The 

Market Structure refers to the characteristics of the

market either organizational or competitive, that describes
the nature of competition and the pricing policy followed
in the market
Thus, the market structure can be defined as, the number
of firms producing the identical goods and services in the
market and whose structure is determined on the basis of
the competition prevailing in that market.

The term “ market” refers to a place where sellers and

buyers meet and facilitate the selling and buying of goods
and services. But in economics, it is much wider than just
a place, It is a gamut of all the buyers and sellers, who
are spread out to perform the marketing activities.

Market Structure
Definition: The Market Structure refers to the
characteristics of the market either organizational or
competitive, that describes the nature of competition and
the pricing policy followed in the market.

Thus, the market structure can be defined as, the number

of firms producing the identical goods and services in the
market and whose structure is determined on the basis of
the competition prevailing in that market.

The term “ market” refers to a place where sellers and

buyers meet and facilitate the selling and buying of goods
and services. But in economics, it is much wider than just
a place, It is a gamut of all the buyers and sellers, who
are spread out to perform the marketing activities.

Types of Market Structure

1. Perfect Competition Market Structure

2. Monopolistic Competition Market Structure
3. Oligopoly Market Structure
4. Monopoly Market Structure
The major determinants of the market structure
are:

1. The number of sellers operating in the market.

2. The number of buyers in the market.
 3. The nature of goods and services offered by the
firms.
4. The concentration ratio of the company, which shows
the largest market shares held by the companies.
5. The entry and exit barriers in a particular market.
6. The economies of scale, i.e. how cost efficient a firm
is in producing the goods and services at a low cost.
Also the sunk cost, the cost that has already been
spent on the business operations.
7. The degree of vertical integration, i.e. the combining
of different stages of production and distribution,
managed by a single firm.
8. The level of product and service differentiation, i.e.
how the company’s offerings differ from the other
company’s offerings.
9. The customer turnover, i.e. the number of customers
willing to change their choice with respect to the
goods and services at the time of adverse market
conditions.
Thus, the structure of the market affects how firm price
and supply their goods and services, how they handle the
exit and entry barriers, and how efficiently a firm carry out
its business operations.

The Perfect Competition is a market structure where a

large number of buyers and sellers are present, and all are
engaged in the buying and selling of the homogeneous
products at a single price prevailing in the market.

In other words, perfect competition also referred to as a

pure competition, exists when there is no direct
competition between the rivals and all sell identically the
same products at a single price.

Features of Perfect Competition

1. Large number of buyers and sellers: In perfect

competition, the buyers and sellers are large enough,
that no individual can influence the price and the
output of the industry. An individual customer cannot
influence the price of the product, as he is too small
in relation to the whole market. Similarly, a single
 seller cannot influence the levels of output, who is too
small in relation to the gamut of sellers operating in
the market.
2. Homogeneous Product: Each competing firm offers
the homogeneous product, such that no individual
has a preference for a particular seller over the
others. Salt, wheat, coal, etc. are some of the
homogeneous products for which customers are
indifferent and buy these from the one who charges a
less price. Thus, an increase in the price would let the
customer go to some other supplier.
3. Free Entry and Exit: Under the perfect competition,
the firms are free to enter or exit the industry. This
implies, If a firm suffers from a huge loss due to the
intense competition in the industry, then it is free to
leave that industry and begin its business operations
in any of the industry, it wants. Thus, there is no
restriction on the mobility of sellers.
4. Perfect knowledge of prices and technology:
This implies, that both the buyers and sellers have
complete knowledge of the market conditions such as
the prices of products and the latest technology being
used to produce it. Hence, they can buy or sell the
products anywhere and anytime they want.
5. No transportation cost: There is an absence of
transportation cost, i.e. incurred in carrying the goods
from one market to another. This is an essential
condition of the perfect competition since the
 homogeneous product should have the same price
across the market and if the transportation cost is
added to it, then the prices may differ.
6. Absence of Government and Artificial
Restrictions: Under the perfect competition, both
the buyers and sellers are free to buy and sell the
goods and services. This means any customer can
buy from any seller, and any seller can sell to any
[Link], no restriction is imposed on either party.
Also, the prices are liable to change freely as per the
demand-supply conditions. In such a situation, no big
producer and the government can intervene and
control the demand, supply or price of the goods and
services.
Thus, under the perfect competition,  a seller is the price
taker and cannot influence the market price.

