Market Structure: Meaning,

Characteristics and Forms | Economics

Market structure refers to the nature and degree of
competition in the market for goods and services. The
structures of market both for goods market and service
(factor) market are determined by the nature of competition
prevailing in a particular market.

Meaning of Market:

Ordinarily, the term “market” refers to a particular place

where goods are purchased and sold. But, in economics,
market is used in a wide perspective. In economics, the term
“market” does not mean a particular place but the whole
area where the buyers and sellers of a product are spread.

This is because in the present age the sale and purchase of

goods are with the help of agents and samples. Hence, the
sellers and buyers of a particular commodity are spread over
a large area. The transactions for commodities may be also
through letters, telegrams, telephones, internet, etc. Thus,
market in economics does not refer to a particular market
place but the entire region in which goods are bought and
sold. In these transactions, the price of a commodity is the
same in the whole market.
According to Prof. R. Chapman, “The term market refers not
necessarily to a place but always to a commodity and the
buyers and sellers who are in direct competition with one
another.” In the words of A.A. Cournot, “Economists
understand by the term ‘market’, not any particular place in
which things are bought and sold but the whole of any
region in which buyers and sellers are in such free
intercourse with one another that the price of the same
goods tends to equality, easily and quickly.” Prof. Cournot’s
definition is wider and appropriate in which all the features
of a market are found.

Contents:

1. Meaning of market
2. Characteristics of market
3. Market structure
4. Forms of market structure

Characteristics of markets

The essential features of a market are:

(1) An Area:

In economics, a market does not mean a particular place

but the whole region where sellers and buyers of a
product ate spread. Modem modes of communication and
transport have made the market area for a product very
wide.
(2) One Commodity:

In economics, a market is not related to a place but to a

particular product.

Hence, there are separate markets for various

commodities. For example, there are separate markets for
clothes, grains, jewellery, etc.

(3) Buyers and Sellers:

The presence of buyers and sellers is necessary for the

sale and purchase of a product in the market. In the
modem age, the presence of buyers and sellers is not
necessary in the market because they can do transactions
of goods through letters, telephones, business
representatives, internet, etc.

(4) Free Competition:

There should be free competition among buyers and

sellers in the market. This competition is in relation to the
price determination of a product among buyers and
sellers.

(5) One Price:

The price of a product is the same in the market because

of free competition among buyers and sellers.

On the basis of above elements of a market, its general

definition may be as follows:

The market for a product refers to the whole region where

buyers and sellers of that product are spread and there is
 such free competition that one price for the product
prevails in the entire region.

Market Structure:

Market structure refers to the nature and degree of

competition in the market for goods and services. The
structures of market both for goods market and service
(factor) market are determined by the nature of
competition prevailing in a particular market.

Determinants:

There are a number of determinants of market structure

for a particular good.

They are:

(1) The number and nature of sellers.

(2) The number and nature of buyers.

(3) The nature of the product.

(4) The conditions of entry into and exit from the market.

(5) Economies of scale.

They are discussed as under:

1. Number and Nature of Sellers:

The market structures are influenced by the number and

nature of sellers in the market. They range from large
number of sellers in perfect competition to a single seller
in pure monopoly, to two sellers in duopoly, to a few
sellers in oligopoly, and to many sellers of differentiated
products.

2. Number and Nature of Buyers:

The market structures are also influenced by the number

and nature of buyers in the market. If there is a single
buyer in the market, this is buyer’s monopoly and is called
monopsony market. Such markets exist for local labour
employed by one large employer. There may be two
buyers who act jointly in the market. This is called
duopsony market. They may also be a few organised
buyers of a product.

This is known as oligopsony. Duopsony and oligopsony

markets are usually found for cash crops such as rice,
sugarcane, etc. when local factories purchase the entire
crops for processing.

3. Nature of Product:

It is the nature of product that determines the market

structure. If there is product differentiation, products are
close substitutes and the market is characterised by
monopolistic competition. On the other hand, in case of no
product differentiation, the market is characterised by
perfect competition. And if a product is completely
different from other products, it has no close substitutes
and there is pure monopoly in the market.

4. Entry and Exit Conditions:

The conditions for entry and exit of firms in a market

depend upon profitability or loss in a particular market.
Profits in a market will attract the entry of new firms and
losses lead to the exit of weak firms from the market. In a
perfect competition market, there is freedom of entry or
exit of firms.

