What is market structure?
Market structure describes how a market is organised. It looks at the number of firms in the market, the level of competition, how easy it is for new firms to enter, and how much power firms have over price.
The two important market structures in this chapter are competitive markets and monopoly markets.
Competitive market
Many firms compete for customers, so consumers usually have more choice and firms must try to keep prices attractive.
Monopoly market
One firm, or one very dominant firm, has a lot of market power and faces little direct competition.
Why it matters
Market structure affects price, output, choice, quality, profits and consumer welfare.
1. Competitive markets
A competitive market is a market where there are many firms selling goods or services, and firms compete with each other to attract customers.
Characteristics of competitive markets
- Many buyers and sellers: no single firm controls the whole market.
- Consumer choice: customers can choose between different firms and products.
- Pressure to keep prices low: if one firm charges too much, customers may switch to competitors.
- Pressure to improve quality: firms may improve customer service, design, delivery or reliability to attract buyers.
- Easy entry and exit: in very competitive markets, new firms can enter more easily if they see a chance to make profit.
How to read the graph: increased competition shifts the market supply curve to the right from S₁ to S₂. This means more firms are supplying the product. As supply increases, the market price falls from P₁ to P₂, and quantity traded rises from Q₁ to Q₂.
In simple terms, competition is usually good for consumers because firms try harder to offer lower prices, better quality and better service. However, very strong competition can reduce profits, and some weaker firms may leave the market.
2. Monopoly markets
A monopoly market exists when one firm is the only supplier, or when one firm has a very large share of the market and strong control over supply. A monopoly has market power, meaning it can influence the price or output more than firms in a competitive market.
Characteristics of monopoly markets
- One dominant firm: one business controls all or most of the market.
- High barriers to entry: new firms may find it difficult to enter because of high start-up costs, patents, control of resources, strong branding or legal protection.
- Price-making power: the monopoly may be able to charge higher prices because consumers have fewer alternatives.
- Limited consumer choice: customers may have fewer products or suppliers to choose from.
- Possible high profits: if competition is weak, the monopoly may earn high profits for a long time.
Barrier to entry
Anything that makes it difficult for new firms to enter a market, such as high costs or legal protection.
Market power
The ability of a firm to influence price, output or conditions in the market.
Consumer choice
In monopoly markets, consumers usually have fewer alternatives than in competitive markets.
3. Benefits and limitations of monopoly
| Benefit | Easy explanation |
|---|---|
| Economies of scale | A large monopoly may produce on a large scale, reducing average costs. If these savings are passed to consumers, prices may fall. |
| Research and development | High profits may give the firm money to invest in new products, better technology and innovation. |
| Stable supply of important services | Some services, such as water, electricity or rail networks, may be easier to organise through one large provider. |
| Limitation | Easy explanation |
|---|---|
| Higher prices | A monopoly may charge higher prices because consumers have few or no close substitutes. |
| Less choice | Consumers may have fewer products, fewer suppliers and less variety than in a competitive market. |
| Less pressure to be efficient | Without strong competition, the firm may become inefficient, offer poorer service or innovate less. |
4. Competitive market vs monopoly market
| Feature | Competitive market | Monopoly market |
|---|---|---|
| Number of firms | Many firms | One firm or one dominant firm |
| Consumer choice | Usually high | Usually limited |
| Control over price | Limited control because of competition | More control because of market power |
| Barriers to entry | Often low | Usually high |
| Effect on consumers | Can lead to lower prices and better quality | Can lead to higher prices and less choice |
Easy exam tip
When comparing market structures, always mention:
- Number of firms in the market.
- Barriers to entry for new firms.
- Effect on price and output.
- Effect on consumers, such as choice, quality and welfare.
Quick check
- Competitive markets usually have many firms and more consumer choice.
- Competition can reduce prices and increase output.
- A monopoly has market power because it faces little or no direct competition.
- Monopolies may charge higher prices, but they may also benefit from economies of scale.