research on market structures

Market Structure

• Living reference work entry
• Later version available View entry history
• First Online: 27 November 2016
• Cite this living reference work entry

• F. M. Scherer 2  

234 Accesses

1 Citations

Since antiquity, a distinction between monopoly and competitive market structures has been recognized. Aristotle (Book I, 5) characterized ‘monopoly’ [ μ ó ν os (alone), \( \pi \omega \lambda \upepsilon \iota \overset{\frown }{\nu } \) (sell)] as a situation in which a single trader engrossed the entire supply. He recounted how one such iron ore monopolist had been expelled from Syracuse by its ruler, Dionysius. Adam Smith (1776, Book I, chapter VI) advanced somewhat beyond the Aristotelean schema, contrasting the price under monopoly (‘the highest which can be got’) to that of free competition (‘the lowest which the sellers can commonly afford to take, and at the same time continue their business’). The most important single step toward a modern theory of how market structure matters was taken by Cournot (1838). He perceived correctly that a monopolist confronts the downward-sloping demand function for its product, and he derived the mathematical conditions (essentially, equality of marginal revenue with marginal cost) by which the monopolist maximized its profits. He then showed how market prices fell with increasing numbers of competitors, converging in the many-seller case toward a zero-profit condition. Thus Cournot provided among other things the first theory of oligopoly, that is, of markets with only a few sellers.

This chapter was originally published in The New Palgrave: A Dictionary of Economics , 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Institutional subscriptions

Bibliography

Aristotle. 1984. Politics . From The complete works of Aristotle , ed. J. Barnes, Princeton: Princeton University Press.

Google Scholar  

Bain, J.S. 1956. Barriers to new competition . Cambridge, Mass.: Harvard University Press.

Book   Google Scholar  

Baumol, W.J., J.C. Panzar, and R.D. Willig. 1982. Contestable markets and the theory of industry structure . New York: Harcourt, Brace, Jovanovich.

Caves, R.E., Fortunato, M. and Ghemawat, P. 1984. The decline of dominant firms, 1905–1929. Quarterly Journal of Economics 99(3), 523–546.

Cournot, A. 1838. Recherches sur les principes mathématiques de la théorie des richesses . Paris: Hachette.

Gaskins Jr., D.W. 1971. Dynamic limit pricing: optimal pricing under threat of entry. Journal of Economic Theory 3(September): 306–22.

Article   Google Scholar  

Gibrat, R. 1931. Les inégalités économiques . Paris: Recueil Sirey.

Robinson, J. 1933. The economics of imperfect competition . London: Macmillan.

Scherer, F.M. 1980. Industrial market structure and economic performance , 2nd ed. Boston: Houghton Mifflin.

Scherer, F.M., A. Beckenstein, E. Kaufer, and R.D. Murphy. 1975. The economics of multi-plant operation: An International Comparisons Study . Cambridge, MA: Harvard University Press.

Schumpeter, J.A. 1942. Capitalism, socialism, and democracy . New York: Harper.

Smith, A. 1776. An inquiry into the nature and causes of the wealth of nations . London: W. Strahan & T. Cadell.

Download references

Author information

Authors and affiliations.

http://link.springer.com/referencework/10.1007/978-1-349-95121-5

F. M. Scherer

You can also search for this author in PubMed   Google Scholar

Editor information

Editors and affiliations, copyright information.

© 1987 The Author(s)

About this entry

Cite this entry.

Scherer, F.M. (1987). Market Structure. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_960-1

Download citation

DOI : https://doi.org/10.1057/978-1-349-95121-5_960-1

Received : 12 August 2016

Accepted : 12 August 2016

Published : 27 November 2016

Publisher Name : Palgrave Macmillan, London

Online ISBN : 978-1-349-95121-5

eBook Packages : Springer Reference Economics and Finance Reference Module Humanities and Social Sciences Reference Module Business, Economics and Social Sciences

• Publish with us

Policies and ethics

Chapter history

DOI: https://doi.org/10.1057/978-1-349-95121-5_960-2

DOI: https://doi.org/10.1057/978-1-349-95121-5_960-1

• Find a journal
• Track your research

Market structure analysis: What it is and how to do it

This article examines market structure analysis, including a comparison of marketing and economic methods and discussions of defining a market, getting to an overall market structure, marketplaces versus study of important groups, market structures, and market structures versus market segments.

