Even if you may have the necessary business skills, it is still important to know what the market challenges that you might face. Starting a business is the same as entering a competition. Knowing where your competitors are the other business, and your goal is successful sales. With this in mind, we can ask a question, how do I win this competition? Before we start the business, we must study what the levels of competition in marketing is. It is what a market structure is about. Market structure, by definition, is the number of businesses producing the same products. It is also the dictating factor for policies in pricing and entering the market.
Now that we know the market structure definition, we can discuss how do the four types of market structures differ. It is essential to know the kinds of the market in business before pursuing it. Several buyers and competitors are the basis of market structure types. There are four types of market structure types divided into these characteristics.
Types of Market Structures
Perfect Competition Market Structure
Perfect competition is one of the types of market structures where businesses sell the same product. Since there is a high number of competitors, no one has a significant impact on this competition. The influence of a single seller or buyer hardly affects the whole market. It means no one can control the price of the product.
A perfectly competitive market is a market that meets the conditions of the amount of product produced determines supply and demand. Business firms also define the price. But since there are many vendors of the same product, price is at the lowest possible price. The model assumes each business is operating at the lowest cost to achieve the best output. The products within the market are identical to little difference between them like information about the product is also available. Factors like price and quality are open and given to the public. Also holding up the supply to increase the value is impossible since there are many other sellers of the same product.
There is also free access to entry and exit within the market. Since there is easy access to the product, it would be possible for anyone to sell it. The capital needed to enter in this market structure is relatively low and can be afforded by most starting entrepreneurs. There are no laws required before entering the market. If there is no more profit, a business can exit the same way.
Assumptions of perfect competition is it is near impossible to find in the market. Most analyst says that completely ideal competition is only a concept, and this structure can result in the best optimal output. We study pure competition because it could still prove to be beneficial to both sellers and buyers in handling the business.
The market on agricultural or crafts may be the closest to this structure. Many sellers sell the same products within the market.
Monopolistic Competition Market Structure
Monopolistic competition is also one of the types of market structures where there are many competitors. They also sell the same products, but there are slight differences. A difference between perfect competition and monopolistic competition is producers add an extra something that would give them the edge over the other. Let me give an example if we can take restaurants. All restaurants serve food. But this food may vary depending on the restaurant. They all serve the same function, which is to give people food. But changes will vary depending on the seller.
It also gives the seller the power to control the price at a particular range. It is allowed since there will be more value depending on the materials or process. The slight difference in products causes a significant impact on the prices. It is not an optimal structure since the business owners can dictate pricing. Of course, the changes will still depend on the company’s ability to get the materials and execute the changes they want. This means that a firm that has little ability to influence market prices operates in a monopolistic competition.
There is also another factor which is customer preference. The said changes in products depending on what the customer wants. The producers add improvements based on market demands. They also alter the products to have unwanted characteristics removed. Most businesses take advantage of this control of the price since they have the supply for the demand. Even if this is true, there are still alternatives, which is why one business cannot get all the customers. It is still reasonably easy to enter this type of market structure since most entrepreneurs that have enough capital opt to start in this kind of structure. Laws that forbid others in entering this kind of market structure are to a minimal level. These laws are almost to a no effect since the products being sold is still the same but with minor changes.
Business like a salon, spa, and repair shops are also in this market structure. Other products like clothing and toiletries are also in a monopolistic competition since they can alter their products but still serve the same purpose.
Oligopoly Market Structure
An oligopoly is another type of market structures that only has a few business firms involved. One way in which monopolistic competition differs from oligopoly is that many firms provide the same product and service. Whereas oligopoly changes the landscape of the market substantial. Competition on this market is on a larger scale. In markets characterized by oligopoly, there are businesses that dominate the competition making it hard for others to enter. These few industries can also collaborate to gain more control of the market. Working with other businesses will boost their market power. It has been a common way for smaller businesses to enter the market structure and be able to compete with established companies that are already present. With this, it will also increase their sales and profits.
The companies in these market structures can be large or small, although it could be possible that a firm that has the ability to control to some degree the price of the product it sells. Since this market structure keeps competition to a few businesses, it is tough to enter. Legal barriers are holding off new business entities from entering the competition. Since most companies in this structure use patents for their work. It is also factoring the physical and financial resources needed to enter as barriers to entry oligopoly. It would amount to large sums of money, and that is to begin. The process while in the market would be a different topic. Most business does not start from this kind of market structure but rather upgrade into this. It is due to the demands of the market.
Since there are only a few firms that are in this market, they can dictate the prices on a more extensive range. They still tend to be sensitive to the pricing since there are still other sellers on the market. Companies in the gaming console industry is an excellent example of oligopoly. These companies often have patents to protect copying, and each product has differences.
Monopoly Market Structure
In a monopoly, in this market structure where single business firm controls the market. One defining characteristic of pure monopoly is that there is a firm that holds all the power for that specific product or service. In this case, the business is the industry itself. There are also no close alternatives for the product or service they produce. That business holds market power since they are the only supplier. They also can control the price as they want. Hence, monopolist tends to reduce the output and increase the cost to gain higher profits.
One major barrier to entry under pure monopoly arises from the fact that there are current business that holds the control over the incoming competitors. The cost of entering alone is high. It is not mentioning that once you enter, you will have to fight them. It would be a great feat if you can go toe to toe with a monopoly. One will need to cope up with an established business if they are to fight a monopoly. Setting up the required facilities and equipment that the existing company already had would need massive funds. With this said, business firms often to stand down when faced with these monopolies.
An excellent example of a monopoly is public utilities. These are natural monopolies due to it already having a massive scale advantage. Attempting to take part in that means you have to build the same facilities and equipment they have. Not to mention, installing them for the actual usage. The capital needed for it is too large that almost no one challenges it.
There we have it, the different kinds of market structures. It is essential to know what your business path will be. A business could change its market structure depending on the situation. Depending on how the market responds to the business, a structure could be adjusted. Does your business need more people in guiding and leading it? Are the current leader or leaders capable as they are? Is the business ready to face a broader market? Would it be able to deliver the demands once it enters a bigger market? You could gather the data on your business and evaluate them. This information would be vital in your decision making. Not only on changing the market structure but in every step. It would never hurt you if you learn in a few things for your the business.
Having a better understanding of the four types of market structure will help you in planning and formulating strategy. It would be helpful to know how firms in every market structure function. Where do you want your business to be and are you ready for the competition? What type of business are you aiming for? What kind of future do you want to have? Share your thoughts with us in the comment section. We would love to hear your opinion regarding this topic on market structures.