Página 1 de 5

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

Juanita Bernal Muñoz

Página 2 de 5

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

Juanita Bernal Muñoz

Página 3 de 5

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.

Oligopolies are characterized by having few sellers which some or all of them control the

market. The behavior of each firm influence the others and it is difficult the entry to the market.

In this case the good may be differentiated or not. Although the concept of few is relative and

many authors consider small up to ten, in the case of oligopolies it does not have a specific limit

as long as there is dominance and influence power of the few firms. In other words, an oligopoly

can be considered as a consequence of mutual interdependence which means that an action by

one firm causes a reaction in the others (Tucker, 2011, p. 278).

Oligopolies can be classified depending on the behavior of the firms, a model in which firms

compete against each other is called game theory. This is commonly compared to a chess game

because firms try to guess its rivals (competitors) moves to act strategically. On the other hand, if

they cooperate in order to gain market power, it is called collusion. There are different types of

collusion, the most commons are price fixing, price leadership and cartel. In the first one, firms

enter an agreement to set the price; the second one occurs when there is a leading firm and the

other sellers set their price according to this; cartels are a way in which companies, instead of

competing, join forces to act as a monopoly, controlling not only the price but also the output of

the good. The latter type of collusion is illegal in many countries. These characteristics make

Juanita Bernal Muñoz

Página 4 de 5

oligopoly similar to monopoly, both tend to be inefficient and limit the possibilities of

consumers.

The objective of every seller or producer is to maximize its profits. In the case of a perfect

competition market the sellers (who only are able to choose the quantity to produce) look for the

level where the marginal revenues equals marginal costs. Monopolies also look for this equality.

Nevertheless, the revenues of them behave different because a monopoly can set not only the

quantity but also the price, it can sell less with a higher price or sell more with a lower price

obtaining a higher or a lower revenue per unit; while the marginal revenue in the perfect

competitive market is always equal to the price set by the market. Monopolistically competitive

firms also seek for a level where marginal costs equals marginal revenues and the condition for

profit maximization in oligopolies varies.

In the long run, economic profits also varies depending on the market structure. In the case of

perfect competitive and monopolistically competitive firms, these are zero due to the free enter

and exit of firms which means that the positive economic profits are temporary. Whereas, for a

monopolist the long run economic profits are positive as long as barriers to enter the market keep

potential competitors out. For oligopolies this varies depending on the type and firms behavior.

(Goodwin et al., 2014, p. 382)

In conclusion, there are market structures with market power (monopolies, oligopolies and

monopolistic competition) and there is perfect competitive markets which have no market power.

Consumers generally prefer a perfect competitive or a monopolistic competition market since

they benefit from competition because it tends to drive prices down and leads to greater variety,

quality and availability of goods. Whereas, for sellers the less competition the better. For them is

better to have market power in order to increase their profits, this is why from the point of view

Juanita Bernal Muñoz

Página 5 de 5

of producers a monopoly or oligopoly might be the best. Nevertheless, all market structures have

their pros and cons: on the one hand competition leads to the growth of the economy which

increases efficiency and benefit consumers, giving them the opportunity to have better goods for

a lower price; on the other hand it also increases the pollution, environmental damages and other

negative externalities.

References

Goodwin, N., Harris, J., Nelson, J., Roach, B. and Torras, M. (2014). Microeconomics in context. 3rd ed.

New York: Routledge.

Montoya, C. (2010). Nociones de economi ́a. 2nd ed. Manizales: Universidad Nacional de Colombia.

Facultad de Ingenieri ́a y Arquitectura.

Tucker, I. (2011). Economics for today. 7th ed. Mason: South-Western Cengage Learning.

Juanita Bernal Muñoz