4 Types Of Market Structures Essay Examples

* There is a single seller and large numbers of buyers that sell products that have no close substitutes. The entry and exit barriers are also high.

* No close substitutes – Monopolies firm would sell products in which there are no close substitutes.
* Restriction of entry of new firms.
* Advertising: Advertising in a monopoly market depends on the products sold. Advantages and disadvantages:

1. Stability of price

* In a monopoly market the prices are most of the times stable. This happens because there is only one firm involved in the market that sets the prices if and when it feels like. In other types of market structures prices are not stable and tend to be elastic as a result of the competition that exists but this isn’t the case in a monopoly market as there is little or no competition at all.

2. Source of revenue for the government

* The government gets revenue in form of taxation from monopoly firms.

3. Massive profits

* Due to the absence of competitors which leads to high number of sales monopoly firms tend to receive super profits from their operations. The massive profits realized may be used in such things as launching other products, carrying out research and development among many other things that may be beneficial to the firm. 4. Monopoly firms offer some services effectively and efficiently.


1. Exploitation of consumers

* A monopoly market is best known for consumer exploitation. There are indeed no competing products and as a result the consumer gets a raw deal in terms of quantity, quality and pricing. The firm may find it easy to produce inferior or substandard goods if it wishes because t the end of the day they know very well that the items will be purchased as there are no competing products for the already available market.

2. Dissatisfied consumers

* Consumers get a raw deal from a monopoly market because quality will be compromised. Therefore it is not a wonder to see very dissatisfied consumers who often complain about the firm’s products

3. Higher prices

* No competition in the market means absence of such things as price wars that may have benefited the consumer and as a result of this monopoly firms tend to charge higher prices on goods and services hence inconveniencing the buyer.

4. Price discrimination

* Monopoly firms are also sometimes known for practicing price discrimination where they charge different prices on the same product for different consumers.

5. Inferior goods and services

* Competition is minimal or totally absent and as such the monopoly firm may willingly produce inferior goods and services because after all they know the goods will not fail to sell.


* Having only a limited number of companies controlling a large proportion of a particular industry reduces the likelihood of one of the members making unjustified price increases. Should such an increase not be adopted by the remaining companies, the first supplier will simply lose its share of the limited market, as consumers will turn to the other providers for the identical product at the lower rate. Although the profit margin of the other companies may be slightly smaller, they will, of course, benefit from the subsequent increase in demand. Disadvantages

* In a normal market, it is supply and demand that mostly affect price. Should a consumer find a similar product offered by another provider at a cheaper price, he will make his purchase from that other provider. Suppliers will not, therefore, over-inflate their prices because they will simply lose customers. In an oligopoly, there is little choice for consumers and this will negate any influence they may have had over price control. By the very nature of an oligopoly, providers in an industry with limited members are able between them to dictate the price of their product, as consumers are unable to find alternatives or substitutes elsewhere. Since in many countries collusion or conspiracy between companies to inflate prices is illegal, members of an oligopoly may follow signals given by its industry leader as to any imminent changes it proposes to implement.

Perfect Competition


1. Resources are allocated in the most efficient way to meet market demand and maximise consumer satisfaction. This means that market mechanism works better. 2. It is the cheapest way of using the factors of production we have. Which says that we are at the lowest part of the AC curve? 3. There is no cost of advertising, selling, marketing, or motions. These are often a form of waste to society as a whole, though beneficial for individual firms. 4. Rapid change is possible to meet new consumer demands – it is very flexible. The interests of producers are the same as for consumers. 5. Freedom to choose exists.

6. It avoids all the wastes of monopoly.
7. It prevents the emergence of a few rich and powerful people .There are a lot of firms, all small, so that no major powerful personality can rise and dominate others.