But in monopoly and oligopoly markets, there are barriers

to entry of new firms. Usually, governments have a
monopoly in public utility services like postal, air and road
transport, water and power supply services, etc. By
granting exclusive franchises, entries of new supplies are
barred. In oligopoly markets, there are barriers to entry of
firms because of collusion, tacit agreements, cartels, etc.
On the other hand, there are no restrictions in entry and
exit of firms in monopolistic competition due to product
differentiation.

5. Economies of Scale:

Firms that achieve large economies of scale in production

grow large in comparison to others in an industry. They
tend to weed out the other firms with the result that a few
firms are left to compete with each other. This leads to the
emergency of oligopoly. If only one firm attains economies
of scale to such a large extent that it is able to meet the
entire market demand, there is monopoly.

Forms of Market Structure:

On the basis of competition, a market can be classified in

the following ways:

1. Perfect Competition

2. Monopoly

3. Duopoly
4. Oligopoly

5. Monopolistic Competition

1. Perfect Competition Market:

A perfectly competitive market is one in which the number

of buyers and sellers is very large, all engaged in buying
and selling a homogeneous product without any artificial
restrictions and possessing perfect knowledge of market
at a time. In the words of A. Koutsoyiannis, “Perfect
competition is a market structure characterised by a
complete absence of rivalry among the individual firms.”
According to R.G. Lipsey, “Perfect competition is a market
structure in which all firms in an industry are price- takers
and in which there is freedom of entry into, and exit from,
industry.”

Characteristics of Perfect Competition:

The following are the conditions for the existence of

perfect competition:

(1) Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers

must be so large that none of them individually is in a
position to influence the price and output of the industry
as a whole. The demand of individual buyer relative to the
total demand is so small that he cannot influence the price
of the product by his individual action.
Similarly, the supply of an individual seller is so small a
fraction of the total output that he cannot influence the
price of the product by his action alone. In other words,
the individual seller is unable to influence the price of the
product by increasing or decreasing its supply.

Rather, he adjusts his supply to the price of the product.

He is “output adjuster”. Thus no buyer or seller can alter
the price by his individual action. He has to accept the
price for the product as fixed for the whole industry. He is
a “price taker”.

(2) Freedom of Entry or Exit of Firms:

The next condition is that the firms should be free to enter

or leave the industry. It implies that whenever the
industry is earning excess profits, attracted by these
profits some new firms enter the industry. In case of loss
being sustained by the industry, some firms leave it.

(3) Homogeneous Product:

Each firm produces and sells a homogeneous product so

that no buyer has any preference for the product of any
individual seller over others. This is only possible if units
of the same product produced by different sellers are
perfect substitutes. In other words, the cross elasticity of
the products of sellers is infinite.

No seller has an independent price policy. Commodities

like salt, wheat, cotton and coal are homogeneous in
nature. He cannot raise the price of his product. If he does
so, his customers would leave him and buy the product
from other sellers at the ruling lower price.

The above two conditions between themselves make the

average revenue curve of the individual seller or firm
perfectly elastic, horizontal to the X-axis. It means that a
firm can sell more or less at the ruling market price but
cannot influence the price as the product is homogeneous
and the number of sellers very large.

(4) Absence of Artificial Restrictions:

The next condition is that there is complete openness in

buying and selling of goods. Sellers are free to sell their
goods to any buyers and the buyers are free to buy from
any sellers. In other words, there is no discrimination on
the part of buyers or sellers.

Moreover, prices are liable to change freely in response to

demand-supply conditions. There are no efforts on the
part of the producers, the government and other agencies
to control the supply, demand or price of the products.
The movement of prices is unfettered.

(5) Profit Maximization Goal:

Every firm has only one goal of maximizing its profits.

(6) Perfect Mobility of Goods and Factors:

Another requirement of perfect competition is the perfect

mobility of goods and factors between industries. Goods
are free to move to those places where they can fetch the
highest price. Factors can also move from a low-paid to a
high-paid industry.
(7) Perfect Knowledge of Market Conditions:

This condition implies a close contact between buyers and

sellers. Buyers and sellers possess complete knowledge
about the prices at which goods are being bought and
sold, and of the prices at which others are prepared to buy
and sell. They have also perfect knowledge of the place
where the transactions are being carried on. Such perfect
knowledge of market conditions forces the sellers to sell
their product at the prevailing market price and the
buyers to buy at that price.

(8) Absence of Transport Costs:

Another condition is that there are no transport costs in

carrying of product from one place to another. This
condition is essential for the existence of perfect compe-
tition which requires that a commodity must have the
same price everywhere at any time. If transport costs are
added to the price of the product, even a homogeneous
commodity will have different prices depending upon
transport costs from the place of supply.