Editor’s note: Steven Struhl is senior vice president, senior methodologist at Total Research, Chicago.

What is market structure analysis? We start with perhaps the most obvious opening question of any article that you will read this year or next. We also begin our answer with an enthusiastic statement: “Unfortunately, no clear definition exists.” Now, let’s see what we can do about this.

Many of us have remained blissfully ignorant of this, but there is nonetheless a large literature on market structure analysis. (A sampling of just some of the articles is cited at the end.) Careful review of these leads to two basic conclusions:

• Numerous approaches to market structure analysis have been proposed in a very large number of scholarly works, with no approach seeming predominant.
• Plowing through all these articles requires frequent naps.

Some of the confusion surrounding this topic arises from the fact that two contrasting traditions have embraced it - namely, marketing and economics. As you might expect, the basic approaches are different. (Perhaps more surprisingly, some of the marketing papers are even harder to read than the ones from some economists. So we can see that, over the years, marketing at least has gained in the area of obscurity.)

Comparing and contrasting: marketing vs. economic methods

We will briefly review both methods, point out some very large differences and commonalities, and then discuss the marketing approach.

Marketing approaches mostly include these basic elements:

• some means to analyze the structure of relationships among competing companies;
• some other means to analyze the structure of relationships among competing brands.

Typically these studies include several areas of focus, whether primarily geared toward looking at competitive entities or brands. They often will investigate how brands are used, and the relationships of usage patterns among brands. They often look at the relationships in ways that brands are perceived. It is fairly common for studies of market structures to include just these topics.

Price elasticities and cross-price elasticities are other important market structures, however, even though they are not often mentioned in this way. There are other, more specialized views of what belongs in a market structure analysis. Trying to summarize them can get complicated. We will pass on tackling many of the more specialized definitions, then, and hope that you can tolerate the disappointment this causes.

Market segments usually are not considered market structures. This is one of the less intuitively appealing aspects of most definitions. Segments and structures can have some fairly complicated relationships, and we indeed will this discuss later.

Now let’s take a very brief view of economic approaches. The list of topics that these cover is broad and, as mentioned, somewhat different from those covered by the marketing approaches. Aspects of markets that seem to have received the most attention from the economists include:

• numbers of buyers and sellers;
• extent to which products are substitutable;
• analysis of comparative costs;
• ease of entry and exit for competitors;
• extent of mutual interdependence or (as they seem to mean) the extent to which buyers and sellers must depend on each other.

The concepts here may appear somewhat rudimentary, and lacking in appreciation of consumer psychology. One important point that the economists have in common with marketers is that they include demand elasticities and cross-demand elasticities (or words meaning the same thing) in market structures. How economists get to their answers may be very different from marketing practices, though.

Indeed, economists can do much of their work without ever talking to an actual person. Some even act as if asking people what they do or think is superfluous to understanding what is happening in a marketplace. This may seem slightly ridiculous, but we should remember that these fellows win Nobel prizes while humble marketers and market researchers do not. Perhaps they are onto something.

The secret of their success may lie in the mathematics they use. This can range from the highly sophisticated to the truly hair-raising. Indeed, as long as people are ancillary to the equations, the concepts can get highly elaborate. You are invited to draw your own conclusions about that.

Back to the marketing approach: a path for getting to market structures

Let’s start with something that may seem self-evident, but which we still need to think about carefully. The basic consideration for all marketing analyses is reaching a definition of exactly what constitutes the market. (We did warn you that this sounds foolish. Still, just reaching a definition can be quite difficult.)

The hardest part of setting this definition is that you need to set some limits on the “competitive set” of products.

