Competition is one thing and one action that everybody has participated in at some point in their lives. Whether it be a small school debate or a school game. In economics, competition is also similar; businesses selling similar products or services are striving to survive and one comes out on top in the market.

In economics, competition encourages innovation and fair prices for consumers, while market structure classifies businesses based on the competition they have in the market.

In this article, we will explain the concept of market structure and how it relates to competition in economics.

What is the market structure?

Market structure can be seen as the conditions under which an organization operates. It explains things like how competitive the market is, how easy it is for a new company to enter the market, and how different each company’s products are from one another. It also alludes to how different organizations are separated as per their nature of competition for goods and services.

How market structure is classified

There are several features and characteristics that are considered before a market is classified into various types of market structures. These features are:

• The extent to which a company’s goods and services are similar or differentiated.
• The entry and exit barriers determine how hard or easy it is for companies to operate, enter, and leave the market.
• The number of companies in the market.
• The number of consumers in the market.
• How price is determined in the market.

The four types of market structure

There are various types of market structures that explain market competition, but there are four main types of market structure: perfect competition, oligopoly, monopolistic competition, and monopoly.

Perfect competition

Perfect competition happens when there are a huge number of small producers and companies competing. They are free to enter or exit the market, have no price control over commodities, and sell similar products.

In perfect competition, price fluctuations rarely happen because if a producer or company decides to increase its price, it might see sales decline. After all, consumers can get the same or similar product from another producer in the market. This is similar to producers and companies reducing their prices because even if they get more customers, their profits would reduce.

Example of perfect competition

When you go to a fruit market with hundreds of sellers all selling fruits, more than half of those sellers sell apples and oranges. The price for oranges and apples will be the same for more than half of those apple and orange sellers.

Another instance, using this example, is that a fruit market has no barrier to entry; apart from the basic requirements needed to sell, you don’t need special patents, licenses, or huge capital to run a small fruit stall in a fruit market.

Characteristics of perfect competition

Here are some characteristics that a perfect competition market possesses:

• There are a large number of buyers and sellers in this market.
• There is accurate knowledge and information about goods being sold to consumers.
• There are no entry barriers.
• There are easy entries due to low capital costs.
• There is no price control.
• Producers and companies alike sell similar goods and services.
• There are no transactional costs incurred in perfect competition.

Oligopoly

An oligopoly is a market that comprises a few big organizations that sell similar or differentiated goods and services, dominating the market. Due to the small number of players in the market, their competitive strategies are interdependent.

Example of oligopoly

An example of an oligopolistic market is the automobile market. Few companies in this industry are responsible for 95% of the automobiles we currently use. The automobile industry has five major players that dominate the market: General Motors, Chrysler, Ford Motors, Toyota Motors, and Honda Motors.

Characteristics of oligopoly

Here are some characteristics an oligopoly market possesses:

• There are high entry barriers.
• There are few companies and producers in the market.
• Companies are interdependent.
• There is no price competition.
• There is product differentiation.
• The price of products is rigid, and when prices are fixed, they are hard to change.

Monopolistic competition

Monopolistic competition is a market that has many companies or producers selling slightly different products that are not close substitutes. All players in this market have a small market share.

Example of monopolistic competition

Restaurants can be used as the perfect example. There could be five restaurants in an area; they all sell something similar, which is food, but their products can be differentiated either through the type of dishes they focus on or the methods and recipes they use to prepare their meals.

Characteristics of monopolistic competition

Here are some characteristics a monopolistic competition market possesses.

• Consumers most often don’t think there is a price difference among competitors.
• They are not perfect substitutes.
• There are many companies on the market.
• There is free exit and entry into the market.
• Marketing, product quality, and pricing are the main ways companies compete against each other.
• The goods and services produced by each company are slightly different.

Monopoly 

A monopoly is a market that has only one seller or producer. A monopoly happens in a market that has no competitors and where the only seller or producer can provide supply for the entire consumer market’s demand.

Example of monopoly

In a small town, there’s only one bakery to buy pastries from. If the bakery does not sell for a day, then the people of the town cannot eat fresh pastries. This bakery is said to be running a monopoly. 

There are also different industries that operate as monopolies, like the telecommunications industry or the electricity industry. These two industries are wired in such a way that there can’t be more than one player. The telecommunications industry is regulated because if there was free entry and anyone could come in and plant a mass to start their company, it would become dangerous.

Characteristics of monopolies

Here are some characteristics a monopoly market possesses.

• There is only one seller or producer.
• There is price discrimination.
• The producers and sellers are price makers.
• There are barriers to entry and exit.
• The sole seller faces zero competition.
• Their products are unique.
• There are no close substitutes for goods and services in the monopoly market.

Industry examples for the market structure types

Here are real-life examples of different industries and the types of markets they classify as:

Monopoly 

• Google
• Microsoft

Oligopoly 

• Film and media industry
• Telecommunications
• Automobile
• Aluminum 

Monopolistic competition

• Restaurants 
• Clothing 
• Make-up 

Perfect competition

• Food market 
• Foreign exchange market

Key Takeaway 

• Market structure helps explain how different industries are classified depending on how competitive they are in the industry.
• Competition in the industry forces companies to be innovative and promotes reasonable prices for consumers.
• We have four main types of market structures: perfect competition, oligopoly, monopolistic competition, and monopoly.
• The characteristics of each market are what differentiate them.

FAQs 

Q. What is competition and market structure?

Ans: Market structure explains the various markets and their level of competition. 

Q. Which of the market structures is less competitive? 

Ans: Market structure is important because it influences the outcome of the markets through incentives, opportunities, and choices made by economic players involved in the market.

Q. What is the advantage of a competitive market structure?

Ans: Competition encourages business growth and innovation. A competitive market is also beneficial for consumers, as strong competition between businesses leads to fair prices.

Take a quick quiz.

Let’s quickly test what we’ve learned.

Q. Which of these is not one of the main market structures?

1. Monopoly
2. Oligopoly
3. Oligopolistic competition

Q. This market structure has only one seller; which is it?

1. Monopolistic market
2. Oligopoly
3. Monopoly 

Q. What differentiates monopolies and oligopolies?

1. Their names are spelt differently.
2. They have different sellers in each market structure.
3. Economist.