what is market structures essay

Market Structures Essay

Introduction, types of market structures.

In an ordinary market structure, there is the assumption that there are several and different sellers and buyers. The result of this is fair competition where price of goods is determined by the forces of demand and supply. This is so because, in such a market, both the seller and buyer are equally able to influence the price.

However, this is not always the case. Some market industries have only a single seller or much fewer sellers than consumers, limiting the buyer’s ability to influence the price. This paper discusses the various market structures that exist in our market today and the various pricing strategies that could be applied in their management.

Pure monopoly

This type of market exists when there is only a single seller controlling the supply of goods or services in the entire market. He alone can control the price and prevents other businesses from entering the market. They commonly exist in a government-regulated setting. A case in point is the provision of electric and Natural gas utilities in the United States.

The government is the sole provider of these utilities and regulates their delivery to the public through the state, federal and local agencies. The prices are not arrived at through the forces of demand and supply but by the structures of the government. “The agencies govern the prices they charge, the terms of their services to consumers, their budgets and construction plans, and their programs for energy efficiency and other services,” (Regulatory Assistance Project 2011, P. 3).

Competition in this sector cannot thrive since the government provides subsidies to these utilities so as to provide cheaper services to the public, something that small private entities are unable to do. In addition, the infrastructural and technological requirement for the provision of the services would be so much of an expense for a private entity to meet.

Even though the government is the price maker here, it cannot set prices at a level that the consumer will not be able to afford if it wants to make profits. To set the prices, the monopolist should use the market demand curve and use it to set its own prices. The position marginal revenue for the monopolist should be less than the marginal revenue (MR). The position and elasticity of the demand curve works to limit the pricing mechanism of the monopolist.

The firm can only make maximum profits, on a short term, where the additional cost used to produce one more unit is equal to the resulting revenue from that one unit. For normal profits, the average revenue (AR) should be equal to the Average Total Cost (ATC). In the long run, the firm will only make profits where the AR is greater than the average cost (AC). (Mcconnel & Brue, 2009)

Pure Competition Market structure

This is a kind of a market where no single entity monopolizes the price determination process. Prices of goods are determined by forces of demand and supply and every player in the market has a part to play. A classic example would be a street vendor business.

In this kind of business, there is a large number of buyers and sellers and anyone may enter or leave the market at will without any barrier to doing so. Both consumers and producers are well informed of the prices and quality of goods and goods are homogenous across the market without much differentiation.

Every partaker is interested in maximizing profits as opposed to monopolizing the market whose returns are non-increasing to scale. Factors of production are freely mobile within the market with flexibility to ever-changing market circumstances. There are no new firms in the industry thus the same number of firms remains throughout.

In this market, the price is normally given by the demand and supply curve, as determined by the market forces, hence referred to as a ‘price taker’. The firm will sell its products at the current market prices and has no power to alter those prices. The stock is fixed while the supply curve will be perfectly elastic. In the short run, the firm can try to increase supply by increasing variable inputs. Profit will be maximized when MR is equal to MC. The firm must however fix their output to the prevailing market prices.

In the long run, the firm may change their unit of output as new firms enter the market. Supernormal profits will be realized where AR is greater than AC. When AR is greater than AC small firms starts quitting the market resulting into a decreased price. This will go on until AR is equal to AC and the firm makes normal profits. (McConnell & Brue, 2009)

Monopolistic Competition

This is a form of market where sellers deal with competitive products but which are differentiated from one another. It is almost like a perfect competition but though there are many firms in the industry, the products of each company are differentiated to make them unique to products of other firms.

An example is the Nike shoes. Even though many firms make shoes, which are equally competitive, only Nike makes that kind of shoe and one cannot obtain it from any other firm. The shoe is homogenous and specific to the firm and their differentiation gives monopoly over Nike to make the shoe alone.

Here, just like perfect market, the firm will take the market prices as determined by rival firms and will be forced to disregard their own influence on prices. In the short run, the firm may determine the prices depending on its level of differentiation and will have the same effects as a monopoly making huge economic prices.

However, as time goes by and competition increases, the effect of differentiation loosens gradually and the market changes to a perfect competitive one, with less profits. At the optimum quantity of production and optimum price, the firms will now earn normal profits. The equilibrium point, no new firms will be entering the industry.

Oligopoly market structure

This is a situation where there are few sellers of a commodity. The commodity being sold is however very similar but not identical to the others in the market. Products are close substitutes of each other but each firm has monopoly power over its own product. It also includes a duopoly where there are only two firms dealing with the product, e.g., Coca-cola and Pepsi. These two companies are the only known producers of carbonated soft drinks, yet their products are differentiated from each other.

For other firms to enter the market, they will require heavy investment and highly developed technology and incur high costs of promotion, thus posing a major barrier to entry of new firms and competition. The existing firms may also decide to merge, presenting even more difficulty to new entry. Both sellers have a substantial amount of influence on the pricing policies but there is mutual interdependency in price. The prices therefore remain relatively stable.

In this case, the pricing of Coca-cola will affect Pepsi’s price appreciably and the vice versa. Therefore, the best way is to agree, as between the two firms, on a pricing policy that is comfortable to the two firms. When such collusion of price determination occurs, the firms agree on an identical price, normally high, maximizing their profits and minimizing the production costs.

The pricing may be done through cost-plus pricing, which involves adding percentages of profit margin to Average Variables Cost to obtain the price. It may also be arrived at through the Mark-up pricing. Here the percentage mark-up it predetermined to cover the average margin. The AVC is estimated through the units of output produced over a given period of time. The level of output is used to determine the average cost.

Monopsony competition

Denotes a situation where one buyer buys from several existing sellers and he is therefore, the main determinant of the price in the entire market.

It is mostly found in the market for the exchange of factor services. The price he sets is lower than the market price and the quality exchanged is not correspondent to the price. For example, major sports clubs such as the National Baseball Association (NBA).

A baseball player wishing to be professional baseball player can only seek employment from NBA only. NBA will determine the minimum factor price which the player will and can take.

Though the monopsony is the price maker, if he wants to obtain quantity services, he has to part with a higher price or incur additional expenses or wages to hire more workers. The additional wages will enable him to earn more profits. These additional expenses are the marginal factor cost and the additional profits are the marginal revenue product. For maximization of profits, the firm should hire the quantity equal to the marginal factor cost and marginal revenue product, where these two curves meet, (Africa Awards, 2011).

The basic assumption of the existence of a perfect competitive market therefore, rarely exists. We have seen that there are markets dominated by one or two sellers or even one buyer.

Each market structure’s existence, however, is dependent on its power to influence the market price. There are also other minor types of markets that exist apart from the ones covered in this paper, for example a bilateral monopoly-duopsony, a market with two buyers and one seller. Also

Bilateral oligopoly-monopsony; one buyer and few sellers. However, all these are embedded in the five main ones discussed above.