1. It produces what is demanded under the given distribution of income. We can imagine a scenario with a very few rich people with pet dogs or cats which dine extremely well on chicken and the like, while the masses starve.
2. Spill overs and externalities can exist. These are costs caused to others, e.g. the disposal of nuclear waste or toxic chemicals by dumping them in streams. 3. No economies of scale possible – all the firms are too small. 4. Perfect competition is consistent with a limited choice of range of goods; monopolistic competition may have a much wider range. An example is motorcars – there are an awful lot of different models and competition is much less than perfect. 5. Little or no research and development is possible because there are no funds for it. Under perfect competition there are no surplus profits (in the long run they are whittled away!) R&D is possible under monopoly because of the surplus profits available.



1. There are no significant barriers to entry; therefore markets are relatively contestable. 2. Differentiation creates diversity, choice and utility. For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition – less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom. Disadvantages

Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in both the long and short run. This is because price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient.

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There are quite a few different market structures that can characterize an economy. However, if you are just getting started with this topic, you may want to look at the four basic types of market structures first. Namely perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has their own set of characteristics and assumptions, which in turn affect the decision making of firms and the profits they can make.

It is important to note that not all of these market structures actually exist in reality, some of them are just theoretical constructs. Nevertheless, they are of critical importance, because they can illustrate relevant aspects of competition firms’ decision making. Hence, they will help you to understand the underlying economic principles. With that being said, let’s look at them in more detail.

Perfect Competition

Perfect competition describes a market structure, where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market power. As a result, the industry as a whole produces the socially optimal level of output, because none of the firms have the ability to influence market prices.

The idea of perfect competition builds on a number of assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market, (3) all firms sell completely identical (i.e. homogenous) goods, (4) there are no consumer preferences. By looking at those assumptions it becomes quite obvious, that we will hardly ever find perfect competition in reality. This is an important aspect, because it is the only market structure that can (theoretically) result in a socially optimal level of output.

Probably the best example of a market with almost perfect competition we can find in reality is the stock market. If you are looking for more information on perfect competition, you can also check our post on perfect competition vs imperfect competition.

Monopolistic Competition

Monopolistic competition also refers to a market structure, where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar, but slightly differentiated products. This gives them a certain degree of market power which allows them to charge higher prices within a certain range.

Monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market, (3) firms sell differentiated products (4) consumers may prefer one product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure will no longer result in a socially optimal level of output, because the firms have more power and can influence market prices to a certain degree.

An example of monopolistic competition is the market for cereals. There is a huge number of different brands (e.g. Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals.


An oligopoly describes a market structure which is dominated by only a small number firms. This results in a state of limited competition. The firms can either compete against each other or collaborate. By doing so they can use their collective market power to drive up prices and earn more profit.

The oligopolistic market structure builds on the following assumptions: (1) all firms maximize profits, (2) oligopolies can set prices, (3) there are barriers to entry and exit in the market, (4) products may be homogenous or differentiated, and (5) there is only a few firms that dominate the market. Unfortunately, it is not clearly defined what a «few» firms means exactly. As a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, let’s look at the market for gaming consoles. This market is dominated by three powerful companies: Microsoft, Sony, and Nintendo. This leaves all of them with a significant amount of market power.


A monopoly refers to a market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as consumers do not have any alternatives. As a result, monopilists often reduce output to increase prices and earn more profit.

The following assumptions are made when we talk about monopolies: (1) the monopolist maximizes profit, (2) it can set the price, (3) there are high barriers to entry and exit, (4) there is only one firm that dominates the entire market.

From the perspective of society, most monopolies are usually not desirable, because they result in lower outputs and higher prices compared to competitive markets. Therefore, they are often regulated by the government. An example of a real life monopoly could be Monsanto. About 80% of all corn harvested in the US is trademarked by this company. That gives Monsanto an extremely high level of market power. You can find additional information about monopolies our post on monopoly power.

In a Nutshell

There are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly. Perfect competition describes a market structure, where a large number of small firms compete against each other with homogenous products. Meanwhile, monopolistic competition refers to a market structure, where a large number of small firms compete against each other with differentiated products. An Oligopoly describes a market structure where a small number of firms compete against each other. And last but not least a monopoly refers to a market structure where a single firm controls the entire market.


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