(9) Absence of Selling Costs:

Under perfect competition, the costs of advertising, sales-

promotion, etc. do not arise because all firms produce a
homogeneous product.

Perfect Competition vs Pure Competition:

Perfect competition is often distinguished from pure

competition, but they differ only in degree. The first five
conditions relate to pure competition while the remaining
four conditions are also required for the existence of
perfect competition. According to Chamberlin, pure
competition means, competition unalloyed with monopoly
elements,” whereas perfect competition involves
perfection in many other respects than in the absence of
monopoly.” The practical importance of perfect
competition is not much in the present times for few
markets are perfectly competitive except those for staple
food products and raw materials. That is why, Chamberlin
says that perfect competition is a rare phenomenon.”

Though the real world does not fulfil the conditions of

perfect competition, yet perfect competition is studied for
the simple reason that it helps us in understanding the
working of an economy, where competitive behaviour
leads to the best allocation of resources and the most
efficient organization of production. A hypothetical model
of a perfectly competitive industry provides the basis for
appraising the actual working of economic institutions and
organizations in any economy.

2. Monopoly Market:

Monopoly is a market situation in which there is only one

seller of a product with barriers to entry of others. The
product has no close substitutes. The cross elasticity of
demand with every other product is very low. This means
that no other firms produce a similar product. According
to D. Salvatore, “Monopoly is the form of market
organisation in which there is a single firm selling a
commodity for which there are no close substitutes.” Thus
the monopoly firm is itself an industry and the monopolist
faces the industry demand curve.
The demand curve for his product is, therefore, relatively
stable and slopes downward to the right, given the tastes,
and incomes of his customers. It means that more of the
product can be sold at a lower price than at a higher
price. He is a price-maker who can set the price to his
maximum advantage.

However, it does not mean that he can set both price and
output. He can do either of the two things. His price is
determined by his demand curve, once he selects his
output level. Or, once he sets the price for his product, his
output is determined by what consumers will take at that
price. In any situation, the ultimate aim of the monopolist
is to have maximum profits.

Characteristics of Monopoly:

The main features of monopoly are as follows:

1. Under monopoly, there is one producer or seller of a

particular product and there is no difference between a
firm and an industry. Under monopoly a firm itself is an
industry.

2. A monopoly may be individual proprietorship or

partnership or joint stock company or a cooperative
society or a government company.

3. A monopolist has full control on the supply of a product.

Hence, the elasticity of demand for a monopolist’s product
is zero.

4. There is no close substitute of a monopolist’s product in

the market. Hence, under monopoly, the cross elasticity of
demand for a monopoly product with some other good is
very low.

5. There are restrictions on the entry of other firms in the

area of monopoly product.

6. A monopolist can influence the price of a product. He is

a price-maker, not a price-taker.

7. Pure monopoly is not found in the real world.

8. Monopolist cannot determine both the price and

quantity of a product simultaneously.

9. Monopolist’s demand curve slopes downwards to the

right. That is why, a monopolist can increase his sales only
by decreasing the price of his product and thereby
maximise his profit. The marginal revenue curve of a
monopolist is below the average revenue curve and it falls
faster than the average revenue curve. This is because a
monopolist has to cut down the price of his product to sell
an additional unit.

3. Duopoly:

Duopoly is a special case of the theory of oligopoly in

which there are only two sellers. Both the sellers are
completely independent and no agreement exists between
them. Even though they are independent, a change in the
price and output of one will affect the other, and may set a
chain of reactions. A seller may, however, assume that his
rival is unaffected by what he does, in that case he takes
only his own direct influence on the price.

If, on the other hand, each seller takes into account the
effect of his policy on that of his rival and the reaction of
the rival on himself again, then he considers both the
direct and the indirect influences upon the price.
Moreover, a rival seller’s policy may remain unaltered
either to the amount offered for sale or to the price at
which he offers his product. Thus the duopoly problem can
be considered as either ignoring mutual dependence or
recognising it.

4. Oligopoly:

Oligopoly is a market situation in which there are a few

firms selling homogeneous or differentiated products. It is
difficult to pinpoint the number of firms in ‘competition
among the few.’ With only a few firms in the market, the
action of one firm is likely to affect the others. An
oligopoly industry produces either a homogeneous
product or heterogeneous products.

The former is called pure or perfect oligopoly and the

latter is called imperfect or differentiated oligopoly. Pure
oligopoly is found primarily among producers of such
industrial products as aluminium, cement, copper, steel,
zinc, etc. Imperfect oligopoly is found among producers of
such consumer goods as automobiles, cigarettes, soaps
and detergents, TVs, rubber tyres, refrigerators,
typewriters, etc.