Africa Awards. (2011). Market Structures: Monopsony , AmosWEB Encyclynomic WEB*pedia. Web.

McConnell, Campbell., & Brue, Stanley. (2009). Microeconomics: Principles, problems, and policies . New York: McGraw Hill. (18th Edition).

Regulatory Assistance Project. (2011). Electricity Regulation in the US: A Guide, Home Office, 50 State Street, Suite 3, Montpelier, Vermont 05602.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2018, October 12). Market Structures. https://ivypanda.com/essays/market-structures/

"Market Structures." IvyPanda , 12 Oct. 2018, ivypanda.com/essays/market-structures/.

IvyPanda . (2018) 'Market Structures'. 12 October.

IvyPanda . 2018. "Market Structures." October 12, 2018. https://ivypanda.com/essays/market-structures/.

1. IvyPanda . "Market Structures." October 12, 2018. https://ivypanda.com/essays/market-structures/.

Bibliography

IvyPanda . "Market Structures." October 12, 2018. https://ivypanda.com/essays/market-structures/.

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Types of market structure

• Perfect competition – Many firms, freedom of entry, homogeneous product, normal profit.
• Monopoly diagram
• Oligopoly diagram
• Collusive behaviour – firms seek to form an agreement to increase prices.
• Kinked demand curve model – when prices are stable and firms compete on non-price competition.
• Monopolistic competition – Freedom of entry and exit, but firms have differentiated products. Likelihood of normal profits in the long term.
• Contestable markets – An industry with freedom of entry and exit, low sunk costs. The theory of contestability suggests the number of firms is not so important, but the threat of competition.
• Duopoly  – where two firms dominate the market. For example, Pepsi and Coca Cola. Android vs Apple. A duopoly falls between a monopoly and oligopoly.

Related pages

• Objectives of firms
• Bertrand competition – (a competitive duopoly)

Table of Contents

What is market structure, types of market structures, monopolistic markets characteristics, oligopoly characteristics, perfectly competitive market characteristics, final thought, market structure: definition, types, features and fluctuations.

You all must have read about the immense scope of markets in economics textbooks. But what does market structure look like in the real world? Market structure can be categorized based on the competition levels and the nature of markets. Let’s look into the details of market structure in this article. 

Market structure refers to the way that various industries are classified and differentiated in accordance with their degree and nature of competition for products and services. It consists of four types: perfect competition, oligopolistic markets, monopolistic markets, and monopolistic competition.

According to economic theory, market structure describes how firms are differentiated and categorized by the types of products they sell and how those items influence their operations. A market structure helps us to understand what differentiates markets from one another.

In economics, market structure is the number of firms producing identical products which are homogeneous. The types of market structures include the following:

• Monopolistic competition, also called competitive market, where there is a large number of firms, each having a small proportion of the market share and slightly differentiated products.
• Oligopoly, in which a market is by a small number of firms that together control the majority of the market share.
• Duopoly, a special case of an oligopoly with two firms.
• Monopsony, when there is only one buyer in a market.
• Oligopsony, a market in which many sellers can be present but meet only a few buyers.
• Monopoly, in which there is only one provider of a product or service.
• Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.
• Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.

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The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation.

These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller’s financial need to cover its costs. In other words, competition can align the seller’s interests with the buyer’s interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.

Monopolistically competitive markets have the following characteristics:

• There are many producers and many consumers in the market, and no business has total control over the market price.
• Consumers perceive that there are non-price differences among the competitors' products.
• There are few barriers to entry and exit.
• Producers have a degree of control over price.

The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.
• Ability to set price: Oligopolies are price setters rather than price takers.
• Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.
• Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
• Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering the market to capture excess profits.
• Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).
• Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
• Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm's effects on market conditions is so negligible as to be safely ignored by competitors.
• Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition
• Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
• Zero entry and exit barriers – A lack of entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market.
• Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
• Perfect information - All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products.
• Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
• Profit maximizing - Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.
• Homogenous products - The qualities and characteristics of a market good or service do not vary between different suppliers.
• Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry.
• Property rights - Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer.

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly and pure monopoly. The main criteria by which one can distinguish between different market structures are the number and size of producers and consumers in the market, the type of goods and services being traded and the degree to which information can flow freely.

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Market Structure

Understanding perfect competition, monopoly, monopolistic competition, and oligopoly.

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at  Lazard in New  York where he completed numerous  M&A  transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in  corporate finance roles at  Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an  MBA  from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a  CFA  Charterholder.

Elliot currently works as a Private Equity Associate at Greenridge Investment Partners, a middle market fund based in Austin, TX. He was previously an Analyst in  Piper Jaffray 's Leveraged Finance group, working across all industry verticals on  LBOs , acquisition financings, refinancings, and recapitalizations. Prior to Piper Jaffray, he spent 2 years at  Citi  in the Leveraged Finance Credit Portfolio group focused on origination and ongoing credit monitoring of outstanding loans and was also a member of the Columbia recruiting committee for the Investment Banking Division for incoming summer and full-time analysts.

Elliot has a Bachelor of Arts in Business Management from Columbia University.

In simple terms, a market is any platform where buyers acquire what they want by exchanging goods, services, or any other item equivalent in value to the products they wish to purchase.

When you think of a market, you usually paint a picture where dozens of sellers have set up their stalls, and buyers flock to these stalls to purchase goods.

However, with globalization, markets have evolved significantly. You can buy anything from the comfort of your home! Markets are everywhere and even for the exchange of information.

The very meaning of a market changes when we observe it from the perspective of an individual customer and a company.

For a buyer, a market is a platform where he can acquire what he desires by offering something of an equivalent value. However, for a seller, it is the range of customers he caters to across all geographic regions.

For a firm to be able to answer the following questions, knowledge of market structure is necessary.

• Is our demand curve elastic or inelastic? What would be the impact on our revenue if we alter our prices?
• Is the market we operate in highly competitive? Who are our major competitors?
• Is there a price leader ? In other words, will all other firms follow this entity if they change their prices?

The major market structures are

Perfect competition

Monopolistic competition.

We will be looking at each of these structures in detail. But before we begin exploring them, I must introduce a few concepts. These concepts are essential to understanding each market form’s price determination process.

Market structure: What is total, marginal, and average revenue?

Understanding the idea behind total, marginal, and average revenue is not so difficult. Most of us probably apply this in our day-to-day purchases. The only difference is that we see these concepts from the “cost” spectrum.

The total revenue earned by an entity is simply the product of the number of units it sells and the price it charges per unit. From the cost perspective, the total cost is the product of the number of units you purchase and the price you pay per unit.

For example, if a firm sells 100,000 units of a product in a financial year and charges its buyers $20 for each unit, it has earned a total revenue of $2 million that year.

The average revenue (AR) is the quotient of the total revenue earned by a firm during a period and the number of units it has sold. In the above example, the firm has made an average revenue of $20 per unit.

