8.1.2 Types of market structure
Economists usually classify market structures into four main types: perfect
competition, monopoly, monopolistic competition and oligopoly.
These types of market structure are different according to the following characteristics:
number of sellers, type of product, barriers to entry, power to affectprice and the extent and type of non-price competition. Perfect competition
(PC) is invariably used as a benchmark for comparison, in terms of price,
output, profit and efficiency (of different types). It is therefore discussed before
the other types of market, not because it is the norm in practice, but because it
represents an ideal in certain respects. The conditions for PC are explained in
more detail in the next section, but essentially it involves many buyers and
sellers of a standardized product. An example would be farmers producing
wheat (though strictly speaking there are different varieties of wheat). This
type of market represents one extreme of the competition spectrum (maximumcompetition),
while monopoly represents the other, where a single seller
exists in a market. This again is rare in practice, but does tend to occur in public
utilities like gas, water and electricity supply, particularly on a local basis.
Monopolistic competition and oligopoly are intermediate cases, and are more
frequently found in practice; the former involves many sellers of a differentiated
product, for example restaurants, whilst the latter involves a few sellers
dominating an industry, for example the car industry. The most important
characteristics of these different markets are summarized in Table 8.1; in this
table the degree of price competition decreases from one row to the next.