Before delving into the core topic of discussion about the different types of market structure, it is very important we take a look at the key terms in the subject matter. Hence, we shall briefly look into what “market” is and what “market structure” is all about.
What is Market?
To begin with, there’s no single definition for the term “market”. There are many definitions for this concept as there are authors who are authoritative in the field of economics. Therefore, a market can be defined as a permanent place in a particular area where the buying and selling of goods and services take place.
In economics parlance, there’s more to a Market as a permanent place in a particular area where transactions take place but rather, it covers the whole places or area where goods, products, and services are spread for a proper transaction.
That is to say, in this present age where buying and selling goods could be done with the help of a certified agent and samples, thus, both buyers and sellers of a certain commodity often spread over and cover a wider area. Plus, commodities could be transacted via a telephone conversation, letters, telegrams, social media platforms, etc.
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And as such, a market in an economics world refers to an entire region where goods, products, and services are bought and sold and not limited to a mere area or place. In this sense, the price of goods or commodities is often the same throughout the whole market.
What is Market Structure?
The market structure could be best defined as nature, degree, and level of competition in selling goods and services in a particular market. It tells how sellers of the same commodity compete and beat one another to selling a substantial amount of goods to limited customers.
Essence, the structure of goods or commodity market, and that of service or factor market are usually determined by the degree, level, and nature of the competitors prevailing in that particular market. Thus, this brings us to determinant factors of types of market structure.
Determinant Factors of a Market Structure
There are quite numbers of determinant factors of a market structure for a particular commodity, and they are as follows:
1. The Nature and Number of Sellers
One of the determinant factors of a market structure is the nature and number of sellers present in a market. This simply means the number of sellers present in a particular market will determine the level of competition in such environments.
For instance, a market with a huge number of sellers will bring out a perfect competition compare to two sellers in a duopoly setting or a single seller as we have it in a pure monopoly and down to several sellers of different goods, products, and services.
2. The Nature and Numbers of Buyers
The market structures can also be influenced by the number, kind, and nature of buyers that patronize a particular market. For instance, where there is a buyer monopoly i.e. a single buyer in the market or few recognized buyers, such a market will be influenced by a stip competition.
Usually, such markets are found purposely for selling cash crops like rice, cocoa, sugarcane, soya beans, etc. Local factories go to such a market to buy the entire cash crops for further processing.
3. Nature of Product
Also, the nature of products, goods, or services sold in a particular market will equally determine or influence the market structure. Simply put, a market with product differentiation will give room for a close substitute; and such markets will be characterized by monopolistic competition.
But a market without product differentiation will be characterized by an ideal and perfect competition.
4. Entry and Exit Prerequisite
A market with huge profits will attract the coming of new firms whereas a market with lots of downfall or losses history will influence the exit of weaker organizations from the market.
In an ideal market setting with perfect competition, there is usually freedom of entry and exit of whosoever wishes. Even where there is product differentiation in a monopoly market, entry and exit freedom still stand.
Essential Features of an Ideal Market Structure
Before going to the types of market structure and their characteristics, it’s very essential we look into the basic features of an ideal market. So for a market to be considered as one, the following features must be present;
1. A Recognized Area or Region
A market cannot exist in isolation or in a vacuum therefore there must be a particular area associated to a particular market. Although economists believe a market is wider than a particular area but still, they’re of the opinion that a market is all about a region (place) where buying and selling take place.
2. Single Commodity
A market cannot be related to a particular place but rather a particular product. That is, before a market can be said to be one, it must have a separate market area for different commodities.
For instance, there should be a separate market where clothes, electronics, grains, utensils, jewellery, etc., will be sold. Selling different products or commodities in the same area will give the market no value.
As such, a single commodity should be transacted in a definite area that is distinct to where other types of goods and services is being carried out.
3. Buyers and Sellers
As a market cannot exist in isolation or in a vacuum so is a market without buyers and sellers. Buyers are very necessary for the purchase of goods and commodities and the sellers are needed to sell the goods too.
However, the coming of technological instruments like telephone, the internet (social media) etc. have made the presence of buyers and sellers in a market not necessary again.
But nevertheless, not every buyer contracted through telephone conversation and not every seller uses the social media platforms to sellt their goods. Majority makes use of the traditional market square.
4. Free Competition
One of the characteristics of a valid market is competition and as such, it must be free among buyers and sellers in relation to the products price and services.