Finally, the  marginal revenue (MR) is the revenue earned by selling one additional unit. For example, if the firm makes a revenue of $8000 by selling 800 units and a revenue of $8300 by selling 801 units, its marginal revenue is $300.

Can marginal revenue be negative? Absolutely. Take a look at this.

Total revenue by selling 100 units                                                                             300

Total revenue by selling 200 units                                                                             260

We can see that the marginal revenue has fallen by $40.

Conversely, a negative marginal revenue implies that total revenue is falling.

Another principle is that the marginal revenue curve is always steeper than the average revenue curve. Again, the reasoning is that a change in average revenue is spread out across all units, whereas the marginal revenue curve is focused on per-unit change.

Both the MR and AR curves are representative of the demand curve. This is because the demand curve follows the law of demand. According to the law of demand, all factors remain constant. Therefore, there is an inverse relationship between price and demand. For example, look at the diagram below.

We can see that the total revenue curve begins to fall right when the MR curve becomes negative. The total revenue is maximum when the marginal revenue is zero. 

Beyond this point, the firm will not earn additional revenue by selling more units. Furthermore, the average revenue curve cannot be negative (because it is impossible to charge a negative price for the product!).

Market equilibrium and determination of prices

I mentioned we would be studying price determination under different market scenarios. But, before that, let us give a general price determination overview. By now, you know that the price of a commodity is affected by demand and supply.

Have you ever gone to your local grocery store or an e-commerce website and been frustrated because your favorite item is “out of stock”? Or, have you started a business but were left with a lot of unsold stock?

We constantly come across demand-supply imbalances. Market equilibrium is when all demand is met, and all stock is sold. There is parity between demand and supply.

The figure below illustrates market equilibrium.

At point E, the market achieves equilibrium. This is the point at which demand equals supply. Notice that supply (S) keeps increasing as price increases, and demand (D) keeps declining. 

The firm would want to reduce the supply of commodities whose prices are falling as such commodities are deemed unprofitable. But, at the same time, customers would like to purchase more of these commodities to take advantage of reduced prices.

Therefore, below point “E,” demand is more than supply. Since many buyers cannot procure what they desire, they are willing to pay more to satisfy their needs. Therefore, we know that an increase in price causes an increase in supply. 

Therefore, production increases, demand is met, and equilibrium is restored.

Above point “E,” supply is more than demand. Producers are left with a lot of unsold stock. To increase sales, they reduce prices. A price reduction will increase demand and restore equilibrium.

Now that we’ve covered these concepts, let us explore the different market structures and how they operate.

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To understand perfect competition, let us take two situations you might experience. First, you walk into a car dealership to buy your first car. The approach would be to thoroughly examine all the different brands and models and shortlist the best ones.

Once you’ve selected your vehicle, you begin  price negotiations  with the salesman. If you’re uncomfortable with the price offered, you could walk away and approach another dealership.

Do you do the same while you purchase groceries? No. This is because you know that market prices for items such as milk, eggs, and bread are standardized in your area. Therefore, you would only negotiate a little.

This differentiator is what constitutes perfect competition. However, there are some features unique to this market structure.

• The products you see on the shelves are homogeneous, i.e., hardly any differentiating factor. However, in the case of a car, companies could use many elements, such as design, performance, etc., to gain a competitive advantage.
• No single buyer or seller has complete control over the market. The number of players is so large that a single entity cannot influence the operation of the entire market.
• There is absolutely no room for a price war. This is because there is no price leader. Furthermore, because of homogeneity in products, buyers can switch to a competitor’s product if they are unsatisfied with the price.
• Since no single entity controls the market, it naturally follows that no firm can place entry barriers over the market. Players are free to enter and exit as they desire.

Now that we know what perfect competition means, let us look at the price determination scenario under perfect competition.

Price determination in a perfectly competitive market

We can explore the idea of price determination under any market structure from two spectrums - the firm’s and the industry’s equilibrium.

In the previous section, we discussed the equilibrium of the industry, which is achieved when demand equals supply.

Determining the equilibrium of a firm is a slightly different ball game. The firm’s equilibrium is the point at which it has maximized its profit. Notice that I used the term  “profit” and not “revenue.”  We need to account for costs too.

We know that businesses in a perfectly competitive market cannot be price leaders. They need to sell their products at a price determined by the market, i.e., the equilibrium price. At this price, they can sell any number of units.

If they sell above the equilibrium price, they will lose customers. But, on the other hand, it does not make sense to operate below the equilibrium price as the firm will lose revenue.

Take a hypothetical example of a firm that sells bread. The market price for bread is $5 per kg. This is the equilibrium price, i.e., the price at which all firms have to sell bread.

We can map an output-revenue chart for this firm under different output conditions.

Notice that the average and marginal revenue remain constant irrespective of output and are equal to the price. Observe the figure below.

We can see that the price determined by the industry is the price followed by individual businesses. This is because the price/AR curve/MR curve is also the firm’s demand curve. The demand curve happens to be perfectly inelastic.

This means that the demand will be unaffected by a change in price, and the firm can sell any number of units it wishes to.

For a moment, let us talk about marginal cost. First, the marginal cost keeps declining as the firm generates more output due to economies of scale. Then, after a point, the marginal cost begins to increase due to diseconomies of scale.

As we proceed, you will understand why I spoke about marginal cost. A company in a perfectly competitive market must satisfy two conditions to achieve equilibrium.

• The marginal revenue must equal the marginal cost. If MR>MC, the firm must produce more. If MR<MC, the firm is incurring losses and must stop production.
• We can see from the figure below that MR = MC at two points. The equilibrium point is the point at which MC cuts MR and begins to rise.

At the first output point, MC = MR, but since the cost is falling, the firm must produce more. If the firm goes beyond point “E,” it will incur losses since the cost rises. Point “E” is the point at which the firm attains equilibrium.

This is a market structure that we would rarely come across today. It is a market where a single seller has complete control over the product. As a result, no other player sells the product, or the sales of the other players are insignificant. 

In short, the seller with the largest market share is the king.

Like a perfectly competitive market, a monopoly has a few distinguishable features.

• Only one entity controls the supply of the product. What does this mean? Do you remember how we said that perfectly competitive firms follow the industry and do not have any individual power? In a monopoly, since all control is with one entity, there is no difference between a firm and an industry. 
• The firm that controls the market does so because it has established strong barriers which other firms cannot penetrate. We will explore what these entry barriers are in just a moment. 
• While perfectly competitive firms accept the market’s price, monopolistic firms are free to adjust their prices.

Let us now explore ways businesses create a strategic advantage that leads to a monopoly.

