Analysis of Market Structures

Analysis of Market Structures


A market structure entails the organizational and characteristics of a market. The various market structures involved in an economy include perfect competition, monopolistic, monopoly, and oligopoly. As a consulting officer, I was requested by my local Mayor to analyze the various market structures. In this paper, we are going to discuss the different types of market structures and provide a real-life example of a market structure in the region. Also, the paper will cover the influence of high barrier entry to the long-run profitability of the firms and the competitive pressure surrounding them. Moreover, the paper will also detail the price elasticity of demand, the role of the government in each market structure and the effect of international trade.

Firms operate under different market conditions, and they all want to maximize profit at their levels of output. Therefore, they behave differently according to their market conditions. As a consultant, the behaviors and characteristics of the various markets are analyzed with respect to the market nature and conditions. The first market structure is perfect competition. It is a type of market structure that is characterized by many buyers and sellers who are independent and exchange identical products (Schwartz, 2010). There are no single firm or buyers who have the power to influence the prices of the market. However, the prices of goods and services are influenced by the market condition of supply and demand.

Similarly, since the firms offer identical products, there is no need for them to advertise their brand names. Also, the consumers are well informed about the prices of the products and services (Otani, & El-Hodiri, 2012). Therefore, they will purchase the goods from stores that offer low prices. Moreover, well-informed sellers also lower their prices to match those of their competitors, and this allows them to retain customers. Lastly, the buyers and sellers are free to enter and exit the business. The freedom provided by the market structure makes it difficult for sellers to control the market.

In this market, the firms maximize their efficiency levels to determine the total surplus. Since the equilibrium price is determined by the forces of demand and supply, firms will select a level of output that is ideal for them to maximize profit at the price given. Second, firms under perfect competition offer total output at a low price. In comparison to other markets, the prices are relatively low. The output is produced at the point where the prices are equal to the marginal revenue and marginal cost. That is P=MR=MC (Otani, & El-Hodiri, 2012).

The second market structure is monopolistic competition. It entails many buyers and sellers, but the firms sell differentiated products (Schwartz, 2010). Products in this market structure are a little different. Similarly, firms extend their differentiation to store design, location, and means of payment, packaging, and delivery. Firms also use advertising or promotional campaigns to reach consumers and convince them about their products. Lastly, there are no barriers to entry and exit the market. Firms can enter and get out of the business for their own pleasure.

In this market structure, consumers choose the products hence their opportunity of choices are more than perfect competition. Similarly, firms offer high prices for their products since they moderately control the prices of goods and services while their output is low. Therefore, regarding efficiency, this market structure is less efficient compared to the perfect competition (Goodwin, 2009). Firms under this market structure produce output at the point where the marginal revenue is equal to the marginal cost. Moreover, in the long-run the firms do not experience economic profit.

Third, oligopoly is a market structure with a few large sellers dominating the industry. The firms may sell either identical or differentiated products (Goodwin, 2009). For example, the auto-industry can differentiate its products while the steel industry standardizes them. The firm’s price is above the marginal cost and in the long-run, the firms can experience economic profit since there are barriers to entry and exit the industry.

Some of its characteristics include interdependent behavior. The oligopolistic industry is so large that when one firm acts the other also follow the suit. For example, when one firm reduces its prices or offers discount on its products, the other firms in the same industry also do the same to retain the customers and maintain their operations in the industry (Goodwin, 2009). The second characteristic is pricing behavior. When one of the oligopoly firms implement a price increase and other firms do not follow, the firm that initiated the increase will be forced to take the price back to the original or less it will lose the customers. Since firms act together regarding prices, most of the firms employ non-price competition by advertising their products hence making it difficult for rivals to respond.

