Market Structures

This refers to the nature and degree of competition within a particular market. It describes the
way goods and services are supplied by firms in a particular market.

Fig.1:Spectrum of Competition

Perfect Competition- this is a situation where there are many buyers and sellers with no
individual power to influence price.

Monopolistic Competition- many firms producing differentiated products such as clothing stores
and hairdressing services.

Oligopoly- a few independent firms dominate the market e.g. major oil companies in the
petroleum industry.

Duopoly- two firms dominate the market for a product. This is a special case of oligopoly.

Monopoly- there is a single supplier for the whole market.

Table 1: Features of 4 Market Structures

Type of Number of Freedom of Nature of Examples Implications

market firms entry product of demand
curve for the
firm

Perfect Very many unrestricted homogenous Wheat Horizontal i.e

competition perfectly
(agricultural elastic (the
product) firm is a price
taker)

Monopolistic Many or unrestricted differentiated Restaurants Downward

competition several sloping but
Hairdressing relatively
salons elastic. The
firm has some
control over
price

oligopoly few restricted Differentiated Car industry Downward

or sloping.
undifferentiated Cement Relatively
industry inelastic. It
depends on
rivals
reactions to
price changes.

monopoly one Restricted or unique Local water Downward

completely and sloping. More
blocked electricity inelastic than
company oligopoly.
The firm has
considerable
control over
price

A Market Structure can be identified by:

1) Counting the number of firms. The bigger the total, the closer to perfect competition.

2) Use sales concentration ratios to see the combined market share of the biggest 3, 5 or 7
firms in the industry, as a percentage of the total industry sales. The bigger the
percentage, the closer the industry will be to oligopoly and monopoly models.

3) By considering how easy or difficult it is for new firms to set up and how easy for firms
to exit.

4) By considering the importance of economies of scale to the firms. The more important
they are, the closer the firm will be to an oligopoly structure.