Answer to Question #95874 in Microeconomics for Sana

Question #95874
Explain the classifications of market structure in detail.
Expert's answer

       Classifications of Market Structures

                       1.Perfect Competition Market Structure.

This is a market structure where a large number of small firms compete against one another. Here no firm has a significant market power over the other. Therefore the levels of output are socially optimal because no firm has the power to regulate the market prices. This market structure is built  on assumptions that; all firms maximize profits, all firms are price-takers, there is free exit and entry to the market, there are no consumer preferences and all firms sell homogenous goods. From the stated assumptions this market structure is hardly  operational in reality.

                       2.Monopoly Market Structure.

It is a market situation in which there exist only one seller of a product with barriers to entry of other sellers. Here the product has no any close substitutes. Therefore the monopoly itself is an industry because it has power to controls the entire market. The monopolies often reduce output to increase prices and  make more profit. The market structure functions under the following assumptions; it can set the prices, the monopolist maximizes profit, there is only one firm that controls the entire market and there are high barriers to entry and exit. In reality most monopolies are undesirable because they result in lower outputs and higher prices compared to competitive markets therefore they are often regulated by the government.

                       3.Oligopoly Market Structure.

This is a market situation in which there are few firms selling homogeneous or differentiated products. Therefore there is a state of limited competition. The firms can either compete against each other or collaborate and by doing so  they can use their collective market power to drive up prices and earn more profit. The oligopoly market structure functions under the following assumptions; there are barriers to entry and exit in the market, all firms maximize profits, they can set prices, products may be homogenous or differentiated and there is only a few firms that dominate the market.

                       4.Monopolistic Competition Market Structure.

Refers to a market structure where there is a large number of small firms selling slightly differentiated products and are competing against each other. Because the firms sell slightly differentiated products, they have a certain degree of market power which allows them to charge higher prices within a certain range. The monopolistic competition is built on assumption that; all firms maximize profits, firms sell differentiated products, there is free entry and exit to the market and consumers may prefer one product over the other. This market structure no longer result in a socially optimal level of output because the firms have more power and can regulate market prices to a certain degree.


Smriti Chand ;< -form-economics/28736 

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