Under, the Monopolistic Competition, there are a large

number of firms that produce differentiated products
which are close substitutes for each other. In other words,
large sellers selling the products that are similar, but not
identical and compete with each other on other factors
besides price.

Features of Monopolistic Competition

 
1. Product Differentiation: This is one of the major
features of the firms operating under the monopolistic
competition, that produces the product which is not
identical but is slightly different from each other. The
products being slightly different from each other
remain close substitutes of each other and hence
cannot be priced very differently from each other.
2. Large number of firms: A large number of firms
operate under the monopolistic competition, and
there is a stiff competition between the existing firms.
Unlike the perfect competition, the firms produce the
differentiated products which are substitutes for each
other, thus make the competition among the firms a
real and a tough one.
3. Free Entry and Exit: With an intense competition
among the firms, the entity incurring the loss can
 move out of the industry at any time it wants.
Similarly, the new firms can enter into the industry
freely, provided it comes up with the unique feature
and different variety of products to outstand in the
market and meet with the competition already
existing in the industry.
4. Some control over price: Since, the products are
close substitutes for each other, if a firm lowers the
price of its product, then the customers of other
products will switch over to it. Conversely, with the
increase in the price of the product, it will lose its
customers to others. Thus, under the monopolistic
competition, an individual firm is not a price taker but
has some influence over the price of its product.
5. Heavy expenditure on Advertisement and other
Selling Costs: Under the monopolistic competition,
the firms incur a huge cost on advertisements and
other selling costs to promote the sale of their
products. Since the products are different and are
close substitutes for each other; the firms need to
undertake the promotional activities to capture a
larger market share.
6. Product Variation: Under the monopolistic
competition, there is a variation in the products
offered by several firms. To meet the needs of the
customers, each firm tries to adjust its product
accordingly. The changes could be in the form of new
design, better quality, new packages or container,
 better materials, etc. Thus, the amount of product a
firm is selling in the market depends on the
uniqueness of its product and the extent to which it
differs from the other products.
The monopolistic competition is also called as imperfect
competition because this market structure lies between
the pure monopoly and the pure competition.

The Oligopoly Market characterized by few sellers,

selling the homogeneous or differentiated products. In
other words, the Oligopoly market structure lies between
the pure monopoly and monopolistic competition, where
few sellers dominate the market and have control over the
price of the product.

Under the Oligopoly market, a firm either produces:

 Homogeneous product: The firms producing the

homogeneous products are called as Pure or Perfect
Oligopoly. It is found in the producers of industrial
products such as aluminum, copper, steel, zinc, iron,
etc.
 Heterogeneous Product: The firms producing the
heterogeneous products are called as Imperfect or
Differentiated Oligopoly. Such type of Oligopoly is
found in the producers of consumer goods such as
automobiles, soaps, detergents, television,
refrigerators, etc.
There are five types of oligopoly market, for detailed
description, click on the link below:

Types of Oligopoly Market

Features of Oligopoly Market

1. Few Sellers: Under the Oligopoly market, the sellers

are few, and the customers are many. Few firms
dominating the market enjoys a considerable control
over the price of the product.
2. Interdependence: it is one of the most important
features of an Oligopoly market, wherein, the seller
has to be cautious with respect to any action taken by
the competing firms. Since there are few sellers in the
market, if any firm makes the change in the price or
promotional scheme, all other firms in the industry
have to comply with it, to remain in the competition.
 Thus, every firm remains alert to the actions of others
and plan their counterattack beforehand, to escape
the turmoil. Hence, there is a complete
interdependence among the sellers with respect to
their price-output policies.

