Understanding the Different Types of Market Structures

competitionIn every economy, there are different types of market structures. Systems exist depending on the industry and the companies operating within that industry, just like how Fredericksburg Pressure Washing defines competition in pressure washing industry within its locality. It is very important for business owners to understand the type of market they operating in, as this helps them to better themselves in terms of dealing with competition.

Here are the four common types of markets.

Perfect Competition Market

In a market structure characterized as perfect competition, there are a large number of buyers and sellers. All the sellers in that market are small sellers in competition with each other. There are no significant or bigger sellers that influence the market. This means all the businesses in such a market are all price takers, but none really defines the prices.  In a perfect competition market, there are a couple of assumptions we make. First, we assume that all products are homogeneous and completely identical. There are no barriers of entry to market in that there is a free entry and exit from the market. There is no concept of consumer preference.

Monopolistic Market

A monopolistic market is a more realistic situation. In this type of market, there is still a large number of buyers as well as sellers, but all of them do not sell homogeneous products. The products are all but same or related but all sellers sell slightly differentiated products. Consumers have the preference of choosing one product over the other. The sellers also have the option of charging a marginally higher price since they enjoy some form of market power.

Oligopoly Market

In an oligopoly market, there are only very few firms in the market.  In most cases, 3-5 dominant firms are considered as the norm in defining this type of market. In this type of market, the firms compete with each other or collaborate to offer products and services to customers. The use their market influence to set the prices and make as much profits as they want. In this case, consumers become price takers. In this type of market, there are different barriers to entry. If a firm succeeds to enter this market, they are faced with a lot a lot of challenges trying to establish themselves.

Monopolistic Market

A monopoly market refers to a market structure in which a single firm have control of the whole market. In this market scenario, a monopoly firm has the highest level of market power and consumers do not have any alternative. As a result being in monopoly, a company normally reduces output and increases prices so as to earn more profits. A company in monopoly maximizes profits and sets its sets its price. There are very high barriers to entry as well as exit. There is only one firm that dominates the market. This means there is only one firm that dominates the market. Monopolies are normally not desirable because they are characterized by low outputs and higher prices as compared to competitive markets.