Market Structures

Market structures describe the fundamental characteristics of markets, based on the degree of competition, the number of buyers and sellers, the extent to which firms can influence prices, the ease of market entry and exit, and the degree of product homogeneity or differentiation (the nature of the product). In economics, the main types of market structure include competition, monopoly, oligopoly, and monopsony. The defining features of each market structure are summarized in the table below:

• Competition. In a competitive market, a large number of firms supply products that meet the same market demand, while a large number of buyers operate on the demand side. Competitive markets are characterized by open entry and exit, enabling firms to freely enter or leave the market.
• Perfect Competition. In a perfectly competitive market, an infinite number of small firms supply goods or services, each capable of meeting market demand, alongside an infinite number of small buyers (e.g., consumers). Under these conditions, firms do not set prices but instead accept the prevailing market price (they are price takers). Any price set above the market level would eliminate a firm's demand entirely. A perfectly competitive market is defined by uniform pricing and a homogeneous product. There are no barriers to entry or exit, fostering completely free competition. Perfect competition is a theoretical model rarely, if ever, observed in the real world.
• Monopoly. In a monopoly, a single firm - the monopolist - controls the market and is able to meet the entire demand. The market features one supplier and many buyers. With no competing firms, the monopolist can set both output levels and product prices in order to maximize profits. Market entry is blocked by technological, financial, legal (legal monopoly), or natural (natural monopoly) barriers.
• Monopsony. In a monopsony, many firms compete on the supply side, but only a single buyer exists on the demand side. This dominant buyer holds substantial bargaining power and can exert downward pressure on market prices.
• Oligopoly. An oligopoly is a market structure in which a small number of firms dominate the supply side, each holding a significant share of the market, while many buyers operate on the demand side. Market entry is restricted by technological, financial, legal, or natural barriers. Firms in an oligopoly do not typically compete through standard price competition alone; instead, they often engage in strategic behavior, and at times may form collusive agreements. The dynamics of competition in an oligopoly are frequently analyzed through game theory.
• Oligopsony. In an oligopsony, the demand side is controlled by a small number of buyers, while supply remains fragmented among many sellers. This is the mirror image of an oligopoly. In an oligopsony, strategic interactions among buyers often resemble the competitive dynamics observed among sellers in oligopolistic markets.
• Monopolistic Competition. Monopolistic competition (also known as imperfect competition) is a market structure featuring many buyers and sellers. Unlike perfect competition, firms in monopolistic competition differentiate their products, making them imperfect substitutes. Firms offer products that are similar but not identical. Monopolistic competition is one of the most common market structures encountered in the real economy.
• Bilateral Monopoly. A bilateral monopoly is an atypical market structure in which a single buyer (monopsonist) interacts with a single seller (monopolist). The market equilibrium in this scenario is determined entirely by the relative bargaining strength and negotiation leverage of the two parties involved.