Characteristics of Oligopoly:

In addition to fewness of sellers, most oligopolistic

industries have several common characteristics which are
explained below:

(1) Interdependence:
There is recognised interdependence among the sellers in
the oligopolistic market. Each oligopolist firm knows that
changes in its price, advertising, product characteristics,
etc. may lead to counter-moves by rivals. When the sellers
are a few, each produces a considerable fraction of the
total output of the industry and can have a noticeable
effect on market conditions.

He can reduce or increase the price for the whole

oligopolist market by selling more quantity or less and
affect the profits of the other sellers. It implies that each
seller is aware of the price-moves of the other sellers and
their impact on his profit and of the influence of his price-
move on the actions of rivals.

Thus there is complete interdependence among the sellers

with regard to their price-output policies. Each seller has
direct and ascertainable influences upon every other seller
in the industry. Thus, every move by one seller leads to
counter-moves by the others.

(2) Advertisement:

The main reason for this mutual interdependence in

decision making is that one producer’s fortunes are
dependent on the policies and fortunes of the other
producers in the industry. It is for this reason that
oligopolist firms spend much on advertisement and
customer services.

As pointed out by Prof. Baumol, “Under oligopoly

advertising can become a life-and-death matter.” For
example, if all oligopolists continue to spend a lot on
advertising their products and one seller does not match
up with them he will find his customers gradually going in
for his rival’s product. If, on the other hand, one
oligopolist advertises his product, others have to follow
him to keep up their sales.

(3) Competition:

This leads to another feature of the oligopolistic market,

the presence of competition. Since under oligopoly, there
are a few sellers, a move by one seller immediately affects
the rivals. So each seller is always on the alert and keeps
a close watch over the moves of its rivals in order to have
a counter-move. This is true competition.

(4) Barriers to Entry of Firms:

As there is keen competition in an oligopolistic industry,

there are no barriers to entry into or exit from it.
However, in the long run, there are some types of barriers
to entry which tend to restraint new firms from entering
the industry.

They may be:

(a) Economies of scale enjoyed by a few large firms; (b)

control over essential and specialised inputs; (c) high
capital requirements due to plant costs, advertising costs,
etc. (d) exclusive patents and licenses; and (e) the
existence of unused capacity which makes the industry
unattractive. When entry is restricted or blocked by such
natural and artificial barriers, the oligopolistic industry
can earn long-run super normal profits.
(5) Lack of Uniformity:

Another feature of oligopoly market is the lack of

uniformity in the size of firms. Finns differ considerably in
size. Some may be small, others very large. Such a
situation is asymmetrical. This is very common in the
American economy. A symmetrical situation with firms of
a uniform size is rare.

(6) Demand Curve:

It is not easy to trace the demand curve for the product of

an oligopolist. Since under oligopoly the exact behaviour
pattern of a producer cannot be ascertained with
certainty, his demand curve cannot be drawn accurately,
and with definiteness. How does an individual seller s de-
mand curve look like in oligopoly is most uncertain
because a seller’s price or output moves lead to
unpredictable reactions on price-output policies of his
rivals, which may have further repercussions on his price
and output.

The chain of action reaction as a result of an initial change

in price or output, is all a guess-work. Thus a complex
system of crossed conjectures emerges as a result of the
interdependence among the rival oligopolists which is the
main cause of the indeterminateness of the demand curve.

If the oligopolist seller does not have a definite demand

curve for his product, then how does he affect his sales.
Presumably, his sales depend upon his current price and
those of his rivals. However, a number of conjectural
demand curves can be imagined.
For example, in differentiated oligopoly where each seller
fixes a separate price for his product, a reduction in price
by one seller may lead to an equivalent, more, less or no
price reduction by rival sellers. In each case, a demand
curve can be drawn by the seller within the range of
competitive and monopoly demand curves.

Leaving aside retaliatory price movements, the individual

seller’s demand curve under oligopoly for both price cuts
and increases is neither more elastic than under perfect or
monopolistic competition nor less elastic than under mo-
nopoly. It may still be indefinite and indeterminate.

This situation is shown in Figure 1 where KD1 is the

elastic demand curve and MD is the less elastic demand
curve. The oligopolies’ demand curve is the dotted kinked
KPD. The reason is quite simple. If a seller reduces the
price of his product, his rivals also lower the prices of
their products so that he is not able to increase his sales.

