Market structures are a fundamental concept in economics, defining the framework within which companies operate and interact with consumers. The type of market structure significantly impacts the behavior of firms, pricing strategies, product differentiation, and overall market efficiency.
Economists have identified several types of market structures, ranging from perfect competition to monopoly, each characterized by unique features that shape the dynamics of supply and demand.
This article provides an in-depth exploration of the main types of market structures in economics, discussing their characteristics, advantages, disadvantages, and real-world examples.
The nature of the commodity determines the market structure. the commodity may be either homogeneous or identical and heterogeneous or differentiated.
Also, The number of buyers and sellers or few sellers and large buyers, or mutual interdependence of buyers and sellers also determine the market structure.
Types of Market Structures in Economics
From the viewpoint of competition, the types of market structures in economics are the following:
- Perfect competition
- Monopolistic competition
The Market Structure can be shown in the following chart:
Thus, there are two extremes of market structure. On the one hand, we have perfect competition or pure competition and monopoly on the other hand.
In between these two extremes have imperfect competition consisting of monopolistic competition, oligopoly, and duopoly.
The various forms of the market structure are discussed below:
1. Perfect Competition
A market structure where a large number of buyers and sellers sell homogeneous products and the price is determined by the industry. All the times sell the product at one price.
Perfect competition prevails when the demand for the output of each product is perfectly elastic.
This entails first, that number of sellers is large, so that the output of any other seller is a negligible smaller portion of the total output of the commodity.
and second, that buyers are all alike in respect of their choice between rival sellers so that the market is perfect.
Thus, we can say that perfect competition is characterized by a large number of buyers and sellers with identical products sold at the price with the perfect mobility of factors and perfect knowledge of market conditions not influenced by either individual sellers or buyers in finalizing transactions.
English economists believe that there is perfect competition while American economist supports the concept of pure competition.
In pure competition, there is a lack of elements there are certain elements in existence.
The following are the salient features of the Pure competition:
- A large number of buyers and sellers
- Homogeneous product
- Free entry and exit of firms in an industry.
2. Monopolistic Competition
It is one of the forms/types of perfect competition. There is neither perfect competition nor pure monopoly market structures in practice.
Monopolistic competition is a market structure in between perfect competition and Monopoly.
Thus, Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller.
Monopolistic competition is there market structure in which there is a co-existence of competition and Monopoly to some degree.
Another type of market structure based on competition is Imperfect competition.
There is a small number of firms selling differentiated products.
Imperfect competition is the stage between perfect competition and monopoly.
Competition is said to be Imperfect if the number of sellers is limited and there is product differentiation.
On the basis of definitions of Imperfect competition, we can say that the following are the salient features of imperfect competition:
- A small number of buyers and sellers.
- Ignorance or laziness of buyers and sellers.
- Product differentiation.
- The difference in prices.
- Non-price competition or advertisement and sales promotion.
- High transport costs.
- Other factors prevailing in the market namely Trademarks, the behavior of sellers, credit facilities, home delivery and repair services, guarantees, samples, etc.
Oligopoly is also known as the competition among law. The word Oligopoly is made up of Oligos + Pollen. Oligos mean few and Pollen means to sell.
Thus, when an oligopoly firm sells a homogeneous product it is called Homogeneous Oligopoly.
Whereas when a firm of an Oligopoly industry sells differentiated products, It is called Heterogeneous Oligopoly.
It is also known as a differentiated Oligopoly.
Oligopoly, in which a market is run by a small number of firms that together control the majority of the market share
Market structure is also based on the number of buyers. It may be of the following types:
A market where there is a single bar of a commodity or service is called Monopsony.
A market where there are two buyers of a commodity or product is called the Duopsony market.
A market structure in which there are few buyers of a product the market is called Oligopsony.
These buyers can influence the price in the market by an agreement of association.
A market wherein there are two sellers or producers of a product is called do a Duopoly.
They have a complete hold over the supply of that product. A product of both the sellers is Homogeneous and the prices are also the same.
Both firms are interdependent and they try to keep the same price.
If a seller of the commodity lowers the price then the other seller is forced to reduce its price because customers will prefer to purchase the cheaper commodity.
Both sellers have to think about the possible impact when they are taking independent decisions relating to price and prediction.
In order to maximize the profits of each, they may form an association or can share the market and can charge high prices for the customers. It will lead to the exploitation of the customers.
When there is a single seller or producer of a commodity or service the market structure is called a monopoly market.
A pure monopolist should be taken who has full control of the supply of a particular product.
A pure monopolist, therefore, is a firm producing a product that has no effective substitutes through the products of any other form effective in the sense that even though the monopolist may be making abnormal profits, other firms cannot encroach on these profits by producing substitute commodities which might and entice purchases away from the product of the monopolist.
It can be well remarked that the producer under pure Monopoly is so powerful that he is always able to take the whole of all consumer’s income whatever levels of his output.
The average revenue curve of the firm under pure Monopoly will be a rectangular hyperbola within the elasticity of demand equal to Unity.
A pure Monopoly exists when there is only one producer in the market. There are no direct competitors.
Thus, a Monopoly market structure is one where there is a single seller of a commodity having full control over its supply and there is no close substitute.