The Different Market Structures

The Different Market Structures

       “Market structure is defined as a set of characteristics which determine corresponding demand and supply conditions” (Tucker, 2011, p. 211). The main issues which differentiate this market structures revolve around the number of sellers and buyers, the differentiation of products and the existing barriers to enter the market. These features determine the degree of power over a market of a single seller, which is the ability to influence, dominate or control the conditions for the exchange of goods and services. Competition is another key point in these structures, which is beneficial for some and undesirable for others. There are four types of market structure consider by traditional economics: monopoly, perfect competitive market, monopolistic competition and oligopoly.  The first two are completely opposite but have some similarities with the others.

      Monopolies have only one seller, the good has no substitutes and there are barriers to enter the market, these barriers may be political, legal, economical or the result of a strategy or advantage of one of the sellers. Examples of barriers are: a firm entering an agreement with its distributors such that they do not supply other competitors; selling the good at a very low price leaving others without competitive power; or commercializing in other country at a price which is lower than the cost of production there. Also, there are different types of monopolies such as a natural monopoly, which arises when a firm is so efficient that it manages to have a great advantage in costs, leaving others out of the market; a local monopoly when it corresponds to a specific place or region; or a regulated monopoly when the government has control of it.

       Perfect competitive markets are characterized for having a great number of sellers and buyers which have complete information about all the options available, the good is supposed to be identical and there are no barriers to enter or exit the market. Clearly, monopolies and perfect competitive markets are completely opposite. While the former has a single seller, in the latter none of the sellers is big enough to dominate or influence the market. While in the first one there are barriers to enter the market, in the second one there are no barriers, and also there are different types of monopolies but only one type of perfect competition market. These differences makes monopolies price makers, which means that a seller has the power to set the price; and perfect competitive markets price takers, which means that a seller has no power to set price and this is determined by the interaction of market supply and demand. However, in practice if a monopoly set a price too high such that consumers cannot or are not willing to pay, it will be forced to reduce it. (Godwin et al, 2014).

       It is important to mention that in practice, it is difficult to find a pure market structure, especially in the case of perfect competition because the assumptions needed might be considered utopian: there are very few identical products and it is unlikely that all producers and consumers have complete information about the market. In the case of monopolies the gap between theory and practice may be much smaller, for example in many countries electricity and water services are state monopolies which set the price as the government wants, they have no substitutes and it is not possible to enter the market.

       Monopolistic competition is probably the most common structure. It is very similar to perfect competitive market because in both, there are many small sellers and it is easy to enter or exit the market. The difference between them lies in the good which is offered, while in the perfect competitive market the good is supposed to be identical, in the monopolistic competition it can be differentiated. This differentiation makes a monopolistic competitor a price maker similar to what happens is a monopoly and contrary to a perfect competitive market. This is because producers seek to differentiate themselves and they have different target markets. For instance, while some producers seek to compete with low prices, others do so with quality or exclusivity. It is important to mention that the price elasticity of demand in the monopolistic competition is more elastic than the one of a monopoly but less elastic that the one for a perfect competitive market. In other words, changes in the quantity demanded are more sensitive to a price change in the monopolistic competition than in a monopoly but not as much as in a perfect competitive market.

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