This document defines and describes different types of market structures: 1. Monopolistic competition, where many firms sell differentiated products and compete. 2. Oligopoly, where a small number of firms control the majority of the market. 3. Monopoly, where there is a single seller. Perfect competition, where many buyers and sellers transact standardized products.

1. Market structure
In economics, market structure is an organizational and other characteristics of a market.
Types
1. Monopolistic competition, a type of imperfect competition such that many producers sell
products or services that are differentiated from one another (e.g. by branding or quality) and
hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged
by its rivals as given and ignores the impact of its own prices on the prices of other. This market
structure exists when there are multiple sellers who are attempting to seem different than each
other.
2. Oligopoly, in which a market is run by a small number of firms that together control the
majority of the market share.
 Duopoly, a special case of an oligopoly with two firms.
 Monopsony, when there is only a single buyer in a market.
 Oligopsony, a market where many sellers can be present but meet only a few buyers.
3. Monopoly, where there is only one provider of a product or service.
 Natural monopoly, a monopoly in which economies of scale cause efficiency to increase
continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the
entire market demand at a lower cost than any combination of two or more smaller, more
specialized firms.
4. Perfect competition, a theoretical market structure that features low barriers to entry,
identical products with no differentiation, an unlimited number of producers and consumers, and
a perfectly elastic demand curve.
Elements and concerns
The imperfectly competitive structure is quite identical to the realistic market conditions where
some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the
market conditions. The elements of Market Structure include the number and size distribution of
firms, entry conditions, and the extent of differentiation.
These somewhat abstract concerns tend to determine some but not all details of a specific
concrete market system where buyers and sellers actually meet and commit to trade.
Competition is useful because it reveals actual customer demand and induces the seller
(operator) to provide service quality levels and price levels that buyers (customers) want,
typically subject to the seller’s financial need to cover its costs. In other words, competition can

2. align the seller’s interests with the buyer’s interests and can cause the seller to reveal his true
costs and other private information. In the absence of perfect competition, three basic
approaches can be adopted to deal with problems related to the control of market power and an
asymmetry between the government and the operator with respect to objectives and
information: (a) subjecting the operator to competitive pressures, (b) gathering information on
the operator and the market, and (c) applying incentive regulation.
Quick Reference to Basic Market Structures
Market Structure Seller Entry
Barriers
Seller
Number
Buyer Entry
Barriers
Buyer
Number
Perfect
Competition
No Many No Many
Monopolistic
competition
No Many No Many
Monopoly Yes One No Many
Duopoly Yes Two No Many
Oligopoly Yes Few No Many
Monopsony No Many Yes One
Oligopsony No Many Yes Few
The correct sequence of the market structure from most to least competitive is perfect
competition, imperfect competition, oligopoly, and pure monopoly.
The main criteria by which one can distinguish between different market structures are: the
number and size of producers and consumers in the market, the type of goods and services being
traded, and the degree to which information can flow freely.

3. Monopolistic competition
Monopolistic competition is a type of imperfect competition such that many producers sell
products that are differentiated from one another (e.g. by branding or quality) and hence are not
perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as
given and ignores the impact of its own prices on the prices of other firms. In the presence of
coercive government, monopolistic competition will fall into government-granted monopoly.
Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic
competition are often used to model industries. Textbook examples of industries with market
structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and
service industries in large cities. The "founding father" of the theory of monopolistic competition
is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of
Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect
Competition with a comparable theme of distinguishing perfect from imperfect competition.
Characteristics of monopolistic competition
There are six characteristics of monopolistic competition (MC):
 Product differentiation
 Many firms
 Freedom of Entry and Exit
 Independent decision making
 Some degree of market power
 Buyers and sellers do not have perfect information (Imperfect Information)
Product Differentiation
MC firms sell products that have real or perceived non-price differìences. However, the
differences are not so great as to eliminate other goods as substitutes. Technically, the cross price
elasticity of demand between goods in such a market is positive. In fact, the XED would be
high. MC goods are best described as close but imperfect substitutes.[7] The goods perform the
same basic functions but have differences in qualities such as type, style, quality, reputation,
appearance, and location that tend to distinguish them from each other. For example, the basic
function of motor vehicles is the same—to move people and objects from point to point in
reasonable comfort and safety. Yet there are many different types of motor vehicles such as
motor scooters, motor cycles, trucks and cars, and many variations even within these categories.
Many firms
There are many firms in each MC product group and many firms on the side lines prepared to
enter the market. A product group is a "collection of similar products". The fact that there are

