Types of market structures In a perfectly competitive market, prices reflect an economy's collective wisdom, but in a monopolistic market, they reflect one company's absence of wisdom. Perfect Competition: Characteristics: Many buyers and sellers. Homogeneous (identical) products. Easy entry and exit for firms. Perfect information for all participants. No single firm can influence the market price. Implications: Prices are determined by market forces (supply and demand). Monopoly: Characteristics: Single seller dominating the market. Unique product with no close substitutes. Significant barriers to entry. Price maker – the firm has control over the price. Implications: The monopolist can set the price to maximize profits. Limited consumer choice. Potential for reduced efficiency and innovation. Firms are price takers, meaning they accept the market price. Oligopoly: Characteristics: Small number of large firms dominate the market. Products can be homogeneous or differentiated. Significant barriers to entry. Mutual interdependence among firms. Implications: Firms may engage in non-price competition (advertising, branding, etc.). Price and output decisions are influenced by the actions of competitors. Collusion is possible but often regulated. Monopolistic Competition: Characteristics: Many firms, each producing a differentiated product. Relatively easy entry and exit. Some control over price due to product differentiation. Implications: Firms have a degree of market power but are price setters to a limited extent. Non-price competition is common through advertising and product differentiation. Consumers have a range of similar but not identical products to choose from.