• Some monopolies have access to precious resources. These resources are in short supply, and having control over such resources enables these firms to control market supply.
• It is not necessary that the firm artificially create entry barriers. Businesses that have improved their production activities and expanded their operations benefit from economies of scale.
• At times, the product or service in question may be hazardous. As such, there might be legal restrictions against mass production, and the authorities assign a single entity complete control.
• A group of businesses may form a conglomerate and use their resources to prevent further competition. New entrants would find it difficult to establish a business in such an environment.
• Some businesses have been in the market for so long that they continue to enjoy complete control solely due to their goodwill over the years.

Price determination in a monopoly market

In a monopoly market, there is no distinction between the business and the industry. Since one entity controls the market, we can map its demand curve exactly how we do so for an industry.

At different price points, the monopolist firm will see different demand levels. The price charged is the average revenue, i.e., the revenue per unit. Therefore, we can say that the average revenue curve represents the price and demand curve.

Although a monopolist enjoys complete control, he cannot charge any price he wishes. Often, regulators cap the price he can charge. But even if there are no restrictions on price, customers will not be willing to purchase beyond a price point.

Therefore, a firm in a monopoly market faces a downward-sloping demand curve.

How does a firm in a monopoly attain equilibrium? Perfectly competitive firms accept the market price. They do not have any restrictions on production and can sell any units at the market price.

In a monopolistic market, the seller must reduce the price to increase sales as the demand curve slopes downward. To attain equilibrium, the monopolist must find the combination of price and output that maximizes profits.

The equilibrium conditions for a monopolistic firm are similar to those of a perfectly competitive firm.

The average cost and marginal cost curves are similar across all market structures. The marginal cost curve initially declines due to economies of scale but later rises due to diseconomies of scale.

First, the marginal revenue curve intersects the marginal cost curve at point “E.” This is the profit maximization point. Second, “EQ” is the equilibrium quantity. Finally, we get the equilibrium price when we extend this point to the demand curve.

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Let us journey back to the concept of perfect competition. First, we learned that since all the products are homogeneous, the buyer can switch to a competitor’s offering. But, realistically, perfect competition is only a theoretical concept.

Take the example of milk. On the surface, it seems that milk is a homogeneous product. After all, how much can you differentiate milk?

However, businesses have developed many innovative offerings to differentiate themselves from their competitors. Such competition has led to the production of skim milk, organic milk, lactose-free milk, raw milk, and tons of other variants.

Price wars are seldom healthy. While businesses in a perfectly competitive market engage in price wars, a monopolistic competition environment is one where sellers attempt to make their products stand out.

This differentiating factor is why the market structure has been termed “monopolistic” competition. It is an amalgamation of both perfect competition and monopoly.

Let us look at some of the features of monopolistic competition.

• A perfectly competitive firm’s demand curve is elastic because the products are perfect substitutes. However, products in monopolistic competition are close substitutes, i.e., they have differentiating factors.
• Like the perfect competition, there are hardly any barriers to entry and exit . New players come and go as they please.
• The firm gains a competitive advantage through innovation rather than price wars.

Price determination under monopolistic competition

We established that monopolistic competition shows a relatively elastic demand curve because of product differentiation and close substitutes. 

The demand curve’s steepness measures the demand elasticity: the flatter the curve, the more elastic the demand. 

The elasticity of demand measures the magnitude of change in demand due to a price change. The more elastic the demand, the more the market responds to a change in price.

In a monopolistic competition scenario, the degree of differentiation will determine the elasticity of demand. Therefore, the more the product is differentiated, the greater the competitive advantage and the steeper the demand curve.

It is important to note that firms under monopolistic competition cannot earn  supernormal profits . Normal profit is a scenario where revenues are only sufficient to meet costs.

The reasoning is that many other firms would want to enter the industry if businesses generate revenues over and above their costs. Due to increasing competition, profits begin to fall, and the firm earns a normal profit.

Conversely, if enterprises incur losses, many players exit, and the market returns to earning normal profits.

The equilibrium of a firm in monopolistic competition is achieved by maximizing profits. Yet again, the conditions for equilibrium are the same as seen in the previous market structures.

We can see that the equilibrium point, i.e., the point at which the MR curve cuts the MC curve, is “E.” EV is the target output, and OP is the target price at which the firm operates.

Notice that the profit, i.e., the area from point “P” to point “E,” is the difference between the average revenue and average cost.

Remember how we said the marginal revenue curve is bound to fall and rise faster than the average revenue curve? This is because a change in the cost of producing one unit is more significant than the change in total per unit cost.

Therefore, when the cost curves are falling ( due to economies of scale ), the marginal cost curve falls faster and is below the average cost curve. Conversely, when the cost curves increase, the MC curve lies above the AC curve.

Let us explore the final market structure, i.e., oligopoly. An oligopoly is a more realistic market structure. We could describe oligopoly as a variation of monopoly.

In monopoly, we saw how a few market leaders firms form a conglomerate to create entry barriers for new entrants. Such a congregation is known as an oligopoly. 

The oligopolistic approach has a few features. These are discussed below.

• There are very few firms that collectively control the market. These firms create entry barriers on the strength of their market share .
• Unlike perfect competition, where no individual firm can affect the market’s performance, each player in an oligopoly can exercise influence over the market. Any move by one business will face similar retaliation from all other businesses.
• Like under monopolistic competition, players in an oligopoly actively avoid price wars. They compete through product differentiation and innovative ventures.
• Usually, firms that form a conglomerate appoint a leader. This leader guides the group’s actions and helps provide an operational framework. All businesses draft their policies by considering the movements of the leader.

We will conclude by looking at the price determination and equilibrium scenario under an oligopolistic market .

Price determination in an oligopolistic market

It is neither possible nor feasible for businesses in an oligopolistic environment to engage in price wars. As soon as competitors notice that a rival firm has altered its prices, they would also bring their prices down.

A unique feature of oligopoly is that it is challenging to create a demand curve for an individual firm because of rival responses. However, many strategies have been developed for price determination through experiential learning.

As discussed, one of the most common approaches is appointing a price leader. The price leader looks at industry trends and determines a price-output range to maximize profits. The other firms simply follow.

Sometimes, the businesses jointly agree to work in tandem and form an organization that serves the interests of all its members. As a result, all benefits arising from the conglomeration are shared equally or as agreed.

The most common example of such a conglomeration is the  Organization of the Petroleum Exporting Countries (OPEC) . 

The final approach is to ignore the collusion and act as independent entities completely. Each firm is responsible for its costs, profits, and losses. We can then draw up a demand curve for each firm.

Paul M. Sweezy  developed a theory depicting an oligopolistic firm’s demand curve. He opined that the demand curve of an oligopolistic firm is kinked, as shown below.

Notice that the demand curve becomes steeper after a point. This price point is the price that is predominant in the market. Below this point, demand is relatively inelastic, i.e., it does not respond much to price changes.

