A market structure is the manner in which firms are organized in terms of production and the relationship with one another and the consumers. There are different types of market structures. They include; monopolistic, monopolies, oligopolies and competitive market structures. These market structures have different characteristics that distinguish them (McEachern, 2010).
Monopoly is a market structure where there exists only one seller or producer serving all consumers in the market. The monopoly is a price setter and the prices are set where firms make the highest possible profits. The prices are set above the marginal cost. Monopolies can also decide on the amount they produce to suit its strategies. There are barriers for other firms trying to enter a monopoly market structure. This is different from perfectly competitive markets where entry and exit is free with many consumers and producers. The products are also homogeneous, and there is perfect information among firms and consumers. Furthermore, in competitive markets the prices are determined by market forces (McEachern, 2010).
A monopolistic competition is a market structure characterized by imperfect competition. There are many consumers and firms in the industry. Each firm produces highly differentiated products. The goods produced can be substituted. The firms use different forms of product differentiation such as improvement of product quality and branding. Even though no firm has control over market prices, each firm has considerable control over prices. Entry and exit into the market has few barriers. Consumers choose products without considering the prices of other firms (McEachern, 2011).
An oligopoly is an industry composed of few firms. The actions of one firm affect the decision of other firms in the market. Therefore, each firm plans strategically putting in mind the probable responses of its rivals. Each firm maximizes profits at the point where its marginal costs are equal to its marginal revenue. The firms set their own prices. Entry and exit is difficult and the firms depend on one another when making decisions. In some cases, the firms may collude to maximize profits at the expense of the consumers.
Therefore, the market structures have different characteristics, which influence how firms operate and behave in each type of market. Monopolies, monopolistic competition and oligopolies have variant numbers of firms, and they apply different strategies to maximize profits. The products they produce can be homogeneous or differentiated depending on the market structure (McEachern, 2011).
McEachern, W. A. (2011). Economics: A Contemporary Introduction (9 ed.). London: Cengage Learning.
McEachern, W. (2010). Principles of Microeconomics (2nd Edition ed.). London: Cengage Learning.