Market structure, or competitive structure, is the form a market takes with respect to competition, measured by the amount and distribution of firms, indicating the competitiveness of the market. Markets are divided into four categories: perfect competition, pure monopoly, oligopoly and monopolistic competition. Perfect competition is at one extreme of the spectrum. It is supplied by a large number of competitors with each firm claiming a small market share—not able to control price. The price is determined by supply and demand and has no barriers preventing new firms from entering the market. On the other extreme is the pure monopoly. A single firm supplies the market and has no direct competitors. In this structure the firm controls prices and maximizes its profits. It is difficult to enter the market of a pure monopoly preventing new competition. Oligopoly is a middle of the round between the perfect competition and pure monopoly market structure. Just a few large firms are represented with each firm attempting to anticipate the strategy of its competition. It is moderate to high entry barriers for potential competitors. The final type of market structure is the monopolistic competition. It has no entry barriers. Like the perfect competition this structure has many firms competing in the market—but small in size—and no entry barriers. They differ in that the firms produce different products. In order to make sound decisions, it is important for managers to understand supply and demand, and how they affect price and output in competitive markets.
Analysis of Market Structures
In a perfect competition a large number of companies supply identical goods or services for a market consisting of a large number of consumers. There are no barriers with respect to new firms entering or exiting the market. Each company has a small share of the available market. As a result, the...