Market structures represent the economic environment in which firms or businesses operate and compete with one another. A particular industry or sector can be characterized by its market structure depending on the intensity of competition among involved firms, as well as the prevailing barriers to entry and exit barriers, the number of firms and customers, the level of differentiation among products, and pricing, among others. Nevertheless, to understand market structures better, note that there are four major types.
Four Major Types of Market Structures
1. Perfect Competition
One of the four major types of market structures that are common in market economies and diverse industries and sectors is the so-called perfect competition. To be specific, in a market with perfect competition, several firms operate and compete with one another.
There is no consensus as regards the required number of firms for a particular market to be considered under perfect competition. However, as a rule of thumb, the number of firms should be enough to the point that each has little influence over the market.
Other characteristics and advantages include a large number of buyers relative to the number of producers or sellers, lower barriers to entry, homogenous products with no differentiation, and pricing fixed by the market or set by a particular industry or sector as a whole.
Some examples of perfect competition include the oil and gas market, which is populated by different oil exporters, and the agricultural sector, which includes different farmers producing and selling homogenous agricultural products.
2. Monopolistic Competition
A monopolistic competition is a specific type of imperfect competition. It is characterized by a large number of producers or sellers and target consumers. Hence, similar to perfect competition, several firms operate and compete with one another.
However, the products are not entirely homogenous because each offers a considerable level of differentiations in terms of quality and features. Hence, these products are not perfect substitutes. The firms in this market attempt to seem different from one another.
Examples include the smartphone market which consists of different manufacturers offering products with different price points and features aimed at different market segments, as well as the fast-moving consumer goods market such as toothpaste and beverages markets.
Markets that have few but not less than two firms competing with each other while operating together to control the majority of market share are under an oligopolistic structure. These firms are neither price takers nor makers. They also tend to avoid price wars.
Products can either be homogenous or differentiated. Each firm monitors the price of its competitors and adjusts accordingly. In addition, instead of focusing on price, they focus on quality and efficiency to build and maintain a competitive advantage.
There are several types of oligopoly. The major ones include duopoly, which involves two major firms having power over a particular market; and oligopsony, which is characterized by a large number of producers or sellers and a smaller number of buyers.
Some examples of oligopoly include the mobile network carrier market in which there are a small number of service providers and a large customer base, as well as the cocoa market in which there is a large number of producers and a small number of buyers.
A monopoly is another one of the four major types of market structures characterized by the presence of a single firm that offers a particular good or service with no competition and substitute. This firm has complete control over a particular industry or sector.
It is also characterized by high barriers to entry due to higher technological requirements, sizeable capital or startup costs, or a particular firm devising and deploying entry-deterring strategies to lower or remove threats from new entrants.
Both the bargaining power of buyers and the bargaining power of suppliers are also very low. For buyers, there are no alternatives while for the suppliers, the bulk of their business and profitability depends on a single monopolistic firm.