What is a market structure?
The market structure consists of a number of firms that supply goods and services and the consumers who buy these
goods and services. This helps to determine the level of production, consumption, and also competition. Depending on
this, market structures are divided into concentrated markets and competitive markets.
Market structure defines the set of characteristics that help us categorize firms depending on certain features of the
market. These features include but are not limited to the number of buyers and sellers, the nature of the product, the
level of barriers to entry and exit.
Number of buyers and sellers
The main determinant of the market structure is the number of firms in the market. The number of buyers is also very
important. Collectively, the number of buyers and sellers not only determines the structure and level of competition in a
market but also influences the pricing and profit levels of the firms.
Barriers to entry and exit
Another feature that helps determine the type of market structure is the level of entry and exit. The easier it is for firms
to enter and exit the market, the higher the level of competition. On the other hand, if the entry and exit are difficult,
competition is much lower.
Perfect or imperfect information
The amount of information the buyers and sellers have in the markets also helps to determine the market structure.
Information here includes product knowledge, production knowledge, prices, substitutes available, and the number of
competitors for the sellers.
Nature of the product
What is the nature of a product? Are there any or close substitutes available for the product? Are the goods and services
easily available in the market and are they identical and uniform? These are a few questions that we can ask to
determine the nature of a product and therefore the market structure.
Price levels
Another key to identifying the type of market structure is to observe the price levels. A firm may be a price maker in one
of the markets but a price taker in another. In some forms of markets, firms may have no control over the price, though
in others there might be a price war.
Perfect Competiton
In a perfect competition market structure, there are a large number of buyers and sellers. All the sellers of the market
are small sellers in competition with each other. There is no one big seller with any significant influence on the market.
So all the firms in such a market are price takers.
There are certain assumptions when discussing the perfect competition. This is the reason a perfect competition market
is pretty much a theoretical concept. These assumptions are as follows,
These are the key features of perfect competition:
 There are a large number of buyers and sellers.
 Sellers/producers have perfect information.
 Buyers have perfect knowledge of the goods and services and the associated prices on the market.
 The firms have no barriers to entry and exit.
 The goods and services are homogeneous.
 No firm has supernormal profits due to low barriers to entry and exit.
 The firms are price takers.
 However, this is a theoretical concept and such a market structure rarely exists in the real world. It is often used
as a benchmark to assess the level of competition in other market structures.
Monopolistic Competition
This is a more realistic scenario that actually occurs in the real world. In monopolistic competition, there are still a large
number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar but all
sellers sell slightly differentiated products.
Now consumers have the preference of choosing one product over another. The sellers can also charge a marginally
higher price since they may enjoy some market power. So the sellers become the price setters to a certain extent.
For example, the market for cereals is a monopolistic competition. The products are all similar but slightly differentiated
in terms of taste and flavours. Another such example is toothpaste.
Oligopoly
In an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5
dominant firms are considered the norm. So in the case of an oligopoly, the buyers are far greater than the sellers.
The firms in this case compete with one another to collaborate together, they use their market influence to set the
prices and in turn, maximize their profits. So the consumers become the price takers. In an oligopoly, there are various
barriers to entry into the market, and new firms find it difficult to establish themselves.
Monopoly
In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set
any price it wishes since it has all the market power. Consumers do not have any alternative and must pay the price set
by the seller.
Monopolies are extremely undesirable. Here the consumer lose all their power and market forces become irrelevant.
However, a pure monopoly is very rare in reality.
Here you have a summary of the distinguishing features of each market structure: