One of the more important elements to building a company is to know which of the 4 types of market structure you're looking to build. Alongside your Industry Analysis, identifying your market structure can help you better understand the basics of your marketing strategy, who your competitors are, and what made them successful in your industry.
Market can be defined as a destination where sellers meet potential buyers, this can be physical or virtual, just like the product offered. However in an economic sense, the product must be of value to the buyer, and that value should be able to be a measured in a monetary value to the consumer. In other words, to be an economic market there should be recurring monetary exchanges involved, something of economic value must be at stake.
Knowing the various types of market is important for a business since it heavily influences the marketing decisions and strategies that go into building different industries. So now we'll dive into the four major market types.
Monopoly or Monopolistic is a a type of market structure where 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 markets maintain certain characteristics of its own, such as the necessity to charge 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 regulations & licensing. While an absolute monopoly does not exist in America, such are widely observed in mixed or socialist economies such as India or China.
Warren Buffet historically invests in monopolistic structures and purchases competitors to create monopolies within his investment portfolio.
Monopolistic Competition is a type of market strucutre where 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.
An Oligopoly is another popular type of market structure. This market relies on there being few sellers selling homogeneous or closely related products, such as cement or smartphones, and typically differentiated by brand name. Oligopolies come up against a few barriers to entry, such as requirement of huge capital or geographical access or control over resources.
The main distinction about Oligopolies is group behavior. Group behavior means that the decisions of one oligopoly will directly affect another. For example if one smartphone company produces a new innovation (such as the air pods), another is soon to follow to maintain a competitive parallel.
Due to the competitiveness of group behavior, there is a lack of pricing competition(2), and hence oligopolies also highly depend on selling costs such as advertisement and PR to gain competitive advantages over others.
Perfect competition is a theoretical type of market structure, this theoretical market structure is difficult to analyze due to there being no real world examples of such a market. The closest thing to a perfect type of market structure is agricultural products such as wheat or grains.
Under this market structure, 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.
A virtual monopoly is a market structure 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 product or good that can be substituted in a monopolistic competition or oligopoly to gain a temporary advantage over competitors.
Symphysis specialises in market structure and strategy. Every day we meet clients from around Greater Seattle for one-on-one training and consultation. Our marketing services extend to businesses of all sizes, family and enterprise. For more information, call or text @ +1 (425) 390-4738.