7.6 Different Market Structures

2026 Syllabus Objectives

By the end of these notes, you should be able to:

  1. Identify and explain different market structures: perfect competition, monopoly, monopolistic competition, oligopoly, and natural monopoly
  2. Describe the structure of each market using number of buyers/sellers, product differentiation, freedom of entry, and availability of information
  3. Explain barriers to entry and exit: legal, market, cost, and physical barriers
  4. Analyse the performance of firms in different market structures, including revenues, output, profits, shutdown price, supply curves, efficiency, contestable markets, price and non-price competition, and collusion
  5. Define and calculate the concentration ratio

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1. Types of Market Structure

A market structure describes how a market is organised — how many firms operate in it, what kind of products they sell, and how easy it is for new firms to join or leave.

There are two broad categories:

  • Perfect competition — a market with many firms, identical products, and no barriers to entry
  • Imperfect competition — markets where firms have some power to control price or conditions

Imperfect competition includes:

1.1 Perfect Competition

In a perfectly competitive market, no single buyer or seller is large enough to influence the price. The price is set by the whole market (supply and demand together), and every firm simply accepts that price. This is why firms in perfect competition are called price takers.

Key features:

  • Very large number of buyers and sellers
  • Identical (homogeneous) products — there is no difference between one firm's product and another's
  • Complete freedom to enter or leave the market
  • Perfect information — buyers and sellers know all prices and product details

Real-world examples are rare, but agricultural markets (e.g. wheat or rice farming) come close.

1.2 Monopoly

A monopoly is a market where there is only one seller dominating the entire market. This single firm produces a product with no close substitutes, meaning buyers have no real alternative.

Key features:

  • One seller, many buyers
  • Unique product — no substitute exists
  • Very high barriers to entry (we'll cover these soon)
  • The monopolist is a price maker — it can set its own price

Example: A national water supply company in a country where only one firm has the infrastructure and legal right to supply water.

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