Introduction to market structure
The term market structure refers to the characteristics of a market, including the number and size of firms, the degree of product differentiation, and the ease of entry and exit. Market structure influences the behaviour of firms and the outcomes for consumers in terms of price, output and efficiency.
Types of market structure
The four main market structures are summarised below.
| Characteristic | Perfect competition | Monopolistic competition | Oligopoly | Monopoly |
|---|---|---|---|---|
| Number of firms | Many small firms | Many firms | Few large firms | One dominant firm |
| Type of product | Homogeneous (identical) | Differentiated but similar | Either homogeneous or differentiated | Unique product, no close substitutes |
| Barriers to entry | No barriers; free entry and exit | Low barriers | Significant barriers (e.g. economies of scale, advertising) | High barriers (legal protection, natural monopoly) |
| Price‑setting power | Price takers (no control) | Some control due to product differentiation | Interdependent – firms consider rivals when making decisions | Price maker – significant control |
| Efficiency | Productive and allocative efficiency in the long run | Not fully efficient due to advertising and excess capacity | May achieve economies of scale but risk of collusion | Potential for dynamic efficiency; risk of inefficiency if regulation is weak |
| Examples | Farm produce markets, currency markets | Restaurants, clothing retailers, hair salons | Airlines, automobile manufacturers, smartphone producers | Utility providers, patented drugs |
Price and non‑price competition
In monopolistic competition and oligopoly, firms engage in price competition (cutting prices to attract customers) and non‑price competition (advertising, branding, product differentiation, customer service). Oligopolists may also form cartels to fix prices, though this is illegal in many countries.
Impact on consumers and producers
Market structure affects consumers’ choice and the prices they pay. Perfect competition yields low prices and maximum choice but little scope for product variety. Monopolies can charge higher prices but may also enjoy economies of scale that lower costs. Regulators often monitor monopolies and oligopolies to prevent abuse of market power.
Examples and applications
At a farmers’ market, dozens of small farmers sell identical vegetables. No single farmer can influence the market price, so this market approximates perfect competition. Consumers benefit from low prices and many sellers.
Many towns have numerous hair salons and restaurants. Each offers slightly different styles and menus, so they have some control over price but face competition. This is characteristic of monopolistic competition.
The smartphone industry is an example of an oligopoly. A few large firms (e.g. Apple, Samsung, Huawei) dominate the market, invest heavily in branding and research, and are interdependent in their pricing and product decisions. Price wars or collusion can occur.
In many countries, electricity distribution is provided by a single firm because duplicating power lines would be inefficient. This is a monopoly, often regulated to prevent abuse of market power.