Looking at just one example, let’s consider the market for diabetes care products. Most authorities say that there are two basic types of diabetics: Type I (sometimes called “juvenile,”) and Type II (sometimes called “adult onset.”) Type I diabetics always need insulin injections to live - their bodies typically produce none that they can use. Type II diabetics usually produce some insulin, and so often only require medications that help them use their insulin more effectively. (Also, exercise and healthier eating habits help too, as does keeping one’s weight down to a reasonable level.) However, some Type II diabetics require insulin, and now many Type I diabetics are taking medications that help them use insulin better along with their insulin. This has led some authorities to say that what we really need to look at is whether a diabetic is taking insulin or not - never mind the traditional medical division of diabetes into two types. Also, there are some new medications coming out that are aimed at treating “pre-diabetic” conditions - or to prevent the disease from taking hold.

Looking at all this, how do you define the structure of the marketplace? Which products are competing with each other, and how? Do you include the new pre-diabetic products in your analysis? How do you divide the universe of diabetic people? Where does exercise and diet figure in all this? Do they compete with products in the marketplace? If so, how?

Some method for setting limits on the market must be chosen, then. Traditionally, this was done by focusing at one these factors:

• the degree to which products can substitute for each other, based on consumer perceptions;
• the extent to which products are intended to serve similar purposes;
• the actual impact of products on each other, as measured by elasticity of demand and effects of products on each other, or cross-elasticity.

Note that the impact products have on each other and degree to which they can be substituted are highly similar ideas. The key point underlying this distinction, it seems, is that impact can be measured without considering perceptions at all. Therefore, different types of studies could be the focus of each of these options.

For instance, elasticity of demand, and related ideas, bring to mind choice-based modeling, or perhaps conjoint. (Whichever one, the same constraints hold, so we will discuss choice-based studies here.) In choice-based studies, we typically look at what people select in some set of competitive marketplaces. The focus here is on what people do, and not on their explanations of why they do it. If perceptions are addressed at all in a choice-based study, they are not part of the choosing that study participants do. What we learn comes from measuring study participants’ choices among the differing product configurations that they see in the interview and applying this to many alternative product configurations not tested.

Similarly, studies that focus on perceptions and opinions rarely have a choice-based exercise in them. Some of the reasons for separating these types of studies are very practical. For instance, most study participants are nearly worn out after they finish a typical choice-based exercise. Since most of us want to know everything about everything when we do a study (of course), the lucky respondent may get to make choices in up to 21 market scenarios in a choice study. (The general rule here is that the more factors we want to analyze in a choice study, the more marketplaces we need to show to get the required information.) In any event, choice-based studies usually run to the known limits of a human being’s ability to do a good job in the interview.

Most of us are likely are more familiar with studies of attitudes and opinions. Therefore, we know that by the time everybody involved has added his or her pet question(s), these get to be real monsters also. Asking a person to do one of these and - at the same time - one of those (a choice-based model or full-blown conjoint task) is just too much. We need to decide which we want - or if we want both, whether we can afford to interview two sets of people.

One key unresolved issue in defining markets

One key issue remains largely unresolved if we start our definitions of markets by looking at substitutability or market impact. That is, neither does particularly well in studying some types of competitive behavior. The same holds if we look just at consumers’ perceptions. Of course, a set of remedies has been proposed for a largely self-imposed problem. These sometimes go under the heading of hybrid forms of structure analysis.

Hybrid methods combine behavior-based and judgment-based methods of defining markets, as well as other approaches in later stages of the analysis. (As you may have expected, we will discuss this.) In more practical terms, you might need to do all sorts of studies, such as perceptions and usage studies, and choice models, and somehow put all the information together. You might even include other topics, depending on what you need to know. Different ways of putting these approaches together almost certainly will yield different ideas about market structures. Hybrid approaches underscore the notion that the search for a “true” market structure is one of those great and endless quests. No one answer about what is “true” exists here, just as is the case in the rest of life.

Getting to an overall market structure

In marketing approaches, we almost always start with people - or as we like to call them, consumers. To reach an overall market structure, individual consumer market structures need to be aggregated. Individual structures are simply each consumer’s behaviors and/or perceptions about key marketing variable(s). If you have kept your eyes open most of the time so far, you will not be surprised to learn that two main aggregation methods are used:

• behavioral aggregation (linked to studying market impact);
• subjective aggregation (linked to the extent to which products can substitute for each other, ratings, opinions, and perceptions).

Aggregation is problematic. One main question that gets asked — in some quarters, at least — has to do with what happens when we “roll up” a lot of idiosyncratic opinions. That is, how do we meaningfully aggregate individual consumer choices or opinions when these often reflect great diversity?

An aggregate market structure that we choose may NOT represent any individual’s structures well. In fact, any overall market structure gives only an average view of consumer diversity. We have numerous pundits to remind us that these averages can hide information, and may even be misleading.

In fact, this is one of the charges leveled against choice-based modeling as it has been traditionally done, at the aggregate (or group) level. Unless you really torture the data from a choice-based model, you never learn anything about what individuals are doing. (The torture method of choice today is something called Hierarchical Bayesian analysis, and generally requires squeezing the numbers for days — or “just hours” for a simpler problem, as some put it — even with the latest monster Pentium IV. But Hierarchical Bayesian analysis is another story.) The point of this is that some experts will go to great lengths to alleviate their discomfort in looking at aggregate (or group) level data.

However, these complaints about looking at groups may not be that well-founded. These are some reasons. (Just remember that you read this here first.) We almost never look at a market solely in its entirety — that is, without having some groups in mind. For instance, if our goal is to study the market for (say) diet colas, we almost certainly will not interview everybody who walks into a supermarket. This might be fun, and if not, certainly very expensive, but nobody outside the further reaches of academia is likely to find this useful.

The secret about whole marketplaces vs. study of important groups

Rather, a useful study would focus on groups of users, such as heavy vs. moderate vs. light users - or on brand-loyal users vs. frequent switchers. Then we would observe any market structures within each group. If we have defined the groups properly, the question of diversity becomes less important. That is, heavy users are typically defined along these lines: “the 20 percent of users who consume 80 percent of our wonderful product.” If heavy users are diverse, it may be nice to know this, but knowing may not help encourage them to use more of our great stuff, or even how to keep them from using less. In this case, the diversity of the group just is part of the way the world runs.

Some of you may then say something like this: “But what if some heavy users are more likely to become moderate users than others?” Or, as it more usually gets asked, “What if some heavy users are more vulnerable than others?” (This shifting of vulnerability from the product, which will suffer no recognizable losses if people decide they don’t need it, to the people themselves, is one of those wonders of modern marketing.)

One appropriate answer to a question like this is to structure the study so that it can isolate those more and less vulnerable among heavy users. That is, the study would find market structures among two or more types of heavy users, and not assume that they are all the same. Here we encounter some of the real complexity that can be found in market structure analysis. To do this accurately, we need to have some good ideas about the groups we are likely to find in the market. If groups are truly different, they will have different market structures. Just lumping these together will lead to gross inaccuracies.

In just a short note, practical marketing approaches move furthest away from (and perhaps beyond) economic approaches, by including the idea that you need to think about groups in the marketplace and to prepare to analyze them separately. In one way, then, the practitioners in marketing and market research routinely take a more sophisticated approach to market structures than their learned brethren.

Below is a flow chart summarizing this step in the process.

Developing a working picture of the market structure

Once individual consumer behavior is aggregated, the next step is devising some working representation of the overall (aggregate) structures. The goal here is showing how products compete, in ways that convey the research and managerial implications effectively. Following the discussion from earlier sections, market structures may never get aggregated up to the whole market level. The analysis may look (for instance) at heavy users, moderate users and light users separately, and go into some depth about each. It may compare and contrast groups that are important to understand. Finally, it may include some communalities, especially areas where strengths and weaknesses appear across the groups studied. It almost never would try to extract some global view and leave it at that.

