Analysing market structures

Market structure refers to the nature and degree of competition among firms operating in the same industry.
The four basic types of market structures include: perfect competition, monopolistic competition, oligopoly, and monopoly.

Perfect competition is characterised by a large number of small firms, all producing and selling identical products.
There is free entry and exit into and from the market.
All firms have full knowledge about the products and prices, and there is no non-price competition.
In this type of market structure, firms are price-takers and have no control over the price.

This market structure consists of a large number of independent firms supplying similar, but not identical products. This gives firms some degree of market power.
There is free entry and exit from the market and firms have some control over price because they can differentiate their products from others in the market.
There is significant non-price competition in this market due to brand name advertising and product differentiation.

The oligopoly market structure is characterised by a few large dominant firms which hold the majority of the market share, with each firm’s actions directly affecting the others.
There are high barriers to entry and exit, often due to factors like high start-up costs or other structural, legal, or strategic barriers.
Firms compete on both price and non-price factors and there may be collusion, explicit or tacit, among competitors.
The exact behaviour and outcome in an oligopolistic market can be unpredictable and varied.

A monopoly is a market structure characterised by a single seller selling a unique product in the market.
Monopolies often arise due to high barriers to entry, which may be legal (patents or licenses), technological (somebody innovates a new product), or natural (a firm enjoys economies of scale).
As there are no close substitutes, the monopolist has a lot of market power and can set the price in the market.
Monopolies can lead to inefficiencies such as allocative inefficiency and productive inefficiency.

Analysing and comparing different market structures can provide insights into the level of competition, efficiency, and welfare.
It helps to understand the determinants of pricing and output decisions, the degree of market power, and the implications for economic efficiency.
Understanding the characteristics of each market structure allows for predictions about firm behaviour, market outcomes, and the effectiveness of different policies.
A thorough understanding of market structures is key in formulating economic policies and strategies for business.