Market Structures

Perfect competition

Perfect competition is an ideal model of the market economy. Often economists use perfect competition as a benchmark to measure how competitive a market is. In fact, the real market is never perfect. When market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition.

In short, a perfect competition has the following characteristics:

• Numerous buyers and sellers.

• Standardized product.

• Freedom to enter and exit markets.

• Independent buyers and sellers.

• Well-informed buyers and sellers.

The Impact of Monopoly

If perfect competition is the most competitive market structure. Monopoly is the other extreme side, the least competitive market. It occurs when there is only one seller of a product that has no close substitutes. Therefore, the monopoly seller becomes a price maker, a business that does not have to consider competitors when setting its prices.

In short, the characteristics of a monopoly are:

• Only one seller

• Control of prices

• Restricted & regulated market

Types of Monopolies

Natural Monopoly

In some industries, having more than one company to supply products or services may be inefficient in production processes and offering the lowest cost to customers due to economic of scale. Most public utilities and transportation companies that are controlled by a nation’s government often fall into this category.

While supporting natural monopolies, the government also regulates them to ensure they do not charge excessively high prices for their services.

Government Monopoly

Businesses run by governments are either unable to be provided by private firms or are not attractive to them because of insufficient profit opportunities. Postal services are one of those government monopolies. Originally, only the government could provide this service effectively and cost-effectively. Over time, with technological advancement, many other private companies offer services that compete with postal services. Many people now can send information via email, fax and text messages and pay bills online.

Technological Monopoly

A technological monopoly occurs when a firm controls a manufacturing method, invention, or type of technology. Technological monopolies last only as long as the patent or until a new technology creates close substitutes. A good example of a technical monopoly company is Polaroid which owned the legal patent for instant cameras.

Geographic Monopoly

A geographic monopoly exists when there are no other producers within a certain region. One example of a geographic monopoly is the professional sports team in which the league limits the number of teams in each league and requires the team to be associated with a specific region or city.  Another example is within the petroleum industry. In the oil & gas market, only a few nations can supply oil to the rest of the world such as Russia or countries in the Middle East.

Monopolistic Competition

Most markets in the real world fall somewhere between perfect competition and monopoly. One of the most common market structures is Monopolistic competition. It occurs when many sellers offer similar, but not standardised, products. The market for clothes, jewellery and accessories is among those examples of this type of market structure.

Adopt image from Link

Monopolistic competition has four major characteristics:

Oligopoly

Oligopoly is a market structure in which only a few sellers offer a similar product. These few sellers have a large market share and dominate the market. Firm production and movie theatre are among good examples within the oligopoly market.

Why so?

For a studio to make a movie, the cost of establishment is high and the chance of success is unknown, therefore, only a few studio firms can enter the market.

Oligopoly has four major characteristics:

References

Adam, H 2024, Perfect Competition: Examples and How It Works, Investopedia, available at <https://www.investopedia.com/terms/p/perfectcompetition.asp>.

Garcia, D, Kutlu, L and Sickles, R.C 2018, Market Structures in Production Economics, Handbook of Production Economics, Volume 1. Springer (Forthcoming 2019), pp.1-48.

Learn Economics n.d., Market structures, Learn Economics, available at <https://www.learn-economics.co.uk/Market-structures.html>.

Tejvan, P 2019, Types of market structure, Economic Help, available at <https://www.economicshelp.org/microessays/markets/>.