Methods for depicting market structures

We can divide approaches for representing market structures into two main classes, namely, the spatial and the non-spatial. Spatial techniques are used often with data based on judgments (opinions, perceptions, ratings). These work well with various maps, or as they are known in formal circles, “continuous dimensional market structures.”

The simplest spatial techniques give a picture of market boundaries as separate clusters of products in two-dimensional space. Some judgment then is made about distance between clusters as determining where a market stops and starts.

Other maps are quite familiar to many of us - for instance, the type showing how products relate to ratings. This type of map often is called a perceptual map - as are many other types of maps. Not all maps that show attributes arrayed in space show market structures, though, as the figures below show us.

The top chart shows one type of market. This map represents brands and perceptions about them. The really basic idea behind the map is: “What appears together goes together.” Attributes that fall close to a brand are strongly associated with that brand. Attributes that fall together have similarities with each other. Brand that fall closest to each other have similar patterns in ratings.

The map on the bottom shows groups in the marketplace, and possibly even market segments (if we can find them and reach them selectively in some way). Showing what is important to various groups of buyers (or even segments) typically does not count as market structure analysis — at least when we are being pure and right about things.

Sometimes, mapping - at least various maps like the one on the top - is most of what gets called market structure analysis. So if somebody who can make life difficult (e.g., a client, a boss, or a boss’s boss) asks for a market structure analysis, you do not need to panic immediately. They may just want some maps. Of course, they might even want something entirely different that is not market structure analysis at all according to the generally accepted rules. (Then you can panic.)

Non-spatial approaches can work well to show behavioral data, as may be readily apparent. For example, analyses of product or price cross-elasticities often lead to displays that are not at all like maps, such as the simulator programs that you can create based on a choice-based modeling study. Simulators can look very impressive if you have a good programmer working on them - and can do great things with “what-if” types of questions about changing product configurations. However, they have nothing faintly map-like about them.

More on showing structures: mixed and other methods

Data based on behaviors and data based on judgments data are not, of course, mutually exclusive. They often provide important insights when combined. For instance, brand-switching studies typically involve both behavioral and opinion-based data. Brand switching, by the way, can be considered as falling under either “product substitution” or under “market impact.” (As you may recall, those were mentioned as two of the possible bases for organizing market structures a few sections ago.)

More academically-oriented practitioners have investigated various “latent” structures presumed to exist in markets. Sometimes these are latent classes, which in some ways resemble market segments. Sometimes, these are causal models or path diagrams. Because there can be diagrams involved, some call these forms of mapping. Others do not. How to categorize these method remains problematic.

A flow chart summarizing this step is shown above.

A few factors sometimes overlooked

In addition to price elasticities, many other factors aside from judgments can enter into market structure analysis. These sometimes are overlooked, and include:

• purchasing time or purchasing cycles;
• intermediaries between sellers and buyers (not just outlets, but such specialized groups as formulary committees for pharmaceuticals, regulators, insurance companies, and so on);
• geographic distribution;
• so-called exogenous or environmental variables such as the state of the economy; publicity and public opinion; governmental activity outside regulation, etc.

Also, models can be explicitly dynamic (attempting to predict change over time) or static (a snapshot of a given situation). Different methods are more suited to each basic approach. Dynamic approaches that take just a step or two into the future include market simulator programs. Other dynamic approaches that try to peer further into the future include product diffusion models, and an incredible array of forecasting techniques, probably even including the crystal ball.

More about market structures versus market segments

Most authorities do not consider market structures to be the same as market segments. In fact, doing a thorough job with market segmentation generally requires so much time and effort that you cannot get the full story on market structures in the same interview.

Here’s the mantra on segmentation, in case you are wondering why this tends to fill most of an interview. Finding segments almost always is taken to mean looking for groups that fit these three criteria:

• each has defined product-related needs different from those of all other groups;
• each can be characterized or identified;
• each can be reached selectively (or “targeted”) with communications and marketing efforts. (Or at the very least, the segments you care about have to be groups you can reach selectively.)

