What is Market Structure?
Market structure, in economics, refers to how different industries are classified and
differentiated based on their degree and nature of competition for goods and services. It is
based on the characteristics that influence the behavior and outcomes of companies
working in a specific market.
Understanding Market Structures
In economics, market structures can be understood well by closely examining an array of
factors or features exhibited by different players. It is common to differentiate these
markets across the following seven distinct features.
1. The industry’s buyer structure
2. The turnover of customers
3. The extent of product differentiation
4. The nature of costs of inputs
5. The number of players in the market
6. Vertical integration extent in the same industry
7. The largest player’s market share
By cross-examining the above features against each other, similar traits can be established.
Therefore, it becomes easier to categorize and differentiate companies across related
industries. Based on the above features, economists have used this information to describe
four distinct types of market structures. They include perfect competition, oligopoly market,
monopoly market, and monopolistic competition.
3.1: PERFECT COMPETITION
FEATURES OF A PERFECTLY COMPETITIVE MARKET
Large Number of Sellers: Many small firms compete with each other.
Homogeneous Products: All firms sell identical products.
Price Takers: Individual firms cannot set prices; the market determines it.
Free Entry and Exit: Firms can easily enter or leave the market without restrictions.
Perfect Knowledge: Buyers and sellers have full knowledge of prices and products.
No Control Over Prices: Firms cannot influence the market price.
Lack of Innovation: Because of fixed profits, there is little motivation for innovation.
Note: Pure perfect competition is rare in the real world, but it's a useful model for comparison.
3.2: IMPERFECT COMPETITION
Imperfect competition includes market structures that do not meet all conditions of perfect competition.
The main types are Monopoly, Monopolistic Competition, and Oligopoly.
1. MONOPOLY
FEATURES:
Single Seller: One company controls the entire market.
No Substitutes: No close alternative products are available.
High Entry Barriers: Due to government licenses, ownership of resources, or high setup costs.
Price Maker: The firm has full control over the price.
Unique Product: Product sold is one-of-a-kind.
Examples: Public utilities, patented drugs.
2. MONOPOLISTIC COMPETITION
Features:
Many Sellers: Several companies selling similar but not identical products.
Product Differentiation: Goods are slightly different in quality, branding, or features.
Some Price Control: Firms can influence the price because of brand loyalty.
Free Entry and Exit: New firms can join the market easily.
Advertising is Important: Helps to differentiate products.
Short Term vs Long Term:
o Short Term: Firms may earn profits like a monopoly.
o Long Term: Profits decrease as more firms enter the market.
3. OLIGOPOLY
Features:
Few Large Firms: A small number of big companies dominate the market.
Interdependence: Firms consider the actions of competitors before making decisions.
Product Type: Can be identical (e.g., steel) or differentiated (e.g., cars).
Price Rigidity: Prices are often stable because companies react to each other’s changes.
Collusion Possible: Firms may cooperate (form cartels) to control prices and output.
Examples: Telecom industry, airline companies.
SUMMARY TABLE
No. of Price
Market Type Product Type Entry Barrier Example
Sellers Control
Perfect Competition Many Homogeneous None Very Low Agriculture products
Railways, Patented
Monopoly One Unique High Very High
drugs
Monopolistic
Many Differentiated Some Low Fast food, Clothing
Competition
Homogeneous or
Oligopoly Few Some/High Medium/High Telecom, Airlines
Diff.
Role of Government in Economic Structures
There are three main types of economic structures where the role of the government differs:
1. Socialist Economy
2. Capitalist Economy
3. Mixed Economy
A. Socialist Economy Structure
In a socialist economy, the government controls most parts of the economy, including production and
distribution. The goal is to make sure wealth and resources are shared equally.
Government's Role:
Owns and manages important industries and resources.
Plans the economy centrally (decides what to produce, how much, and at what price).
Reduces inequality by using taxes and welfare programs.
Sets prices, wages, and production levels.
Example:
Former Soviet Union – The government controlled nearly everything in the economy including
factories, farms, and services.
B. Capitalist Economy Structure
In a capitalist economy, the private sector (individuals and companies) owns most businesses. The
government has a limited role, and the market decides prices and production through supply and demand.
Government's Role:
Protects private property rights.
Enforces rules and contracts fairly.
Provides basic public services (like roads, defense, education).
Regulates markets to stop monopolies and protect consumers.
Example:
United States – Mostly private businesses, but the government regulates through agencies like:
o SEC (for financial markets)
o EPA (for environment)
o Department of Labor (for workers' rights)
C. Mixed Economy Structure
A mixed economy combines features of both socialism and capitalism. Both private businesses and the
government play important roles.
Government's Role:
Maintains a balance between free market and social welfare.
Provides essential services (like health, education, roads).
Fixes market problems (like pollution or monopolies).
Runs welfare programs to reduce poverty and support the needy.
Example:
Sweden, Norway, Denmark – These countries have:
o Free or low-cost healthcare
o Education support
o Strong social security
o Private companies also operate in a competitive market
Summary Table
Economic
Role of Government Ownership Example
Structure
Controls economy, plans everything,
Socialist Government-owned Former Soviet Union
redistributes wealth
Minimal role, protects rights, regulates
Capitalist Privately owned United States
fairly
Both public and Sweden, Norway,
Mixed Balances market with social welfare
private Denmark