Key Takeaways

• There are four market structures - Perfect competition, monopoly, monopolistic competition, and oligopoly.
• In a perfectly competitive market, products are homogeneous, there are many sellers, the market determines the price, and each seller can sell as much output as desired at this price.
• A monopoly is a market where only one entity controls the working of the market. He is not a price taker but fixes the market’s price. There is no distinction between the firm and the industry.
• Monopolistic competition is also called imperfect competition. There are many sellers, just as in perfect competition, but competition is based on product differentiation rather than price.
• An oligopoly is a market wherein the major players form a conglomerate. This union is to prevent competition and create entry barriers.

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Competition and Market Structures

Definitions and Basics

Competition , from the Concise Encyclopedia of Economics

“Competition,” wrote Samuel Johnson, “is the act of endeavoring to gain what another endeavors to gain at the same time.” We are all familiar with competition—from childhood games, from sporting contests, from trying to get ahead in our jobs. But our firsthand familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the core concept around which all modern economics is built….

What are Market Structures? An Economics Topic Detail, by Arnold Kling

Market structures, or industrial organization, describe the extent to which markets are competitive. At one extreme, pure monopoly means that there is only one firm in an industry. At the other extreme, economists describe a theoretical possibility termed perfect competition. In between are the market structures found most often in the real world, which are oligopoly and monopolistic competition.

Competition and Market Structure : A Video and Quiz from EconEdLink

Monopoly , from the Concise Encyclopedia of Economics

A monopoly is an enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition: the market may be so small that it barely supports one enterprise. But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power…. The main kind of monopoly that is both persistent and not caused by the government is what economists call a “natural” monopoly. A natural monopoly comes about due to economies of scale—that is, due to unit costs that fall as a firm’s production increases. When economies of scale are extensive relative to the size of the market, one firm can produce the industry’s whole output at a lower unit cost than two or more firms could. The reason is that multiple firms cannot fully exploit these economies of scale. Many economists believe that the distribution of electric power (but not the production of it) is an example of a natural monopoly. The economies of scale exist because another firm that entered would need to duplicate existing power lines, whereas if only one firm existed, this duplication would not be necessary. And one firm that serves everyone would have a lower cost per customer than two or more firms.

The Costs and Benefits of Monopoly , at Marginal Revolution University

Timothy Taylor, The Blurry Line Between Competition and Cooperation , Econlib, February 2015.

What is the opposite of “competition”? If you fear that this is a trick question and run off to check a synonym/antonym dictionary, you will find an answer that probably came to mind in the first place: “cooperation.” Indeed, many people view economics as morally suspect because they perceive economics as emphasizing competition, rather than the arguably more virtuous approach of cooperation.

Industrial Concentration , from the Concise Encyclopedia of Economics

Industrial concentration occurs when a small number of companies sell a large percentage of an industry’s product. The most widely used measure of concentration is the so-called four-firm concentration ratio, which is the percentage of the industry’s product sold by the four largest producers. If, for example, four firms each sell 10 percent of an industry’s product, the four-firm concentration ratio for that industry is 40 percent….

In the News and Examples

Teaching Market Structures with a Competitive Gum Marke t, from EconEd at the St. Louis Fed

In this lesson, students participate in an activity that demonstrates a key economic idea: The level of competition in an industry is a major determinant of product prices. Students are placed in groups that replicate four competitive conditions—perfect competition, monopoly, competitive oligopoly, and collusive oligopoly. Students act as firms in each industry competing to sell their product to the teacher (acting as a consumer).

In Defense of Apple , by Richard McKenzie at Econlib, July 2012.

Richard McKenzie examines the 2012 antitrust case against Apple, providing a defense of the tech company based on antitrust enforcers misunderstanding of monopoly theory.

Antitrust , from the Concise Encyclopedia of Economics

Before 1890 the only “antitrust” law was the common law. Contracts that allegedly restrained trade (price-fixing agreements, for example) often were not legally enforceable, but such contracts did not subject the parties to any legal sanctions. Nor were monopolies generally illegal. Economists generally believe that monopolies and other restraints of trade are bad because they usually have the effect of reducing total output and, therefore, aggregate economic welfare (see Monopoly). Indeed, the term “restraint” of trade indicates exactly why economists dislike monopolies and cartels. But the law itself did not penalize monopolies. The Sherman Act of 1890 changed all that. It outlawed cartelization (every “contract, combination… or conspiracy” that was “in restraint of trade”) and monopolization (including attempts to monopolize)….

Don Boudreaux on Market Failure, Government Failure and the Economics of Antitrust Regulation . EconTalk podcast episode, October 1, 2007.

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about when market failure can be improved by government intervention. After discussing the evolution of economic thinking about externalities and public goods, the conversation turns to the case for government’s role in promoting competition via antitrust regulation. Boudreaux argues that the origins of antitrust had nothing to do with protecting consumers from greedy monopolists. The source of political demand for antitrust regulation came from competitors looking for relief from more successful rivals.

A Little History: Primary Sources and References

Of Competition and Custom , by John Stuart Mill . Book II, Chap. 4 from Principles of Political Economy

Under the rule of individual property, the division of the produce is the result of two determining agencies: Competition, and Custom. It is important to ascertain the amount of influence which belongs to each of these causes, and in what manner the operation of one is modified by the other. Political economists generally, and English political economists above others, have been accustomed to lay almost exclusive stress upon the first of these agencies; to exaggerate the effect of competition, and to take into little account the other and conflicting principle. They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do. This is partly intelligible, if we consider that only through the principle of competition has political economy any pretension to the character of a science….

Steven Horwitz, Competition and Entrepreneurship : The Fountainhead of the Contemporary Austrian School , Econlib, December 2020.

One way of seeing the contribution of Competition and Entrepreneurship , and Kirzner’s work on entrepreneurship more generally, is that he provided a Misesian solution to a Hayekian problem…The Hayekian problem was how to explain the process of social learning that led to the coordination that characterized equilibrium. What ensured that the tendency toward equilibrium would be effective? The answer Kirzner offered was to take from Mises the idea of the entrepreneurial element of human action- the idea that we are not just maximizers but active agents who do not take our means-ends frameworks as given, and to make entrepreneurship the prime mover of the market process. Kirzner argued that the process of plan coordination is set in motion by entrepreneurial alertness to hitherto unseen opportunities, the exploiting of which constitutes the competitive market process.

Garret Edwards, Competition as a Discovery Procedure: Smith, Hayek, and Leoni , AdamSmithWorks, May 19, 2021.

‘Competition is thus, like experimentation in science, first and foremost a discovery procedure. […] Competition as a discovery procedure must rely on the self-interest of the producers, that is it must allow them to use their knowledge for their purposes, because nobody else possesses the information on which they must base their decision.’ But what does that really tell us about competition? How is competition relevant in discovering new ways to improve our everyday lives? Is it possible that competition ends up being useful for entrepreneurs to innovate even when government regulations get in the way?

