9 Market Structures

Market Structures
Market structure, in economics, refers to how different industries are classified and differentiated
based on their degree and nature of competition for goods and services. It is based on the
characteristics that influence the behavior and outcomes of companies working in a specific market.
Some of the factors that determine a market structure include the number of buyers and sellers,
ability to negotiate, degree of concentration, degree of differentiation of products, and the ease or
difficulty of entering and exiting the market.
Types of Market Structures
1. Perfect Competiton
In a perfect competition market structure, there are a large number of buyers and sellers. All the
sellers of the market are small sellers in competition with each other. There is no one big seller with
any significant influence on the market. So all the firms in such a market are price takers.
There are certain assumptions when discussing the perfect competition. This is the reason a perfect
competition market is pretty much a theoretical concept. These assumptions are as follows,
 The products on the market are homogeneous, i.e. they are completely identical
 All firms only have the motive of profit maximization
 There is free entry and exit from the market, i.e. there are no barriers
 And there is no concept of consumer preference
2. Monopolistic Competition
This is a more realistic scenario that actually occurs in the real world. In monopolistic competition,
there are still a large number of buyers as well as sellers. But they all do not sell homogeneous
products. The products are similar but all sellers sell slightly differentiated products.
Now the consumers have the preference of choosing one product over another. The sellers can also
charge a marginally higher price since they may enjoy some market power. So the sellers become
the price setters to a certain extent.
For example, the market for cereals is a monopolistic competition. The products are all similar but
slightly differentiated in terms of taste and flavours. Another such example is toothpaste.
3. Oligopoly
In an oligopoly, there are only a few firms in the market. While there is no clarity about the number
of firms, 3-5 dominant firms are considered the norm. So in the case of an oligopoly, the buyers are
far greater than the sellers.
The firms in this case either compete with another to collaborate together, They use their market
influence to set the prices and in turn maximize their profits. So the consumers become the price
takers. In an oligopoly, there are various barriers to entry in the market, and new firms find it
difficult to establish themselves.
*An oligopsony is a market for a product or service which is dominated by a few large buyers. The
concentration of demand in just a few parties gives each substantial power over the sellers and can
effectively keep prices down.
4. Monopoly
In a monopoly type of market structure, there is only one seller, so a single firm will control the
entire market. It can set any price it wishes since it has all the market power. Consumers do not have
any alternative and must pay the price set by the seller.
Monopolies are extremely undesirable. Here the consumer loose all their power and market forces
become irrelevant. However, a pure monopoly is very rare in reality.
*A monopsony is a market condition in which there is only one buyer, the monopsonist. Like a
monopoly, a monopsony also has imperfect market conditions. The difference between a monopoly
and monopsony is primarily in the difference between the controlling entities. A single buyer
dominates a monopsonized market while an individual seller controls a monopolized market.
References:
1. Mankiw (2018). Principles of Microeconomics (8th edition). Cengage Learning Asia Pte Ltd
2. https://corporatefinanceinstitute.com/resources/knowledge/economics/market-structure/
3. https://www.toppr.com/guides/business-economics/meaning-and-types-of-markets/types-of-market-
structures/
4. https://www.investopedia.com/terms/m/monopsony.asp
5. https://www.investopedia.com/terms/o/oligopsony.asp

9 Market Structures

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Market Structures

Types of Market Structures

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