5.1 — Market Structures

How Different Markets Are Organized

Market structure describes how a market is set up and how firms within that market compete. Market structures are used to explain pricing, competition, consumer choice, and business behaviour. Not all markets operate the same way. Some Markets are highly competitive, while others are dominated by only a few firms or even just one.

The structure of a market depends on three main factors:

Number of sellers
Type of product being sold
Barriers to entry for new firms

Understanding market structures helps explain why prices are low in some industries and high in others, and why consumers sometimes have many choices, or very few.

The Four Main Market Structures

Economists classify markets into four main types, listed from most competitive to least competitive.

Perfect Competition

Perfect competition is the most competitive market structure.

Key Characteristics:

A very large number of buyers and sellers
Firms sell identical (standardized) products
Firms are price takers — they cannot influence market price
No barriers to entry or exit

Because all products are identical, consumers will always buy from the lowest-priced seller. This forces firms to operate efficiently and keep prices low.

For Example:
Agricultural markets (such as wheat or corn farming) often resemble perfect competition. One farmer cannot charge more than the market price because buyers can easily purchase the same product from another farmer.

Why this matters: Perfect competition leads to low prices, high efficiency, and maximum consumer benefit.

Monopolistic Competition

Monopolistic competition is common in everyday consumer markets.

Key Characteristics:

Many buyers and sellers
Products are similar but not identical
Firms have some control over price
Low barriers to entry

Because products are differentiated, firms compete using branding, quality, location, and advertising, rather than price alone.

Example:
Restaurants operate in monopolistic competition. While many restaurants sell food, each offers a slightly different experience, menu, or brand, allowing them to charge different prices.

Why this matters: Consumers get variety and choice, but prices are usually higher than in perfect competition.

Oligopoly

An oligopoly exists when a small number of large firms dominate a market.

Key Characteristics:

Few sellers control most of the market
Products may be identical or differentiated
High barriers to entry
Firms are interdependent — each firm’s decisions affect others

Because firms are so large, they must consider how competitors will react to price changes. This often leads to price stability and heavy use of advertising and branding instead of price competition.

Example:
The car/vehicle industry is an oligopoly. A small number of large Car brands are most of the populations cars, which dictate prices and tend to move together.

Why this matters: Oligopolies can reduce competition, leading to higher prices and fewer choices for consumers.

Monopoly

A monopoly is the least competitive market structure.

Key Characteristics:

A single seller controls the entire market
No close substitutes for the product
Very high barriers to entry
The firm is a price maker

Because there is no competition, monopolies can charge higher prices and restrict output.

Example:
Utility companies (electricity, water) are often monopolies because it would be inefficient to have multiple competing infrastructures.

Why this matters: Monopolies can harm consumers without regulation, which is why governments often step in to prevent corruption by implementing price ceilings/floors.