The competitive structure of a market is defined by the number of competing firms in some segment of an economy and the proportion of the market held by each competitor. Market structure influences pricing strategies and creates barriers to competitors wishing to enter a market.
Types of Competition Based Market Structures
There are four basic types of competition based market structures. They are pure competition, monopolistic competition, oligopoly, and monopoly.
Pure competition exists when there are no barriers to competition. The market consists of many small, competing firms and many buyers. This means that there is a steady supply of the product and a steady for demand for it. There fore, the price cannot be controlled by either the buyers or the sellers. The product itself is homogeneous – that is, one seller’s offering is identical to all others offerings. The markets for basic food commodities, such as rice and cereals, approximate pure competition.
The principal characteristic of monopolistic competition is product differentiation, a large number of sellers offering similar products differentiated by only minor differences in, for example, product design, style, or technology. Firms engaged in monopolistic competition have enough influence on the marketplace to exert some control over their own prices. The fast-food industry provides a good example of monopolistic competition.
Oligopoly, the third type of market structure, exists where a small number of sellers dominate the market.
Finally, markets with only one seller, such as a local telephone company or electric utility, are called monopolies. A monopoly exists in markets which there are no suitable substitute products.