Market structure is defined as the particular mix of characteristics which determine the nature of competition and pricing in a market. Important market characteristics are:
- Number of firms in the market: Market structures when ordered by number of sellers, from very large number of sellers to just one seller, are: pure competition, monopolistic competition, oligopoly, pure monopoly.
- The degree of standardization of product: In oligopoly, firms may either sell a standardized or a differentiated product. Firms in pure competition and pure monopoly always sell a standardized product whereas those in monopolistic competition always sell differentiated products.
- Market share of largest firms: In pure monopoly, a single firm has full market share. In oligopoly, few firms have majority market share. Then comes the monopolistic competition, in which firms have relatively lower market share and lastly, in pure competition, a single firm's market share is negligible.
- Entry barriers: Markets structures when ordered by severity of entry barriers, from most strict to most lenient, are: pure monopoly, oligopoly, monopolistic competition, pure competition.
- Pricing: Firms in different market structure have varying control over price of their product. Those in pure monopoly have highest control over price, those in pure competition have lowest control over price. Firms in monopolistic competition have slight control over price due to product differentiation and advertisement. In oligopolistic market structure, control over price depends on whether the firm is selling a standardized product or a differentiated product. In general, prices in oligopolies are relatively rigid.
Thus, there are four major types of market structures:
- Pure Competition
- Monopolistic Competition
- Pure Monopoly
Written by Irfanullah Jan