What is market structure?
Market structure describes the features of a market, especially the number of firms, how much competition there is, and how easy it is for new firms to enter. These features affect the prices charged, the choice available to consumers, and how firms behave.
Competitive markets
In a highly competitive market there are many firms selling similar products. No single firm controls the price, so each is a price taker. Competition tends to keep prices low, encourage efficiency, and push firms to improve quality and service to attract customers. New firms can usually enter fairly easily.
Remember
- More competition usually benefits consumers through lower prices and more choice.
- Firms in competitive markets have little power to set their own price.
Monopoly and market power
A monopoly exists when a single firm dominates the market. Such a firm has market power and can act as a price maker, often charging higher prices and offering less choice. Barriers to entry, such as high start-up costs or legal protection, keep rivals out. However, a large firm may gain economies of scale and invest more in research.
Example
A town with only one water supplier is a monopoly: consumers cannot switch, so the supplier has strong power over price.