27 Apr The Four Major Types of Market Structure
One of the most important things to know before starting a business is under which market form your business falls. Complimentary to Industry Analysis (click here to learn more), identifying the type of market you will be functioning under determines the basics of your marketing strategies and tactics, and also defines how you will be going along with the business processes.
- What is a market?
- Monopolistic Competition
- Theoretical Market Form: Perfect Competition
What is a market?
Market can be defined as a destination where sellers meet potential buyers. This can be real or virtual, just like the product offered. However in economic sense, such product must of some utility to the buyer, and such utility should be able to be measured in relation to utility of money to the consumer. In other words, to be an economic market there should be recurring monetary exchanges involved, so that something of economic value is at stake.
Knowing about various types of markets is important for a business since it heavily influences the marketing decisions and strategies they will be pursuing. The following are the four major forms of market:
Monopoly 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 market form attracts certain characteristics of its own such as the ability 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 licencing. While an absolute monopoly does not exist in America, such are widely observed in mixed or socialist economies such as India or China
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.
Another popular market form, in an Oligopoly market form there are a few sellers selling homogeneous or closely related but differentiated products, such as cement or smartphones. Oligopoly form of market comes into existence due presence of barriers to entry, such as requirement of huge capital or geographical constraint over resources.
The main distinction about Oligopoly form of market is group behavior. Group behavior means that the decisions of one business under oligopoly market form directly affect another’s. For example if one smartphone company produces a new innovation (such as the airpods), another is soon to follow to maintain a competitive parallel.
Due to such high importance of group behaviour, there is a lack of pricing competition(2), and hence businesses under oligopoly market form also depend highly on selling costs such as advertisement and PR to gain competitive advantage over others.
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.
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- 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.
- Pricing competition is competition based on price, such that a business may reduce the profit margin for a good that can be substituted in monopolistic competition or oligopoly to gain a temporary advantage.