Non-market activity within the family: Gary Becker , biography from the Concise Encyclopedia of Economics

One of Becker’s insights was that a major cost of investing in education is one’s time. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist’s concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food….

Advanced Resources

Shedding Light on Market Power , by Morgan Rose at Econlib.

How should government react to firms with too much supposed market power? How ought barriers to entry be dealt with?

Why Predatory Pricing is Highly Unlikely , by David Henderson at Econlib, May 2017.

A widely held belief is that large firms with some market power can use their profits generated in particular markets to cut prices below costs in another market and drive out their competitors. Then, according to this belief, once the competitors are driven out, the large firms can raise their prices in that market and collect higher-than-competitive prices. There are two problems with this view. First, it is logically deficient. Second, there is little evidence to support it.

Is Market Failure a Sufficient Condition for Government Intervention? , by Art Carden and Steven Horwitz at Econlib, April 2013.

Externality problems are market ‘failures’ only in comparison to the perfectly competitive model’s equilibrium. In other words, the ‘failure’ here is not that markets ‘do not work’ in practice, but that they fail to live up to a blackboard ideal.

Related Topics

Markets and Prices

Roles of Government

Market structures

Economists identify several market structures, including perfect competition, monopolistic competition, duopoly, oligopoly and monopoly. We can identify the key differences in each market form, which revolve around:

• Barriers to entry
• Number of firms
• Product differentiation
• Level of competition
• Level of profits
• Efficiency levels, and:

We can now apply these to different market structures:

For perfect competition ;

• Knowledge is ‘complete’
• There are no barriers to entry or exit
• There are infinite numbers of competitive firms
• Products are identical
• Firms are price takers
• Super-normal profits are available in the short run, but not long run
• Firms are allocatively efficient in both the short and long run, but only productively efficient in the long run, and:
• Welfare is maximised

In the diagram we can see that, in the short run, the single firm can gain super-normal profits. However, this acts as an incentive for new firms to enter the market in anticipation of also making super-normal profits. Given that there are no barriers to entry, and with perfect knowledge, firms can enter. As they enter, the industry supply curve shifts to the right, pushing down the industry price. The effect of this is to reduce the super-normal profits available for each firm. Entry comes to an end when only normal profits are available to the 'marginal' firm.

For monopolistic competition

• Knowledge is only partial and asymmetric
• Minor barriers to entry exist
• There are large numbers of independent firms
• Products are differentiated
• Firms are price makers and can vary prices
• Firms are not allocatively or productively efficient in the short and long run, and:
• There is a welfare loss as price is greater than marginal cost

In a process similar to perfect competition, the firm operating under monopolistic competition can gain super-normal profits in the short run. This acts as an incentive for new firms to enter the market in anticipation of also making super-normal profits. They can enter either by offering a different product, or by making an 'existing' product more cheaply or more effectively. As firms enter, the industry supply curve shifts to the right, pushing down the industry price. As with perfect competition, the effect of this is to reduce the super-normal profits available for each firm, and entry comes to an end when only normal profits are available to the 'marginal' firm.

For oligopoly

• Knowledge is only partial and not symmetrical, with firms able to control information
• There are just a few interdependent firms
• Firms may engage in collusion, including overt, covert and tacit collusion (see Game Theory )
• Products may be differentiated
• Price tends to remain ‘ sticky ’- see the video for an explanation

For monopoly

• Knowledge is asymmetric, with the monopolist able to control information
• The monopolist is a 'price maker' and can set a price without taking competitors into account - however, monopolists may not have absolute power given that consumers may simply not purchase products if the price set is outside of their budget limit. This is, of course, problematic if the good or service is 'essential'
• The diagram below shows the main pricing options for a monopolist, including profit maximisation at output Q, revenue maximisation at output Q1 (whe MR=zero), and sales maximisation at output Q2 (where the monopolist sells as much as it can without making a loss)
• Major barriers to entry exist, including ‘limit’ pricing, vertical integration along the supply chain, and control of key resources, including infrastructure
• Super-normal profits are likely, (and are maximised at Q in the diagram, where MC = MR) though monopolists may make losses (as shown, especially when average cost is excessive)
• Given the likelihood that monopolists may act against the interests of consumers and the national economy, they may be nationalised, or tightly regulated through price controls, profit controls and special taxes, setting standards, fining anti-competitive practices, and establishing competition regulators, such as the Federal Trade Commission in the US, and the Competition and Markets Authority in the UK.

Try a Quiz on Market structures.

Perfect competition

More on perfect competition.

What are the disadvantages of oligopoly?

Game theory

How does game theory explain oligopoly?

Quickonomics

The Four Types of Market Structure

Four basic types of market structure characterize most economies: perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has its own set of characteristics and assumptions, which in turn affect the decision-making of firms and the profits they can make.

It is important to note that not all of these market structures exist in reality; some of them are just theoretical constructs (which can be really useful in economics sometimes). Nevertheless, they are critical because they help us understand how competing firms make decisions. With that said, let’s look at the four market structures in more detail.

1. Perfect Competition

Perfect competition describes a type of market structure where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market share or market power. As a result, the industry as a whole produces the socially optimal level of output because none of the firms can influence market prices.

Perfect competition is defined by the following characteristics:

• All firms maximize profits
• Entry and exit to the market are free (i.e., no barriers to entry or exit)
• All firms sell entirely identical (i.e., homogenous) goods
• There are no consumer preferences.

By looking at those assumptions, it becomes obvious that we will hardly ever find perfect competition in reality. This is important to note because it is the only market structure that can (theoretically) result in a socially optimal level of output.

Probably the best example of an almost perfectly competitive market we can find in reality is the stock market. If you are looking for more information on different types of competitive firms, you can also check our post on perfect competition vs. imperfect competition .

2. Monopolistic Competition

Monopolistic competition also refers to a type of market structure where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar but slightly differentiated products. That gives them a certain degree of market power despite small market shares, which allows them to charge higher prices within a specific range.

Monopolistic competition is defined by the following characteristics:

• All firms are profit-maximizing
• Firms sell differentiated products
• Consumers may prefer one product over the other (however, they are still very close substitutes).

Note that those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure no longer results in a socially optimal level of output because the firms have more power and can influence market prices to increase their total revenue and profit at the expense of the consumers.

An example of monopolistic competition is the market for cereals. There is a vast number of different brands (e.g., Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals.

3. Oligopoly

An oligopoly describes a market structure that is dominated by only a small number of firms that serve many buyers. That results in a state of limited competition. The firms can either compete against each other or collaborate (see also Cournot vs. Bertrand Competition ). By doing so, they can use their collective market power to drive up prices and earn a higher profit.

An oligopoly market is defined by the following characteristics:

• Oligopolies can set prices (i.e., they are price-makers)
• Barriers to entry and exit exist in the market
• Products may be homogeneous or differentiated
• Only a few firms dominate the market.

