Types of market structure

  1. Perfect competition – Many firms, freedom of entry, homogeneous product, normal profit.
  2. Monopoly – One firm dominates the market, barriers to entry, possibly supernormal profit.
    1. Monopoly diagram
  3. Oligopoly – An industry dominated by a few firms, e.g. 5 firm concentration ratio of > 50%. Interdependence of firms
    1. Oligopoly diagram
    2. Collusive behaviour – firms seek to form agreement to increase prices.
  4. Monopolistic competition – Freedom of entry and exit, but firms have differentiated products. Likelihood of normal profits in the long term.
  5. Contestable markets – An industry with freedom of entry and exit, low sunk costs. The theory of contestability suggests the number of firms is not so important, but the threat of competition.

 

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