The oligopolies' demand curve

So the demand curve for the individual seller’s product
will be less elastic just below the present price P (where
KD1and MD curves are shown to intersect). On the other
hand, when he raises the price of his product, the other
sellers will not follow him in order to earn larger profits at
the old price. So this individual seller will experience a
sharp fall in the demand for his product.

Thus his demand curve above the price P in the segment

KP will be highly elastic. Thus the imagined demand curve
of an oligopolist has a comer or kink at the current price
P. Such a demand curve is much more elastic for price
increases than for price decreases.

(7) No Unique Pattern of Pricing Behaviour:

The rivalry arising from interdependence among the

oligopolists leads to two conflicting motives. Each wants
to remain independent and to get the maximum possible
profit. Towards this end, they act and react on the price-
output movements of one another in a continuous element
of uncertainty.

On the other hand, again motivated by profit maximisation

each seller wishes to cooperate with his rivals to reduce or
eliminate the element of uncertainty. All rivals enter into a
tacit or formal agreement with regard to price-output
changes. It leads to a sort of monopoly within oligopoly.

They may even recognise one seller as a leader at whose

initiative all the other sellers raise or lower the price. In
this case, the individual seller’s demand curve is a part of
the industry demand curve, having the elasticity of the
latter. Given these conflicting attitudes, it is not possible
to predict any unique pattern of pricing behaviour in
oligopoly markets.

5. Monopolistic Competition:

Monopolistic competition refers to a market situation

where there are many firms selling a differentiated
product. “There is competition which is keen, though not
perfect, among many firms making very similar products.”
No firm can have any perceptible influence on the price-
output policies of the other sellers nor can it be influenced
much by their actions. Thus monopolistic competition
refers to competition among a large number of sellers
producing close but not perfect substitutes for each other.

It’s Features:

The following are the main features of monopolistic

competition:

(1) Large Number of Sellers:

In monopolistic competition the number of sellers is large.

They are “many and small enough” but none controls a
major portion of the total output. No seller by changing its
price-output policy can have any perceptible effect on the
sales of others and in turn be influenced by them. Thus
there is no recognised interdependence of the price-
output policies of the sellers and each seller pursues an
independent course of action.

(2) Product Differentiation:

One of the most important features of the monopolistic
competition is differentiation. Product differentiation
implies that products are different in some ways from
each other. They are heterogeneous rather than
homogeneous so that each firm has an absolute monopoly
in the production and sale of a differentiated product.
There is, however, slight difference between one product
and other in the same category.

Products are close substitutes with a high cross-elasticity

and not perfect substitutes. Product “differentiation may
be based upon certain characteristics of the products
itself, such as exclusive patented features; trade-marks;
trade names; peculiarities of package or container, if any;
or singularity in quality, design, colour, or style. It may
also exist with respect to the conditions surrounding its
sales.”

(3) Freedom of Entry and Exit of Firms:

Another feature of monopolistic competition is the

freedom of entry and exit of firms. As firms are of small
size and are capable of producing close substitutes, they
can leave or enter the industry or group in the long run.

(4) Nature of Demand Curve:

Under monopolistic competition no single firm controls

more than a small portion of the total output of a product.
No doubt there is an element of differentiation neverthe-
less the products are close substitutes. As a result, a
reduction in its price will increase the sales of the firm but
it will have little effect on the price-output conditions of
other firms, each will lose only a few of its customers.

Likewise, an increase in its price will reduce its demand

substantially but each of its rivals will attract only a few of
its customers. Therefore, the demand curve (average
revenue curve) of a firm under monopolistic competition
slopes downward to the right. It is elastic but not perfectly
elastic within a relevant range of prices of which he can
sell any amount.

(5) Independent Behaviour:

In monopolistic competition, every firm has independent

policy. Since the number of sellers is large, none controls
a major portion of the total output. No seller by changing
its price-output policy can have any perceptible effect on
the sales of others and in turn be influenced by them.

(6) Product Groups:

There is no any ‘industry’ under monopolistic competition

but a ‘group’ of firms producing similar products. Each
firm produces a distinct product and is itself an industry.
Chamberlin lumps together firms producing very closely
related products and calls them product groups, such as
cars, cigarettes, etc.

(7) Selling Costs:

Under monopolistic competition where the product is

differentiated, selling costs are essential to push up the
sales. Besides, advertisement, it includes expenses on
salesman, allowances to sellers for window displays, free
service, free sampling, premium coupons and gifts, etc.
(8) Non-price Competition:

Under monopolistic competition, a firm increases sales

and profits of his product without a cut in the price. The
monopolistic competitor can change his product either by
varying its quality, packing, etc. or by changing
promotional programmes.

The features of market structures are shown in Table 1.