Types of Market Structures (Cambridge (CIE) A Level Economics): Revision Note

Perfect competition

Market structures

• Market structures are the characteristics of the market in which a firm or industry operates

• Market structures can be separated into perfect competition and imperfect competition

Perfect competition

• Perfect competition describes a market structure where no individual firm has control over price

  • Typical examples include fruit sellers on a street market

Characteristics of perfectly competitive markets

• Large number of buyers and sellers

  • Each firm produces a very small share of total market output

  • No firm can influence the market price

• Homogeneous products

  • Goods produced by different firms are identical

• Free entry and exit

  • Firms can easily enter or leave the market

• Perfect information

  • Consumers and firms have full knowledge of prices and products

• Price takers

  • Individual firms must accept the market-determined price

Imperfect competition

• Imperfect competition occurs when firms have some control over price and competition is not perfect

• Several imperfect market structures exist

1. Monopoly

• A monopoly is a market structure where a single firm dominates the market

  • A  pure monopoly market structure is when there is a single supplier of a particular product and has the power to influence the market supply and price

  • A natural monopoly is when the optimum number of firms in the market is one as the LRAC minimum efficient scale is unobtainable

Characteristics of monopoly

• Number of firms

  • One dominant firm

• Product differentiation

  • The product has no close substitutes

• Barriers to entry

  • Very high barriers prevent new firms entering the market

• Information

  • Information may be imperfect

• Because there is only one firm, the monopolist is a price maker.

2. Monopolistic competition

• Monopolistic competition is a market structure where many firms compete but sell differentiated products

• Typical examples include hair or nail salons, tattoo artists, pizza takeaways, etc.

Characteristics of monopolistic competition

• Number of firms

  • Many firms

• Product differentiation

  • Products are similar but not identical

• Freedom of entry

  • Firms can enter and exit the market relatively easily

• Information

  • Information is not perfect

• Firms have some price-setting power due to product differentiation.

3. Oligopoly

• An oligopoly is a market structure dominated by a small number of large firms

  • Many industries are oligopolies, e.g., banking, retail, supermarkets, insurance, petrol

Characteristics of oligopoly

• Number of firms

  • Few large firms dominate the market

• Product differentiation

  • Products may be differentiated or homogeneous

• Barriers to entry

  • High barriers to entry protect existing firms

• Information

  • Information is usually imperfect

• Firms in an oligopoly are interdependent, meaning their decisions affect competitors

Comparison of market structures