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, likely 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 an agreement to increase prices.
   3. Kinked demand curve model – when prices are stable and firms compete on non-price competition.
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.
6. Duopoly – where two firms dominate the market. For example, Pepsi and Coca Cola. Android vs Apple. A duopoly falls between a monopoly and oligopoly.

Examples of Market Structure in the real world

Perfect competition (closest examples)

• Agricultural markets (e.g. wheat, rice in global commodity markets)
• Foreign exchange markets
• Selling on ebay

Monopolistic competition

• Restaurants and cafés
• Hairdressers and beauty salons
• Clothing brands
• Hotels

Oligopoly

• UK supermarkets (Tesco, Sainsbury’s, Asda, Aldi)
• Mobile phone networks (EE, O2, Vodafone, Three)
• Car manufacturers
• Airlines

Monopoly (or near-monopoly)

• National rail infrastructure (Network Rail)
• Local water companies in the UK
• Royal Mail (letters delivery)
• Microsoft Windows (PC operating systems)

Revision Summary

Types of Market Structure How markets differ by competition and power

Perfect Competition Many firms, identical products, perfect information and free entry/exit. Firms are price takers and earn only normal profit in the long run. E.g Farmers market	Monopolistic Competition Many firms selling differentiated products. Some price-setting power, but free entry leads to normal profit in the long run. E.g. Restaurants
Oligopoly A few dominant firms with high barriers to entry. Firms are interdependent and may compete on price, quality or advertising. E.g. Supermarkets, soft drinks	Monopoly A single firm dominates the market with no close substitutes. Significant price-setting power and high barriers to entry. E.g. British Rail/Water
Evaluation As you move from perfect competition to monopoly, competition falls, market power rises and prices tend to increase.

Related pages

• Mergers
• Objectives of firms
• Bertrand competition – (a competitive duopoly)