MARKET STRUCTURES

Market Structure

Market structure is best defined as the organisational and other characteristics of a market

It refers to the number of competing firms in the market

It is defined by 3 characteristics:

1.The number of firms in the market

2.The ease of entry and exits of firms

3.The degree of product differentiation

4 Market structures

Perfect competition

Monopolistic

competitionOligopoly Monopoly

Least Most

Competitiveness Continuum

PERFECT COMPETITIONPerfect competition is an economic model of a market situation characterized by a large number of firms all making the same product

Features of perfect competition:Many firms.Freedom of entry and exitAll firms produce an identical or homogeneous product.All firms are price takersThere is perfect information and knowledge.In the long run, only normal profits can be earned

Monopolistic Competition

Monopolistic competition occurs when there are many firms in the industry, each selling a slightly differentiated product

Features of monopolistic competition:

A large number of firms

Easy entry

Differentiated products

Because each firm’s product is slightly different each firm is kind of a mini-monopoly-the only producer of that specific product

Oligopoly

A market in which there are a few

large firms competing with one another

The main features of oligopoly:

An industry which is dominated by a few firms.

Interdependence of firms, firms will be affected by how other firms set price and output.

Barriers to entry, but less than monopoly.

Differentiated products, advertising is often important

Most common market structure

MonopolyMonopoly is defined as a single seller of a product. i.e. 100% of market shares

Characteristics of Monopoly:There is a single seller

There are no close substitutes for the firms product

The firm is a ‘price maker’

No.of Firms

InfluenceOver price

Product Differentiation

Ads Entry intoMarket

Examples

PerfectCompetition

Many None None None Easy AppleWheats

Monopolistic Competition

Many Limited Fair Amount

FairAmount

Easy Restaurant

Oligopoly Few Some Fair Amount

Some Hard Automobiles

Monopoly One Extensive None None Very Hard

Microsoft

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