By Shane Johnston
Market structures make up the infrastructure of an industry. The type of market structure greatly depends on the amount of competing businesses and how the products are made.
Characteristics of Market Structures
- Perfect Competition: Happens when numerous small firms compete against each other. Firms on a competitive level will produce the socially optimal output per cost ratio.
- Monopolistic Competition: An industry contains many competing firms. However, each firm has their own non-standardized product. They own their part of the market, but there is still competition.
- Oligopoly: An oligopoly is an industry with only a few firms. They work together in trusts to reduce output and drive up profits similarly to a monopoly. However, oligopolies also tend to compete against eachother.
- Monopoly: A monopoly is a firm that has no competitors in its industry. It reduces output to drive up prices and increase profits. It produces less than the socially optimal output level and has higher costs.
Advantages of Market Structures
- Perfect competition allocates resources in the most efficient way. There is a low barrier-to-entry in this type of market.
- Monopoly competition has many sellers and allows for a low barrier-to-entry. There is limited control over the prices that sellers set. Products are non-standardized and there is the maximum amount of choice from the consumers on businesses.
- Oligopolies has a lot of control from the businesses. Consumers can easily force companies to set standardized prices for their products.
- Monopolies can have an increased output which can be passed on to consumers in lower prices. More profit for a company can also mean improved products and long term lower costs.
Disadvantages of Market Structures
- Monopoly competition are inefficient in regulating prices for products sold that exceed regulation.
- Perfect competition has no scope for economies of scale. Small firms produce small amounts of products. With high fixed costs comes high prices.
- Oligopolies can have a dominating company. If the business owns a massive share, they can almost set the prices to whatever they desire.
- Monopolies have control over the entire market. They can name whatever price they want because people will have to buy from them.