Lesson 13 of 14 · free to read
Market structure is defined by the number of firms and barriers to entry, ranging from perfect competition (many firms, no control) to pure monopoly (one firm, high control), with monopolistic competition and oligopoly in between.
You run a small coffee shop and want to raise your prices to cover rising costs. But will customers simply walk to the café next door? The answer depends on the market structure you're in — how many rivals you face and how hard it is for new ones to enter.
The idea
Market structure ranges from perfect competition (many firms, no price control) to pure monopoly (one firm, high price control), with monopolistic competition and oligopoly in between.
Market structure describes the competitive environment of an industry, shaped by the number of firms and the barriers to entry. The spectrum runs from perfect competition to pure monopoly, with two structures in between.
Comparison of Market Structures
| Characteristics | Perfect Competition | Pure Monopoly | Monopolistic Competition | Oligopoly |
| Number of firms in market | Many | One | Many, but fewer than perfect competition | Few |
| Firm's ability to control price | None | High | Some | Some |
| Barriers to entry | None | Subject to government regulation | Few | Many |
| Product differentiation | Very little | No products that compete directly | Emphasis on showing perceived differences in products | Some differences |
| Examples | Farm products such as wheat and corn | Utilities such as gas, water, cable television | Retail specialty clothing stores | Steel, automobiles, airlines, aircraft manufacturers |
Each row is a characteristic; each column is a market structure. Read across a row to compare, for example, how the number of firms falls from 'Many' to 'One' as you move from perfect competition to pure monopoly.
In perfect competition, many firms sell nearly identical products, and each firm is too small to influence the market price. Price is set by supply and demand, so a firm that raises its price above the going rate loses customers. Perfect competition is an ideal; no industry shows all its characteristics, but the stock market and some agricultural markets, such as wheat and corn, come closest.
Definition
barriers to entry
Factors that prevent new firms from competing equally with the existing firm.
Obstacles like patents, control of resources, or government rules that keep new competitors out.
Pure monopoly sits at the opposite end of the spectrum. Barriers to entry often come from technology or law: Polaroid held patents on instant photography, and DeBeers controls most of the world's uncut diamonds. Public utilities like gas and water are pure monopolies, and some monopolies are created by government order, such as the U.S. Postal Service.
Definition
pure monopoly
A market structure in which a single firm accounts for all industry sales of a particular good or service; the firm is the industry.
One company sells the entire market's supply of a product, so it faces no direct competitors.
Under monopolistic competition, firms use product differentiation to justify their prices. Because consumers don't see the products as perfect substitutes, firms have more pricing power than in perfect competition. Advertising highlights differences, which may be significant or superficial — Nike says 'Just Do It,' and Tylenol is advertised as easier on the stomach than aspirin.
Vocabulary· 2 terms
In an oligopoly, firms watch one another closely for new technologies, product changes, promotions, pricing, and production. Sometimes they coordinate pricing and output, which is illegal, and many antitrust cases arise in oligopolies. Examples include Boeing and Airbus in aircraft, and Apple and Google in smartphone operating systems.
Easily confused
Both monopolistic competition and oligopoly give firms some control over price, so they might seem similar.
Monopolistic competition has many firms with few barriers to entry, while oligopoly has only a few firms with many barriers.
The number of firms changes how much each firm's decisions affect rivals — in an oligopoly, firms watch each other closely, but in monopolistic competition they don't.
Market structure can change over time. Telecommunications is a classic example: AT&T once held a monopoly on long-distance service, but the government split it into seven regional companies in 1984, opening the door to competition from MCI and Sprint. The 1996 Telecommunications Act further changed the environment, and today broadcasting, computer, telephone, and video industries are converging through mergers and acquisitions.
The spectrum
Recap
Say each point to yourself, then tap it to check.
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Adapted from Introduction to Business, © 2018 OpenStax, Rice University
Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, and James C. Hyatt
Licensed under CC BY 4.0. This course is an adaptation, not the original work.
Access for free at openstax.org/details/books/introduction-business