Market Structures

There are four types of market structures. They are perfect completion, monopolistic competition, oligopoly, and monopoly. A large number of sellers characterize perfect competition. The large number of sellers in a perfect competition is because there are no barriers of entry or exit in the market. Sellers can enter and leave the market at their will. Due to the large number of sellers, the market share in perfect competition is evenly distributed.

Product is a commodity also characterizes perfect competition market. This is because the large number of sellers/producers in this market makes it impossible for buyers to identify which firm produces what. Sellers who trade in commodities participate in the same market where sellers who trade in products participate. For example, wheat producers participate in the same market where wheat flour sellers participate. In fact, buyers view sellers of products and commodities similarly.

Advertising by firms is a characteristic of monopolistic competition. Firms in monopolistic completion market conduct advertising as a method of differentiating their products. In monopolistic competition market, there is large number of firms and the products are highly differentiated. Therefore, advertising becomes one of the best methods of making a given firm’s products gain a competitive edge in the market.

Barriers of entry, is a characteristic of monopoly and oligopoly markets. In a monopoly market, there is only one seller while in an oligopoly market there are a few sellers (usually two). The few numbers of sellers in these markets is because of existence of barriers of entry into the markets. Such barriers include economic barriers, such as technological superiority, capital requirements, economies of scale, and cost advantages, governmental regulation/control, patents, and tactical actions by current firms directed towards discouraging new entrants.

Firms are price makers is also another characteristic of monopoly and oligopoly markets. In a monopoly market, the seller has the liberty to fix prices at will. This is because a monopoly’s price actions do not have effects on the demand of the product. There are no competitors or substitute goods, which can interfere with price actions of a monopoly. Likewise, in oligopoly market, the interdependence nature of firms makes it possible for them to set prices. The action of one firm easily influences the actions of other firm. Therefore, when one sets a new price, the other firm follows.