other end of the spectrum is the monopoly market structure. In such a market there is usually just one seller. The entry barrier is very high to this kind of market. The cost of investment, copyright or holds over resources are some examples of high entry barrier. The railway network of any country is an example of a monopoly.

When it makes natural sense to have one firm produce a product it is called a natural monopoly. Public utilities, electronic defense equipment are government sponsored natural monopolies.

Covering the middle ground of market structure in one form is monopolistic competition. In this scenario firms do not produce identical products. There exist in the products difference in features, price, branding and so on. The shampoo market demonstrates this. Despite the same end use, i.e., cleaning hair and scalp, the firms producing them market their differences. Removal of dandruff, stopping hair fall, more luster are some of the differentiators they advertise. Consumers are loath to shift unless there is a very high (>10%) increase in price.

In an oligopoly market there are a few players who need to keep an eye on each other’s strategy. The cement industry or airline manufacturing industry are good examples. In both these industries the economies of scale are very high making entry barriers in these segments high. The different firms differentiate on the basis of some features, their offerings being good substitutes to each other. In this market structure demand elasticity is more than that of a monopoly.

The following table highlights and compares the features of these four types of market structures.

Perfect Competition Monopolistic Competition Oligopoly Monopoly
Number of Sellers Many Many Few One
Barriers to Entry Very Low Low High Very High
Type of Substitute Products Very good Good substitutes but differentiated Very good differentiated substitutes No good substitutes
Nature of competition Price only Marketing, features and price Marketing, features and price Advertising
Pricing Power None Little Little to significant Significant

Leave a Reply

Your email address will not be published. Required fields are marked *

Name *