Fourth, a monopoly market structure entails one seller of a particular product (Goodwin, 2009). The product offered by a monopolist firm is unique and consumers have no choice about the product to purchase. Also, large capital required, patent right and ownership of resources are some of the sources of monopoly power hence other firms find it difficult to enter the industry. Since there is only one firm in the industry, a monopolist controls the market and set the price at the point where marginal revenue equals marginal cost (MR=MC) (Mastrianna, 2012). For this case, the MR is the demand curve and price is set where the quantity of the product equals the demand. Therefore, price equals marginal cost. In the long-run, the firm experiences economic profit.

In my local city, we have the following example of market structures. First, we have perfect competition and a real-life example of the market that is close include the agricultural products market.  A perfectly competitive market does not exist; however, some firms operate close to a perfectly competitive market structure. For the case of agricultural products, industries such as fish and grain sell same products while there free entry and exit into the industry. Similarly, the industry experiences many buyers and sellers.

Second, we have monopolistic competition. A real-life example of the industry in this markets is men and women clothing industries. Firms in this industry differentiate their products so that they look appealing to their customers. The products can be of the same price, but they are designed differently, located at different shop outlets. Also, the firms can offer different means of payment that may include cash, cheques or credit cards. Firms in the clothing industries do not experience barriers to entry and exit. Similarly, we have many buyers and sellers in this particular industry.

Third, a real-life example of an industry in an oligopoly market is a soft drink industry, and the firms include Coca-Cola and Pepsi. An oligopoly market entails a few large sellers who dominate the market. There are only a few large soft drink industries in my nation and precisely my local city. Other firms experience barriers to entry and exit into an oligopoly market since large capital is required to operate the market and also there is high advertisement cost (Mastrianna, 2012). Firms in this industry operate interdependently and when one firm acts others also follow. For example, if Coca-Cola reduces the price of its products, Pepsi will also reduce the product’s prices to retain customers.

Lastly, in a monopoly market, we have a cable television operator company. The cable TV operator company acts as a monopoly since it is the sole provider of media services in the region. The firm does not face competition from the rivals since the market has barriers to entry and exit. Similarly, in the short-run, the firms generate an abnormal profit because it set prices for its products and services. Moreover, the cable TV operator company enjoy economic profit in the long-run.

Some markets have barriers to entry and exit; however, the high barriers into the market may have an influence the long-run profitability of the companies. In a perfectively competitive market structure, there are no barriers to entry; however, firms experience high barriers in a monopoly and oligopoly market structures. Therefore, any person or firm that would like to start the business in these market situation would find it difficult. First, firms in these market structures will experience an economic profit in the short-run, and this will encourage other firms to come in and compete, but the high barriers to entry will eventually discourage them.

The factors that contribute to the high barriers to entry include the following. Firms in this market structures always operate under high advertisement cost. The high advertisement costs involve the use of resources and commitment by firms hence this discourages most firms since they are not capable of engaging in such kind of operations. Also, for the case of a monopoly, the government may decide to provide them with patent rights to operate their business without competition hence making them the sole producer and distributor of certain products. Similarly, for firms to operate as a monopoly or oligopoly, they require large capital and technological advancement to start the business. Such requirements act as a hindrance to other firms to operate in the market.

Therefore, since we have high barriers to entry even in the long-run, firms operating as monopolies or oligopolies will still enjoy economic profit in the long-run (Mastrianna, 2012). Besides, firms will continue producing the amount of output they wish to produce and set their prices. Since firms do not experience competition especially the monopolies, they will either increase or decrease the supply of the products and still make the profit in the long-run.

A market such as a monopoly with high barriers does not experience competitive pressure. A monopoly market structure involves a single seller of a product with no good substitute (Amacher, & Pate, 2013). Therefore, since there are no firms that sell a substitute product, then the firm does not face competition. Firms that offer water, gas or electricity utilities operate as monopolies, and they are the only ones that provide such good and services. Moreover, since the market has only one producer of a good, the market’s demand curve is a monopolist’s demand curve. The firms will maximize profit and expand its output at the point where the marginal revenue equals the marginal cost (MR=MC).