Unfortunately, it is not clearly defined what a “few firms” means precisely. As a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, we can look at the gaming console industry. This market is dominated by three powerful companies: Microsoft, Sony, and Nintendo. That leaves all of them with a significant amount of market power.

4. Monopoly

A monopoly refers to a type of market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as it supplies the entire demand curve and consumers do not have any alternatives. As a result, monopolies often reduce output to increase prices and earn more profit.

A monopoly is defined by the following characteristics:

• The monopolist is profit-maximizing
• It can set the price (i.e., it is the price-maker)
• There are high barriers to entry and exit
• Only one firm dominates the entire industry.

From the perspective of society, most monopolies are not desirable because they result in lower outputs and higher prices compared to competitive markets. Therefore, they are often regulated by the government.

An example of a real-life monopoly could be Monsanto. This company trademarks about 80% of all corn harvested in the US, which gives it a high level of market power. You can find additional information about monopolies in our post on monopoly power .

Frequently Asked Questions (FAQ)

How do real-world markets deviate from the ideal types of market structures outlined in the theory, especially in dynamic industries like technology.

Real-world markets often blend characteristics from different theoretical models, especially in dynamic sectors like technology, where innovation and strategic behaviors create more complex scenarios than those described by pure market structures.

What role does government regulation play in shaping and maintaining these market structures, and how do these regulations impact competition?

Government regulations are pivotal in shaping market structures, employing antitrust laws and policies to foster competition, prevent monopolistic dominance, and protect consumer interests, thereby influencing the competitive landscape.

How do market structures evolve over time with technological advancements and changing consumer preferences?

Market structures are not static; they evolve over time as a result of technological advancements, shifts in consumer preferences, and changes in regulatory landscapes. These evolutions can disrupt existing market equilibriums, leading to the emergence of new business models and the decline of others.

There are four basic types of market structure in economics: perfect competition, imperfect competition, oligopoly, and monopoly. Perfect competition describes a market structure where a large number of small firms compete against each other with homogeneous products. Meanwhile, monopolistic competition refers to a type of market structure where a large number of small firms compete against each other with differentiated products. An Oligopoly describes a market structure where a small number of firms compete against each other. And last but not least, a monopoly refers to a type of market structure where a single firm controls the entire industry.

Related Posts

• Macroeconomics

The Demographic Transition Model

• Microeconomics

The Economics Of Advertising

What is game theory.

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Home — Essay Samples — Business — Amazon — Market Structure Analysis – Amazon

Market Structure Analysis – Amazon

• Categories: Amazon

About this sample

Words: 382 |

Published: Jan 29, 2024

Words: 382 | Page: 1 | 2 min read

Table of contents

Overview of amazon's market structure, dominance of amazon in the e-commerce market, oligopolistic aspects of amazon's market structure, analysis of amazon's pricing strategy, antitrust and regulatory concerns.

• References> Evans, D. S. (2018). The antitrust economics of two-sided markets. Competition Policy International. Khan, L., & Vahe, R. (2016). Market power and inequality: The antitrust counterrevolution and its discontents. Harvard Law Review. Picker, R. (2017). Antitrust, competition policy, and inequality. The Antitrust Bulletin. Stucke, M. E., & Grunes, A. P. (2016). Big data and competition policy. Oxford University Press.

References> Evans, D. S. (2018). The antitrust economics of two-sided markets. Competition Policy International. Khan, L., & Vahe, R. (2016). Market power and inequality: The antitrust counterrevolution and its discontents. Harvard Law Review. Picker, R. (2017). Antitrust, competition policy, and inequality. The Antitrust Bulletin. Stucke, M. E., & Grunes, A. P. (2016). Big data and competition policy. Oxford University Press.

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Essay on market structure.

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Business competition takes on different forms depending on the type of market structure present in a given industry. This sample essay explores the four primary models of market structure:

• Perfect competition
• Monopolistic competition

Different types of market structure and competition

In the world of economics, the competition between businesses is not always the same or level. Certain fields of industry have very different types of markets than that of others. Where one business could find itself in a field of competition where the playing field is leveled and easy to gain a foothold within, others find themselves in playing fields that are heavily stacked to favor one (or several large) industrial player. The most common forms of market structure that are seen in the economic world are:

All of these market structures have defining characteristics that separate them from each other and are all set up in a way that will have a dramatic distinction on how the competition within that market works. The defining characteristics of the market structure will be one of the most important determining factors in how many, as well as, how large the major players within that particular market become.

One such example of a company that operates efficiently within its particular market structure is Samsung Electronics. By understanding and playing to the strengths of the market structure that the company finds itself within, Samsung Electronics has been able to become one of the largest and most financially successful companies in the business world.

Perfect competition and equilibrium within the market structure

The first market structure to be described is named perfect competition. This market structure is most easily recognized by the fact that its low barriers for entry on both the buyer and seller allow for the continued operation of a large number of firms (Econ Guru, 2006). With a market structure such as this, new firms are able to constantly enter the market so long as they offer a product or service to a consumer base that is well received.

The economic efficiency within the perfect competition market structure, therefore, is seen to be very high because of these low entry barriers for new firms, which allows for a constant and continued level of competition to be maintained by the different number of firms within the particular market (Riley, 2012). One of the benefits of perfect competition is easier access to market segmentation and determining the demographics of the market . One of the most surprising factors about this sort of market structure, however, is seen when examining the innovative behavior of firms within this market.

Upon first glance, one would naturally be inclined to believe that the innovative behavior for a perfect competition market would be very strong because start-up firms would want to bring new, creative ways to market in order to propel their firms into a position of exposure and success. Research shows this hypothesis to be incorrect, though. Instead, the innovative behavior of a perfect competition market is relatively weak.

“In capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition which commands a decisive cost or quality advantage and which strikes not at the margins of profits and the outputs of the existing firms but at their foundations and their very lives,” (Riley, 2012).

The old style monopolistic competition market structure

The next type of market structure to be examined is the monopolistic competition market structure.

Within this type of market, one would typically expect to see a large number of firms that produce a “congeneric product with distinguishable differentiations,” (Econ Guru, 2006).

This means that firms within this market structure will have many different competitors within the market, but each competitor will be selling a slightly different type of product. Within this market, the entry barriers for both the buyer and the seller are very low and allow for easy entry or exit from the market (Hubbard & O’Brien). Compare Google Docs and Microsoft Word for example. Both companies offer data and word processing software that have similar but distinctly difference attributes.

One of the distinguishing features for firms within this market structure comes from the pricing found within it. Within a monopolistic competition market, the firms act as the price makers; they can set, raise, and lower the price of their products because they are selling something that is highly individualized (Economics Online).

Because of the set up of this market structure, the level of innovation is considered to be quite strong as firms entering the market can make subtle changes to existing products to form new, unique ones. This market structure, therefore, places a high emphasis on advertising.