3. Advertising: Under Oligopoly market, every firm

advertises their products on a frequent basis, with the
intention to reach more and more customers and
increase their customer [Link] is due to the
advertising that makes the competition intense.
If any firm does a lot of advertisement while the other
remained silent, then he will observe that his
customers are going to that firm who is continuously
promoting its product. Thus, in order to be in the
race, each firm spends lots of money on
advertisement activities.

4. Competition: It is genuine that with a few players in

the market, there will be an intense competition
among the sellers. Any move taken by the firm will
have a considerable impact on its rivals. Thus, every
seller keeps an eye over its rival and be ready with
the counterattack.
5. Entry and Exit Barriers: The firms can easily exit
the industry whenever it wants, but has to face
certain barriers to entering into it. These barriers
could be Government license, Patent, large firm’s
economies of scale, high capital requirement, complex
 technology, etc. Also, sometimes the government
regulations favor the existing large firms, thereby
acting as a barrier for the new entrants.
6. Lack of Uniformity: There is a lack of uniformity
among the firms in terms of their size, some are big,
and some are small.
Since there are less number of firms, any action taken by
one firm has a considerable effect on the other. Thus,
every firm must keep a close eye on its counterpart and
plan the promotional activities accordingly.

The Monopoly is a market structure characterized by a

single seller, selling the unique product with the restriction
for a new firm to enter the market. Simply, monopoly is a
form of market where there is a single seller selling a
particular commodity for which there are no close
substitutes.

Features of Monopoly Market

 
1. Under monopoly, the firm has full control over the
supply of a product. The elasticity of demand is zero
for the products.
2. There is a single seller or a producer of a particular
product, and there is no difference between the firm
and the industry. The firm is itself an industry.
3. The firms can influence the price of a product and
hence, these are price makers, not the price takers.
4. There are barriers for the new entrants.
5. The demand curve under monopoly market is
downward sloping, which means the firm can earn
more profits only by increasing the sales which are
possible by decreasing the price of a product.
 6. There are no close substitutes for a monopolist’s
product.
Under a monopoly market, new firms cannot enter the
market freely due to any of the reasons such as
Government license and regulations, huge capital
requirement, complex technology and economies of scale.
These economic barriers restrict the entry of new firms.

Kinked demand curve

A kinked demand curve occurs when the demand curve is
not a straight line but has a different elasticity for higher
and lower prices.

One example of a kinked demand curve is the model for

an oligopoly. This model of oligopoly suggests that prices
are rigid and that firms will face different effects for both
increasing price or decreasing price. The kink in the
demand curve occurs because rival firms will behave
differently to price cuts and price increases.

Diagram of kinked demand curve

 T
he logic of the kinked demand curve is based on
 A few firms dominate the industry

 Firms wish to maximise profits

Impact of price rise

 If a firm increases the price, then it becomes

more expensive than rivals and therefore,
consumers will switch to its rivals.
 Therefore for a price rise, there is likely to be a
significant fall in demand. Demand is, therefore,
price elastic.
 In this case, of increasing price firms will lose
revenue because the percentage fall in demand is
greater than the percentage rise in price.
Impact of price cut

If a firm cut its price, it is likely to lead to a

different effect. In the short term, if a firm cuts
price it would cause a big increase in demand
and therefore would lead to a rise in revenue.
The firm would gain market share.
 However, other firms will not want to see this fall

in market share and so they will respond by also

cutting price to follow the first firm. The net
effect is that if all firms cut price – the individual
firm will only see a small increase in demand.
 Because there is a ‘price war’ demand for a firm

is price inelastic – there is a smaller percentage

rise in demand.
 If demand is inelastic and price falls, then

revenue will fall.

Prices stable
 If the kinked demand curve is true, the firm has

no incentive to raise price or to cut price.

Example of a kinked demand curve in practice

 One possibility is the market for petrol. It is

homogenous and consumers are price sensitive.
 If one petrol station increased the price there
would be a shift to other petrol stations.
 However, if one petrol station cuts price, other
firms may feel obliged to follow suit and also cut
price – therefore a price cut would be self-
defeating for the first firm.
How realistic is the kinked demand curve in
practice?

