Market structures are classified based on the number of firms, product differentiation, and barriers to entry.
Example: Agricultural markets (wheat, corn), foreign exchange markets
Example: Restaurants, clothing stores, hair salons
Example: Automobile industry, airlines, telecom companies, banks
A side-by-side comparison of key characteristics across all four market structures.
| Characteristic | Perfect Competition | Monopolistic Competition | Oligopoly | Monopoly |
|---|---|---|---|---|
| Number of Firms | Very many | Many | Few | One |
| Product Type | Homogeneous (identical) | Differentiated | Identical or differentiated | Unique (no substitutes) |
| Barriers to Entry | None | Low | High | Very high / Blocked |
| Price Control | None (price taker) | Some | Considerable | Substantial (price maker) |
| Non-price Competition | None | Advertising, branding | Extensive advertising | Public relations |
| Long-run Profit | Zero economic profit | Zero economic profit | Positive economic profit possible | Positive economic profit |
| Real-World Examples | Agriculture, forex | Restaurants, retail | Auto, airlines, telecom | Utilities, patents |
Barriers to entry are obstacles that prevent new firms from entering a market. These barriers allow existing firms to maintain market power and earn economic profits.
When large firms can produce at significantly lower average costs than small firms, new entrants struggle to compete on price.
How it works: Existing firms spread fixed costs over large production volumes, achieving lower per-unit costs. New firms with small volumes face higher costs and cannot price competitively.
Example: Automobile manufacturing requires billions in factory investments that only make sense at high production volumes.
Government-granted exclusive rights that legally prevent other firms from entering a market or producing certain products.
Types include: Patents (exclusive rights to inventions for 20 years), copyrights (creative works), licenses (broadcast frequencies, taxi medallions), and franchises (exclusive service areas).
Example: Pharmaceutical companies hold patents on new drugs, preventing generic competitors for years.
When a firm owns or controls a resource that is essential for production and cannot be easily replicated or substituted.
How it works: If a key input is scarce and controlled by existing firms, new competitors cannot acquire the resources needed to produce and compete.
Example: De Beers historically controlled most of the world's diamond mines, limiting competition in the diamond industry.
The spectrum from perfect competition to monopoly represents varying degrees of market power and competitive intensity.
Market structures exist on a spectrum from most competitive (perfect competition) to least competitive (monopoly). The position on this spectrum determines how much control firms have over prices and how efficiently resources are allocated.
Market power is the ability of a firm to influence the market price of its product. Firms with market power face downward-sloping demand curves and can set prices above marginal cost.
When you finally understand market structures
"So you're telling me there are FOUR different types?"
Perfect competition, monopolistic competition, oligopoly, monopoly... got it!
Barriers to entry be like:
"Just start your own telecom company!"
Me: *looks at billions needed for infrastructure*
"Never mind." 😅
Learning economics doesn't have to be boring!