11.6 : Differentiating Types of Markets

Market structures are classified by distinct characteristics that influence how firms compete and set prices.

In the realm of perfect competition, numerous businesses offer identical products. Prices are determined by market forces of supply and demand, with firms acting as price takers. Everyone has complete information, and there are no barriers to market entry or exit.

Contrastingly, a monopoly exists when a single provider serves the entire market, often offering a one-of-a-kind product with no close alternatives. The high entry barriers grant the provider the power to determine pricing. Here, the monopolist is the price maker and can earn economic profits even in the long run.

The monopolistic competition offers differentiated products. These firms exert a degree of pricing power with minimal barriers to market participation.

In an oligopoly, a few firms hold market control, providing either similar or distinct products. Entry obstacles are considerable, with the pricing decisions of one firm impacting the others due to their market influence. Firms can maintain economic profits in the long run due to entry barriers.

These market structures differ primarily in the number of firms, degree of product differentiation, level of market power, and ease of entry/exit. Each structure has implications for allocative and productive efficiency. While all firms aim to maximize profits, the strategies they employ and the market outcomes vary significantly across these structures.