Analysing market structures

Analysing market structures

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

  • 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.

Monopolistic Competition

  • 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.

Comparing Market Structures

  • 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.