In many oligopolies, firms may have a degree of

brand differentiation. Mobile phone companies
can increase the price but consumers are willing
to pay because the price is not the dominant
factor. Some petrol stations may increase price
and not see elastic demand because they have
the best location.
 Firms may not want to defend market share.

Rather than getting pulled into a price war, some

firms may not respond to price cut but
concentrate on non-price competition to retain an
advantage.
Other examples of the kinked demand curve

It is not just in an oligopoly where there is potential

kinked demand curve.

 In the market for an addictive drug like cocaine.

If the price is cut, it may encourage first-time
users to try. However, once addicted, if the price
rises, then demand will be price inelastic (they
will be willing to pay the higher price to get their
drug fix)

All Firms Should Produce at MR=MC

In economics, the point of profit maximizing and loss
minimizing is called MR=MC. This point is where marginal
revenue equals marginal cost, meaning that cost does not
exceed revenue and revenue does not exceed cost. This is
a profit-maximizing zone, meaning that total cost is not
the lowest, but is farthest away from the total returns.
The optimal point of production for the firm is at the point
MR=MC. Marginal revenue is defined as the change in
total revenue as a result of producing an additional unit,
while marginal cost is the increase or decrease of a firm's
total cost of production as a result of the change in
production by one additional unit. When these two are
equal, the firm is not losing money, and is making the
most profit possible. In the area of the graph where less
quantity is being sold, the firm still obtains a profit but it is
not maximized, and in the area of the graph where more
quantity is being sold, profit is less and money can be lost
from the firm.

English: Short-run equilibrium of the firm

under m...
 Marginal profit is the difference between
a firm's...

English: marginal cost curve Polski:

krzywa kosztu...

To the left of MR=MC, cost is low to the firm and revenue

is high. As the graph progresses toward the point of
MR=MC, each unit provides less and less profit. As the
first unit is produced, the profit is high for that unit, but
the profit for each extra unit produced declines toward the
point of profit maximization. This may sound absurd, and
may make the reader wonder why the firm does not
produce at the first unit. However, as each unit is
produced, the firm gets to keep the profit from every unit
produced previously. This would add up to far more profit
than if the firm produced when cost is lowest and revenue
is greatest. The point where marginal revenue equals
marginal cost is the point where all of the profits from the
previous units are combined. At this point, total cost is not
at its lowest, and total revenue is not the greatest, but are
farthest away from each other, which is represented in the
graphs attached. It is true that in the less quantity level of
the graph revenue exceeds cost, however, the profit at
MR=MC is far more than any of the units produced.

To the right of MR=MC, total costs exceed total revenue.

The firm would spend more money on workers, resources,
and the production of goods, and not get a great profit
back. Once the quantity of goods produced passes the
point where MR=MC, the firm not only does not make a
great profit, but after a while, it loses the money that the
company has already, and soon the company would go
into debt. The point of profit maximization and loss
minimization is the ideal point of production because if the
firm was to produce more, all previous profit would be lost
and the firm could possibly close down. As shown in the
graphs attached, the profit depletes until the point where
money is being taken from the firm just to produce more.
When the firm cuts down its production and gets to the
point of MR=MC again, the profit will once again be
maximized.

To conclude, the point of loss minimization and profit

maximization is where marginal revenue equals marginal
costs. This way, all profit from previous units sold is
combined for a large profit and all costs do not exceed the
total revenue. The firm should always produce at the point
where MR=MC. If they move to the left or right of this
point, total profit would drop. As the change in total
revenue changes, so does the cost of production. The
optimal point of production is when both of these are
equal to each other. The graphs attached show how profit
is still being made on other points of the curve, but
MR=MC is the greatest. If a firm wants to increase
revenue and profit, the best bet is to produce where
marginal return is equal to marginal cost.

Costcurve - Marginal Cost

English: A typical marginal cost curve.

How supply and demand determine

electricity prices..