SummaryThe analysis of market structures is of great importance when studying microeconomics. How the market will behave, depending on the number of buyers or sellers, its dimensions, the existence of entry and exit barriers, etc. will determine how an equilibrium is reached. Even though market structures were thoroughly analysed by economists from the early 20th century on, its study can be traced back to economists such as Antoine Cournot, Alfred Marshall or even Adam Smith.
A market is a set of buyers and sellers, commonly referred to as agents, who through their interaction, both real and potential, determine the price of a good, or a set of goods. The concept of a market structure is therefore understood as those characteristics of a market that influence the behaviour and results of the firms working in that market.
The main aspects that determine market structures are: the number of agents in the market, both sellers and buyers; their relative negotiation strength, in terms of ability to set prices; the degree of concentration among them; the degree of differentiation and uniqueness of products; and the ease, or not, of entering and exiting the market. The interaction and differences between these aspects allow for the existence of several market structures, from which we can highlight the following:
–Perfect competition: the efficient market where goods are produced using the most efficient techniques and the least amount of factors. This market is considered to be unrealistic but it is nevertheless of special interest for hypothetical and theoretical reasons.
–Imperfect competition, which includes all situations that differ from perfect competition. Sellers and buyers can influence in the determination of the price of goods, leading to efficiency losses. Imperfect competition includes market structures such as:
–Monopoly: it represents the opposite of perfect competition. This market is composed of a sole seller who will therefore have full power to set prices.
–Oligopoly: in this case, products are offered by a series of firms. However, the number of sellers is not large enough to guarantee perfect competition prices. These markets are usually studied by analysing duopolies, since these are easier to model and the main conclusions can be extrapolated to oligopolies.
–Monopolistic competition: this market is formed by a high number of firms which produce a similar good that can be seen as unique due to differentiation, that will allow prices to be held up higher than marginal costs. In other words, each producer will be considered as a monopoly thanks to differentiation, but the whole market s considered as competitive because the degree of differentiation is not enough to undermine the possibility of substitution effects.
–Monopsony: it’s similar to a monopoly, but in this case there are many firms selling products, but only one buyer, the monopsonist, who will have full power when negotiating prices.
–Oligopsony: similar to oligopolies, but with buyers. Sellers will have to deal with the increased negotiating power of the only few buyers in the market, the oligopsonists.