4. "many firms" gives each MC firm the freedom to set prices without engaging in strategic decision
making regarding the prices of other firms and each firm's actions have a negligible impact on
the market. For example, a firm could cut prices and increase sales without fear that its actions
will prompt retaliatory responses from competitors.
How many firms will an MC market structure support at market equilibrium? The answer depends
on factors such as fixed costs, economies of scale and the degree of product differentiation. For
example, the higher the fixed costs, the fewer firms the market will support.
Freedom of Entry and Exit
Like perfect competition, under monopolistic competition also, the firms can enter or exit freely.
The firms will enter when the existing firms are making super-normal profits. With the entry of
new firms, the supply would increase which would reduce the price and hence the existing firms
will be left only with normal profits. Similarly, if the existing firms are sustaining losses, some of
the marginal firms will exit. It will reduce the supply due to which price would rise and the existing
firms will be left only with normal profit.
Independent decision making
Each MC firm independently sets the terms of exchange for its product. The firm gives no
consideration to what effect its decision may have on competitors. The theory is that any action
will have such a negligible effect on the overall market demand that an MC firm can act without
fear of prompting heightened competition. In other words, each firm feels free to set prices as if
it were a monopoly rather than an oligopoly.
Market power
MC firms have some degree of market power. Market power means that the firm has control
over the terms and conditions of exchange. An MC firm can raise its prices without losing all its
customers. The firm can also lower prices without triggering a potentially ruinous price war with
competitors. The source of an MC firm's market power is not barriers to entry since they are low.
Rather, an MC firm has market power because it has relatively few competitors, those
competitors do not engage in strategic decision making and the firm’s sells differentiated
product. Market power also means that an MC firm faces a downward sloping demand curve.
The demand curve is highly elastic although not "flat".
Imperfect information
No sellers or buyers have complete market information, like market demand or market supply.

5. Duopoly
A duopoly (from Greek δύο, duo (two) + πωλεῖν, polein (to sell)) is a form of oligopoly where only
two sellers exist in one market. In practice, the term is also used where two firms have dominant
control over a market. it is the most commonly studied form of oligopoly due to its simplicity.
Characteristics of duopoly
1. Existence of only two sellers
2. Independence
3. Presence of monopoly elements: so long products are differentiated, the firms enjoy some
monopoly power, as each product will have some loyal customers
4. There are two popular modes of duopoly, i.e., Cournot’s Model and Chamberlain’s Model.
Monopsony
In economics, a monopsony (from Ancient Greek μόνος (mónos) "single" + ὀψωνία (opsōnía)
"purchase") is a market structure in which only one buyer interacts with many would-be sellers
of a particular product. In microeconomic theory of monopsony, a single entity is assumed to
have market power over terms of offer to its sellers, as the only purchaser of a good or service,
much in the same manner that a monopolist can influence the price for its buyers in a monopoly,
in which only one seller faces many buyers.
In addition to its use in microeconomic theory, monopsony and monopsonist are descriptive
terms often used to describe a market where a single buyer substantially controls the market as
the major purchaser of goods and services.
Oligopsony
An oligopsony (from Ancient Greek ὀλίγοι (oligoi) "few" + ὀψωνία (opsōnia) "purchase") is
a market form in which the number of buyers is small while the number of sellers in theory could
be large. This typically happens in a market for inputs where numerous suppliers are competing
to sell their product to a small number of (often large and powerful) buyers. It contrasts with
an oligopoly, where there are many buyers but few sellers. An oligopsony is a form of imperfect
competition.
Barriers to entry
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a
cost that must be incurred by a new entrant into a market that incumbents do not have or have
not had to incur.

