Market Structure – Definition and Examples

The market is referred to as the common place for sellers and buyers where they can buy and sell goods, or services. In economics, the term market covers a broader spectrum than this simple definition. It refers to a big platform where people combine to advertise, buy, sell, and expand their businesses.

The term “Market Structure” denotes the organizational characteristics of the market that govern the way the market behaves. An attribute of Market Structure would be the pricing of commodities. The structure of a market can be understood via the number and types of firms manufacturing similar goods or rendering similar services. This gives a measure of the competition within the market, which is an indicator of market structure.

 

Different Types of Market Structure

Four basic market structures describe the economy. The market structures fundamentally denote the degree of rivalry and competition inside a market. We will shed some light on these market structures. So, let’s explore and understand what market structures are? And how they affect the market?

 

Perfect Competition

When we say “perfect competition”, we mean it in purely theoretical terms, referring to a market structure with a large number of vendors and consumers. It deals with a similar set of products and services. A “perfect competition” market caters to buyers with similar services and products that have similar prices.

 

Features of Perfect Competition

  1. The number of vendors and consumers are really big. Due to this large proportion of the sellers and buyers in the market, the capacity of a single individual to effect sufficient change in the dynamics of the market is very minimal, so the market remains stable.
  2. In perfect competition, sellers have similar services and products to sell. There is no diversity. For instance, coal, wheat, salt, etc. are homogenous products. The consumer of these products shows indifferent buying behavior.
  3. In this type of market competition, sellers can enter and exit the market anytime that too without any cost.
  4. Due to tight competition, the sellers and buyers of such a market have complete insights such as the condition of the market, prevailing prices, technology used in manufacturing, etc.
  5. There are no restrictions imposed by the government and there are no artificial limitations.

 

Therefore, under the umbrella of perfect competition, a seller cannot influence the market dynamics like price change. Vendors are price takers that cannot impact the prevailing price in the market.

Monopolistic Competition

The Monopolistic rivalry symbolizes an industry, where numerous organizations offer similar services or products but these are not ultimate substitutes of each other. Besides price, these firms compete via various other factors.

Features of Monopolistic Competition

  1. The differentiation of the product is the major aspect of the businesses working under the monopolistic rivalry. As such products are somewhat dissimilar from each other but they are close alternatives. And their price does not vary vastly.
  2. There is a hefty number of businesses that operate under the monopolistic rivalry, which leads to rigid competition among the prevailing businesses. Unlike the perfect competition, the organizations deal in the segregated goods that are substitutes for each other to some extent.
  3. With a penetrating rivalry among the businesses, the unit experiencing the loss can remove itself out anytime from the industry. Likewise, new businesses can freely enter anytime into the industry
  4. Since the products are close substitutes for each other, if one business depresses its product price then the clients of other goods will ultimately shift over to it. Conversely, with the upsurge in the product’s price, the company will easily lose its clients. Hence, the market structure works under the influence of monopolistic rivalry, a discrete company is not a price taker.
  5. Under the monopolistic rivalry, the organizations incur massive costs on ads with an additional promotional selling for their products. Meanwhile, there are differentiated goods, the businesses need to commence the publicity activities to attract a large share of the market.
  6. Under the monopolistic rivalry, several firms offer differentiated products. To fulfill customer needs, each company does efforts to regulate its goods accordingly.

The monopolistic rivalry is also known as the imperfect rivalry since this market structure stands among the pure competition and the pure monopoly.

 

Oligopoly Market

Oligopoly is the market structure with a lesser number of companies and no one of them can retain others from a noteworthy impact. The ratio of the companies’ concentration in the market measures the stake of the biggest businesses. There is no exact set range of upper limit of the companies in an oligopoly.

Under the oligopoly market, a seller either produces similar products or different products.

Homogeneous or Similar Product:

The companies that manufacture the same products are named as Perfect Oligopoly or Pure Oligopoly. It is an exclusive trait of industrial producers who manufacture products like copper, aluminum, zinc, iron, steel, etc.

Heterogeneous or different Products:

The companies that manufacture the heterogeneous products are known as Imperfect Oligopoly or Differentiated Oligopoly. For instance, the producers of consumer products such as soaps, automobiles, refrigerators, detergents, television, etc.

Features of Oligopoly Market

  1. Under the Oligopoly market structure, there is a fewer number of sellers, with a large number of clients. Limited businesses control the market and enjoy a substantial price control.
  2. In an oligopoly, companies are more cautious due to their lesser number. The firms either collaborate or compete with each other to remain in the market. Therefore, all companies stay watchful of their rival actions and plan their retaliation, to cope with the chaos.
  3. Under Oligopoly market rivalry, each business promotes its goods on an everyday basis, with the purpose to reach more clientele and upsurge their client base. The advertisement makes this rivalry more intense.
  4. If any company publicizes its products frequently while the other one keeps on quiet, then the promoter company will get more customers. Therefore, to keep pace in the race, all the firms in the oligopoly spend a huge amount on ads and publicity of their products and goods.
  5. The market with fewer sellers, it is obvious, that they have a strict competition in the market.
  6. If the companies do any price change, do promotion or marketing campaign, it will have a substantial influence on their competitors. Therefore, each seller is always aware of its rival.
  7. An oligopoly market has easy exit but, the entry has obstructions. The companies can exit the industry without difficulty, whenever they wish, but there is a barrier in entering into the oligopoly market. For instance, these obstructions could be Patent, Government license, high capital condition, multifaceted technology, etc. Similarly, at times the government rules favor the prevailing big companies, thus acting as an obstacle for the new competitors.
  8. In an oligopoly market, there is a dearth of homogeneousness among the companies. This similarity is in terms of size, as some are big while others are small.

Meanwhile, there are fewer companies one firm’s action has a substantial influence on the remaining firms. Therefore, each firm needs to be aware of its rivals and strategize the publicity events accordingly.

 

Monopoly Market

The monopoly denotes any business that dominates an industry or sector. Monopolies are the product of free-market private enterprise that runs without any restraints or limitations, a sole business or group of companies can overtake major or almost all of the market share like supplies, goods, assets, commodities, and infrastructure for a specific kind of good or service.

Features of Monopoly Market

  1. Under the monopoly market, the company has all the control over the product streamflow. The demand pliability is zero for such products.
  2. In a monopoly, the sole business or manufacturer of a specific product is dominant in the whole market. it is easily said that a monopoly company is an industry itself.
  3. The monopoly business can affect the product’s price and henceforth, a monopoly company is a price maker of the market.
  4. There are rigid obstructions for the new candidates in the monopoly market.
  5. Under the monopoly market, the demand curve is always downsloping that is the monopoly company will always earn heavy profits via decreasing prices and increasing the product’s sale. The monopolist’s product has no substitutes.

 

Under a monopoly market, new companies cannot enter easily in the market because of strict limitations on entry such as Government regulations and licenses, huge capital prerequisites, compound technology, and economies of scale. These economic obstructions restrict the new entrants.

Conclusion

Therefore, the market structure influences how the price of the product changes, how the firm supplies its goods, how the firm will handle the entrance and exit barriers, and how the business effectively carries its operations.

Besides these four main market structures, other factors also affect the market dynamics like the nature of the products and goods, consumers, sellers, economies of scale, entry barriers, etc.

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