Firms that operate within the monopolistic competition market are, “often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences, ” (Economics Online).

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Monopoly's role within a structured economy

A third market structure seen in the economic world is the monopoly. The monopoly is characterized as a market in which there is only one provider for a good or service to consumers (Econ Guru). Within this type of market structure, the barriers for entry are extremely high as the firm with all of the power in the market can undercut its prices and force competitors out of the market. The United States started to abolish monopolies within the nation during the 1890's with the enactment of the Sherman Antitrust Act .

From a buyer’s perspective, the barriers are low as their selection for products or services is so limited. In a pure monopoly with only one firm controlling the market, the type of product is very limited; in fact, it is exclusively limited to what that particular firm offers to its consumers (Riley, 2012).

Being the controlling power of the market, a firm operating within a monopoly is considered to be a price maker in that it will be able to continually set, raise, and lower the cost of its offered product or service. Within this type of market structure, the economic efficiency does run the risk of being damaged as the controlling firm will not have to deal with any competition, which could allow for the firm to become inefficient over time (Riley, 2012).

The same holds true for the innovative behavior within a monopolistic market. The controlling firm has no real reason to be constantly reimagining and redesigning its products or services and can instead release upgrades and updates at its own pace with no real urgency. Although, it is worth noting that a firm that holds a monopoly on the market could also have a strong innovative behavior because it is able to spend a great deal of its profits on research and development.

Oligopolies and corporations' efforts to control the market

The final market structure to observe is the oligopoly. Similar to a monopoly in many regards, the oligopoly has one major difference when compared to the former. Within a monopoly, there is one firm that controls the market, whereas an oligopoly has a few firms that dominate the market (Econ Guru, 2006). A market structure such as this will place considerable barriers on new firms that are entering the market as they must compete with several corporate giants, but will put limited barriers on the buyer because of the different options available to him or her.

The firms that dominate the market of an oligopoly can act, for the greater part, as price makers so long as the dominant firms keep their prices relatively similar (Riley, 2012). One such example of this occurring in the real world is seen in the gas industry. The large firms that control the industry are able to set the price for gasoline to whatever they should choose so long as the competition does not dramatically lower their own prices and attract a larger proportion of the market to utilize its product exclusively. It is within this market that the innovative behavior is observed to be the highest (Riley, 2012).

The dominant firms are seen to spend a significant portion of their marketing resources on research and development so that they can have the most innovative products to offer to their consumer base in order to attempt to gain a larger control of the market and gain a competitive advantage over their major competitors. It is this sort of market structure that Samsung Electronics finds itself a part of.

Samsung Electronics operates in a market that is clearly an oligopoly. One of the major components to this firm is seen in its cellular phone sales. In this market, Samsung operates as a dominant force along with such companies as Apple, Motorola, and LG. Outside of these major players, the competition is much more limited.

It is extremely difficult for outside firms to gain a foothold in this market because the dominant firms have such a large percentage control of the consumer base currently. The effectiveness of the market structure is extremely beneficial for Samsung, and they have taken full advantage of it to become one of the most dominant firms in their particular market. It is directly from the structure of the market that the forms of labor and demand are shaped for Samsung.

Samsung and the oligopoly

The demand that Samsung receives is based almost entirely as a consequence of the market structure of an oligopoly. Because Samsung created a business strategy that is able to dominate the market and place a high emphasis on the research and development of new, innovative products, the firm is able to offer technologically superior products to its consumer base that allows for the demand for its products to rise.

The Galaxy S III is a perfect example of this. This particular product is so innovative and well designed that it has allowed Samsung to become one of the top sellers of mobile phones worldwide and has consistently beaten out the iPhone 5 (Samsung’s main competition from Apple) on a consistent basis. In terms of labor, as well as supply, the same basic principle holds true.

It is because of the dominant share of the market that Samsung controls by successfully navigating its market structure that allows for the company to produce so many products and keep its supply high enough to meet the demand facing it, and in order to produce such a high supply of new, innovative products, Samsung is able to employ a large labor force for everything from assembly of a product to research and development of new ways to design, market, and ultimately sell to its consumer base.

Market structures play a key role in the way a firm is able to do business. By understanding what sort of market structure that a firm is placed in, that firm will be able to see if the cost of business is worth continuing to fight for. The factors that separate the different types of market structures can be the difference in whether or not a start-up firm will be able to become successful or be driven from business by the major players that currently exist in that particular market structure.

It is by understanding and playing to the market structure that certain companies such as Samsung Electronics have been able to become so successful. Different market structures place emphasis on different factors; however, one truth is held. In the end, every firm is simply trying to push its products or services onto its consumer base. This is one of many economic axioms that has come about as a result of study and research paper writing .

Econ Guru. (2006). Market structure. EconGuru Economics Guide, Retrieved from http://www.econguru.com/micro/market-structure.shtml

Economics Online. (2012). Monopolistic competition. Economics Online, Retrieved from http://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html

Hubbard, R. G., & O'Brien, (2012). Economics. (4th ed.). Prentice Hall.

Riley, G. (2012, September 23). Market structure summary. Tutor2u, Retrieved from http://www.tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html

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A2 Micro: Market Structure, Conduct & Performance

19th May 2011

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This updated revision presentation is designed to help students preparing for markets-related topics on A2 economics specifications.

Market Structure Conduct & Performance - revision presentation

Download printable (pdf) slide handout

Market structure is best defined as the organisational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing – but it is important not to place too much emphasis simply on the market share of the existing firms in an industry.

Traditionally, the most important features of market structure are:

*The number of firms (including the scale and extent of foreign competition) *The market share of the largest firms (measured by the concentration ratio – see below) *The nature of costs (including the potential for firms to exploit economies of scale and also the presence of sunk costs which affects market contestability in the long term) *The degree to which the industry is vertically integrated - vertical integration explains the process by which different stages in production and distribution of a product are under the ownership and control of a single enterprise. A good example of vertical integration is the oil industry, where the major oil companies own the rights to extract from oilfields, they run a fleet of tankers, operate refineries and have control of sales at their own filling stations. *The extent of product differentiation (which affects cross-price elasticity of demand) *The structure of buyers in the industry (including the possibility of monopsony power) *The turnover of customers (sometimes known as “market churn”) – i.e. how many customers are prepared to switch their supplier over a given time period when market conditions change. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketing

Market structure and innovation

Which market conditions are optimal for effective and sustained innovation to occur? This is a question that has vexed economists and business academics for many years.

High levels of research and development spending are frequently observed in oligopolistic markets, although this does not always translate itself into a fast pace of innovation.

The work of William Baumol (2002) provides support for oligopoly as market structure best suited for innovative behaviour. Innovation is perceived as being “mandatory” for businesses that need to establish a cost-advantage or a significant lead in product quality over their rivals

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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