6. Because barriers to entry protect incumbent firms and restrict competition in a market, they can
contribute to distortionary prices and are therefore most important when
discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies or
give companies market power.
Examples
The following examples fit all the common definitions of primary economic barriers to entry.
 Distributor agreements - Exclusive agreements with key distributors or retailers can make it
difficult for other manufacturers to enter the industry.
 Intellectual property - Potential entrant requires access to equally efficient production
technology as the combatant monopolist in order to freely enter a market. Patents give a
firm the legal right to stop other firms producing a product for a given period of time, and so
restrict entry into a market. Patents are intended to
encourage invention and technological progress by guaranteeing proceeds as an incentive.
Similarly, trademarks and service marks may represent a kind of entry barrier for a particular
product or service if the market is dominated by one or a few well-known names.
 Restrictive practices, such as air transport agreements that make it difficult for new airlines
to obtain landing slots at some airports.
 Supplier agreements - Exclusive agreements with key links in the supply chain can make it
difficult for other manufacturers to enter an industry.
 Switching barriers - At times, it may be difficult or expensive for customers to switch
providers
 Tariffs - Taxes on imports prevent foreign firms from entering into domestic markets.
 Taxes – Smaller companies typical fund expansions out of retained profits so high tax rates
hinder their growth and ability to compete with existing firms. Larger firms may be better
able to avoid high taxes through either loopholes written into law favoring large companies
or by using their larger tax accounting staffs to better avoid high taxes.
 Zoning - Government allows certain economic activity in specified land areas but excludes
others, allowing monopoly over the land needed.
Perfect competition
In economics, specifically general equilibrium theory, a perfect market is defined by several
idealizing conditions, collectively called perfect competition. In theoretical models where
conditions of perfect competition hold, it has been theoretically demonstrated that a market will
reach an equilibrium in which the quantity supplied for every product or service, including labor,
equals the quantity demanded at the current price. This equilibrium will be a Pareto optimum,

7. meaning that nobody can be made better off by exchange without making someone else worse
off.
Idealizing conditions of perfect competition
There is a set of market conditions which are assumed to prevail in the discussion of what perfect
competition might be if it were theoretically possible to ever obtain such perfect market
conditions. These conditions include.
 A large number of buyers and sellers – A large number of consumers with the willingness and
ability to buy the product at a certain price, and a large number of producers with the
willingness and ability to supply the product at a certain price.
 Perfect information – All consumers and producers know all prices of products and utilities
each person would get from owning each product.
 Homogeneous products – The products are perfect substitutes for each other, (i.e., the
qualities and characteristics of a market good or service do not vary between different
suppliers).
 Well defined property rights – These determine what may be sold, as well as what rights are
conferred on the buyer.
 No barriers to entry or exit
 Every participant is a price taker – No participant with market power to set prices
 Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing
free long term adjustments to changing market conditions.
 Profit maximization of sellers – Firms sell where the most profit is generated, where marginal
costs meet marginal revenue.
 Rational buyers: Buyers make all trades that increase their economic utility and make no
trades that do not increase their utility.
 No externalities – Costs or benefits of an activity do not affect third parties. This criteria also
excludes any government intervention.
 Zero transaction costs – Buyers and sellers do not incur costs in making an exchange of goods
in a perfectly competitive market.
 Non-increasing returns to scale and no network effects – The lack of economies of
scale or network effects ensures that there will always be a sufficient number of firms in the
industry.
 Anti-competitive regulation - It is assumed that a market of perfect competition shall provide
the regulations and protections implicit in the control of and elimination of anti-competitive
activity in the market place.