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The Four Major Types of Market Structure

Written by

Symphysis

Published 

April 27, 2019

One of the more important elements to building a company is know what type of market structure you're looking to build. Alongside your Industry Analysis, identifying your market structure can help you better understand the basics of your marketing strategy, who your competitors are, and what made them successful in your industry.

The four types of market structure infographic
Understanding the four types of market structure

Contents

What is a market?

Monopoly

Monopolistic Competition

Oligopoly

Theoretical Market Form: Perfect Competition

Footnotes

What is a market?

Market can be defined as a destination where sellers meet potential buyers, this can be physical or virtual, just like the product offered. However in an economic sense, the product must be of value to the buyer, and that value should be able to be a measured in a monetary value to the consumer. In other words, to be an economic market there should be recurring monetary exchanges involved, something of economic value must be at stake.

Knowing the various types of market is important for a business since it heavily influences the marketing decisions and strategies that go into building different industries. So now we'll dive into the four major market types.

Monopoly

The four types of market structure - Monopolistic
The four types of market structure - Monopolistic

Monopoly or Monopolistic is a market form under which there is a single seller who provides goods that have no close substitute. There is no perfect monopoly in America. However, virtual monopolies(1) are quite prevalent. For example, DeBeers Diamond Corporation has a virtual monopoly over diamond distribution since they have control over most of the world’s diamond extraction. Monopoly markets maintain certain characteristics of its own, such as the necessity to charges different prices from different individuals (price differentiation), no selling costs (lack of advertisement expenditure), and artificial or real restriction of entry in the market.

Reasons behind barrier to entry include natural restrictions such as control over resources or artificial restrictions such as patents or government regulations & licensing. While an absolute monopoly does not exist in America, such are widely observed in mixed or socialist economies such as India or China.

Warren Buffet historically invests in monopolistic structures and purchases competitors to create monopolies within his investment portfolio.

Monopolistic Competition

Monopolistic competition one of the four market structures
Monopolistic competition one of the four market structures

Monopolistic Competition is a market form under which different sellers sell closely related but somewhat differentiated goods. In other words, under this market form various sellers sell goods that can be substituted for another, but each good has some differentiation to the others. This is the most popular and healthy form of free market. Examples include toothpaste, shoes, soaps, and other goods and services used daily. Under this market form there is little to no restriction of entry and exit. However, it involves a high selling cost since your competitors are constantly looking to acquire market share from you and vice-versa.

Oligopoly

Oligopoly one of the four market structures
Oligopoly one of the four market structures

An Oligopoly is another popular market form. This market relies on there being few sellers selling homogeneous or closely related products, such as cement or smartphones, and typically differentiated by brand name. Oligopolies come up against a few barriers to entry, such as requirement of huge capital or geographical access or control over resources.

The main distinction about Oligopolies is group behavior. Group behavior means that the decisions of one oligopoly will directly affect another. For example if one smartphone company produces a new innovation (such as the air pods), another is soon to follow to maintain a competitive parallel.

Due to the competitiveness of group behavior, there is a lack of pricing competition(2), and hence oligopolies also highly depend on selling costs such as advertisement and PR to gain competitive advantages over others.

Perfect Competition

Perfect competition graphic
Source: EO

Perfect competition is a theoretical market form, which means that there is no real life example for the same. The closest thing to a perfect market form is agricultural products such as wheat or grains.

Under this market form, the consumers are expected to have perfect knowledge of every product and vendor, since all of them are absolutely the same. There is no brand value, no involvement of selling cost, no innovation or expansion, no super profits, and no form of competition. There are no barriers and hence there is absolute freedom of entry and exit to and from the market.

Footnotes

(1)

A virtual monopoly is a market form under which technically there is no official barrier to entry, however other factors such as resource control or cartel may lead to this. A famous example of this is Organisation of the Petroleum Exporting Countries (OPEC) which gained a virtual monopoly by various distributers coming together and forming a single exporting alliance. This oligopoly was turned into a monopoly.

(2)

Pricing competition is competition based on price, such that a business may reduce the profit margin for a product or good that can be substituted in a monopolistic competition or oligopoly to gain a temporary advantage over competitors.

We Can Help!

Symphysis specialises in market structure and strategy. Every day we meet clients from around Greater Seattle for one-on-one training and consultation. Our marketing services extend to businesses of all sizes, family and enterprise. For more information, call or text @ +1 (425) 390-4738.

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