5. Price Regulations
A market will cease to be a market if there’s no price regulation on good services. The price of commodities in a market should be one and the same so as to enhance free competition between the buyers to buyers and sellers to sellers.
4 Different Types of Market Structure
Haven explained what market structure is, the determinant factors of a market structure and the essential features of a market structure, now is the perfect time to explore the major topic of discourse.
Ideally, there are four different types of market structure that are recognised and highly celebrated in economics and they are as follows:
1. Perfect Competition
This class of market structure teaches that, where small businesses compete against one another in an ideal market setting, such competition is perfect, normal and healthy. No single business or firm has a significant power to upturn the market or influence the market prices.
Essentially, the theory of perfect competition is build on numerous assumptions and all these assumptions are firm and true. What’s more, all business enterprise maximize profits and they are free to enter or leave the market whenever they please.
It’s also said that all organizations sell a completely homogenous or identical good with no preferences to any consumer or target audience. Taking a close look at this, it’s obvious and apparent that there will never be a perfect and healthy competition in reality.
Such is an important area in theory since it is only the market structure that can facilitate a result in an optimal as well as desirable level of output. However, the best example of this type of market structure i.e. perfect competition in reality can be found at the stock market.
2. Monopolistic Competition
Another type of market structure that sees healthiness in small businesses competing against each other is monopolistic competition. Unlike the perfect competition, here, business organizations sell similar products with little or no differences.
Therefore, the monopoly of products and commodities in the market enable the small firms and business organizations to have certain level of control and market power to charge or raise prices of goods and services within a particular range.
While monopolistic competition also has some assumptions that are similar to the perfect competition in terms of firms and businesses maximizing profits with the free will of entering or leaving the market as they wish.
However, in monopolistic competition, firms and business opportunity doesn’t sell identical products but rather, different commodities with their target audience having different options of products to choose from.
That said, these assumptions are very much real as market structure doesn’t rely on socially optimal and desirable level of output result any longer. Business organizations, firms and the like have enough power now, and they can influence those market prices as they want to a certain level or degree.
A perfect example of this type of market structure in economics is the cereals market where there are numerous numbers of business brands competing against each other.
An oligopoly explains a market structure dominated by secular number of firms and small businesses which resulted into a finite state of limited competition. Here, the business organizations can either collaborate together or compete against each other as they see fit.
By so doing, they can invoke their market power or collective influence to charge higher prices and as such, earn more profit.
Similarly, the oligopolistic market structure also preaches that all small businesses and organizations exist to maximize profits with little problem in market entry and exit freedom although they can set prices as they wish.
However, in oligopolistic structure, products may be identical and it may be differentiated as there are only a few business organizations dominating the labour market. Using the rule of thumb, an oligopoly market structure can be said to consists of about 3 to 5 typically dominant firms.
A perfect example of this market is the simulation gaming consoles market. This market is no doubt being ruled by three distinct powerful companies: Sony, Microsoft, and Nintendo. This dominant trait leaves them with a magnificent amount of price control and market power.
By and large, a monopoly market structure comes in to play a role when there is a single firm or business entity influencing and controlling the market. In such a situation, the business entity will leave its target audience with no alternative and will have the highest degree of market control.
In line with the above, monopoly market structure usually reduce the desirable level of output in other to hike the prices and earn even more profit. But to societal perspective, monopolies are not desirable — as competitive markets – with their lower optimal outputs and higher prices.
In addition, monopoly market structure also assumed that the monopolist makes profit, set prices as it pleases although there is no freedom of coming and going since there is only a single business entity that is ruling the whole market.
Therefore, this class of business structure is answerable to the government as they regulate it affairs. A real-life monopoly market is Monsanto. It’s a US based company that trademarks 80% or thereabouts of all the corn that is being harvested in the country.
From the foregoing, it is evident that there are four different types of market structures: perfect competition, monopolistic competition, oligopoly and the monopoly market structure. Each of them has their high and low. Plus, it’s shown in the discussion that perfect competition is far from being real but monopolistic competition is feasible. So is oligopoly and the monopoly market structure.
The perfect competition also teaches that competition between small businesses with identical products is normal and healthy. Meanwhile, the monopolistic competition also supported the assertion with a slight difference in the product varietals.
Accordingly, oligopoly explains a market structure with few numbers of organizations fighting for individual market power or collective influence. And lastly, a monopoly market structure explained a single business entity taking control of the whole market; albeit under the government regulations.
Hope you find it useful. However, that’s all there is to it about the types of market structure and their characteristics.