Therefore, a firm that operates as a monopolist will always set its price along the demand curve that is consistent with the output produced. Because of the high entry barriers that discourage other firms from competing or operating the business, the monopolists are protected from competitive pressure. In such situation, the monopolists will earn an economic profit even in the long-run. Mostly, the monopolist will use its powers to restrict production of goods and prevent competition from the rivals (Mastrianna, 2012). In such circumstances, the market will experience artificial shortage hence this causes prices to go high.

The term price elasticity is the responsiveness of the demand for a product due to the change in its price. Similarly, it can also refer to the amount of money consumers are willing and able to pay for a particular product (Amacher, & Pate, 2013). In a perfect competition market structure, the prices of goods and services are influenced by the forces of demand and supply. Therefore, a change in price will not have an adverse effect on the quantity demanded so long as the materials used are not expensive.

The following is the diagram for a perfect competition market structure.


In a monopolistic competition, the market has many buyers and sellers. In case there is a price change, a few of the consumers will remain with the market situation while others will move to sort themselves with products of low prices.

An oligopoly market structure has a few large sellers of products. When one firm in the industry try and change the prices of its goods, the other rival firms also change theirs. Similarly, the price leader will set the price and the other firms will follow. Moreover, a change in price in an oligopoly market will turn the industry into either a monopolistic or a monopoly.


Lastly, in a monopoly market structure, there is one producer of a product. The monopolist always set their prices high and generate more revenue. However, a price change can decrease the company’s revenue since consumers will demand less of the products. Also, the company can completely close its operations.


The government play vital role in each market structures ability to price its products. Its roles have significant influence as far as the interest of the consumers and the firms are concerned. The government can either directly participate in the market or engage indirectly through taxation, regulation, and subsidy. The government will intervene in a situation when the markets do not operate well (Amacher, & Pate, 2013). Therefore, regulation helps the markets operate effectively. Also, government’s regulation is vital to ensuring that it distorts competition. The government can regulate the number of new firms that enter the market and their ability to provide incentives for them to compete.

Competition laws enforced by the government protect the consumers against abuse from firms with market powers. The main reason behind government regulation is to ensure confidence in both the buyers and sellers (Amacher, & Pate, 2013). It protects the health and safety of the consumers through licensing and approving the suppliers.

The government can also control markets through subsidies and taxation. When the government imposes subsidies and taxes, it influences competition among firms by changing their cost of operation. In the end, the change in the cost of production will influence their production decision. Also, government’s intervention through taxes and subsidies helps to correct situations of market failures (Schwartz, 2010). The common examples include taxation of pollution whereby firms are required to produce low-carbon and environmentally friendly goods. Similarly, the government can subsidize education sector in case private schools offer expensive services. Lastly, the government subsidies and taxes can create entry barriers in a market. Firms will not face competition hence they will build and exploit the market power.

International trade involves countries exchanging goods and services through imports and exports. Therefore, the global events have been influenced by price, supply, and demand for goods and services. International trade affects market structures in the following ways. First, through trade companies can import goods from other countries and reduce their prices hence affecting the domestic goods available. Mostly, the imported products are always cheaper hence consumer will prefer purchasing cheaper products. Companies have also gone far and outsource call centers so that they can reduce the cost of production; however, such moves affect the economy of the country since the job growth reduces. International trade also increases the input of the firms because they can import the scarce raw materials hence increasing the output and the industry’s returns.




Amacher, R., & Pate, J. (2013). Microeconomic principles and policies. San Diego, CA: Bridgepoint Education, Inc.

Goodwin, J. A. (2009). Microeconomics in Context. New York: M.E. Sharpe.

Mastrianna, F. (2012). Basic economics. Cengage Learning.

Otani, Y., & El-Hodiri, M. (2012). Microeconomic theory. Springer Science & Business Media.

Schwartz, R. A. (2010). Micro markets: A market structure approach to microeconomic analysis (Vol. 515). John Wiley & Sons.



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