Here we are putting aside the idea of “a priori segments,” which are defined before looking at any data. Sometimes groups defined in this way in fact turn out to be segments, and many times not.

For instance, many banks used to segment customers based on the area of the bank that handled their business. There could be various lobby areas for the more indigent, some executive and professional areas, and finally the “upstairs,” where all the big-money people got to visit. One major bank had seven such “customer centers,” and they solemnly believed that each served a segment of the market. They believed this, that is, until they did a fairly thorough analysis of their customers’ needs. When they did, they found only three distinct groups. Their segments were convenient and supported a long tradition, but they were wasting a lot of time developing separate sets of services for all of them.

In any event, if you do find segments, market structures may exist within market segments, just as they can within any group. Different segments of a market may structure a market differently - and indeed we would expect them to do precisely this, since their needs are different.

Many other structural concerns can differ for various segments, as well. For instance, different structural constraints may apply to some market segments, and not others. We need only think of such examples as different groups having differences in insurance coverage, or different groups having access to different public services (like transportation) to see that these environmentally-imposed limitations may be crucial factors in understanding how segments work.

For these reasons, market segmentation and market structure analysis can appear in the same study. As we said earlier, though, given the capacity of most human beings to endure interviews without certain illegal recreational substances, it is hard to do justice to both issues at the same time. Almost invariably, all-in-one studies will skimp in some way on segments or on structures. Just to be fair, we should add that a few academics now claim that both segmentation and marketing structure analysis can be done at the same time, and everything comes out fine. This may happen sometimes, but how often it works remains to be proven.

Finally, as many of you have observed, some practitioners confuse segments and structures so much that the line between them is nearly obliterated. You can have a conversation with some of these people and, at the end, not only will you not know what they are talking about, but you will feel confused about both subjects. We only hope that we have left you in somewhat better condition by the time you have reached this point of the article.

Review: basic steps in getting to market structures

It all seems simple when summed up in a nice diagram like the one above, but the problem of market structures is both large and complex. As the reference list at the end of this article suggests, you may get an entirely different answer about what market structure analysis absolutely needs to include, depending on the experts you consult.

Writing this article, your author tried as much as possible to keep to a central path, and not follow anybody’s pet theories to the exclusion of others. This also represented an earnest effort not to make your feet fall asleep from the sheer excitement of reading about the topic. Tastes vary, though, and if that is just what you wanted, taking a careful look at the reference list below may provide just what you expected.

References Arabie, Phipps, J. Douglas Carroll, Wayne DeSarbo, and Yoram Wind. (1981). “Overlapping Clustering: A New Methodology for Product Positioning.” Journal of Marketing Research 18 (August): 310-317.

Arndt, Johan. (1979). “Toward A Concept of Domesticated Markets.” Journal of Marketing 43 (Fall): 69-75.

Bawa, Kapil and Avijt Ghosh. (1999). “A Model of Household Grocery Shopping Behavior,” Marketing Letters, 10 (2): 149-60.

Bell, David R. and James M. Lattin. (1998). “Shopping Behavior and Consumer Preference for Store Price Format: Why ‘Large Basket’ Shoppers Prefer EDLP,” Marketing Science, 17 (1): 66-88.

Bucklin, Randolph E. and James M. Latin. (1992). “A Model of Product Category Competition Among Grocery Retailers,” Journal of Retailing, 68 (3): 271-93.

Burnett, P. (1973). “The Dimensions of Alternatives in Spatial Choice Processes,” Geographical Analysis, 5: 181-204.

Chintagunta, Pradeep K. (1998). “Inertia and Variety Seeking in a Model of Brand-Purchase Timing,” Marketing Science, 17 (3): 253-70.

Chintagunta, Pradeep K. (1994). “Heterogeneous Logit Model Implications for Brand Positioning,” Journal of Marketing Research, 32 (2): 304-311.

Elrod, Terry. (1988). “Choice Map: Inferring a Product Market Map from Panel Data,” Marketing Science, 7 (1): 21-40.

Elrod, Terry. (1991). “Internal Analysis of Market Structure: Recent Developments and Future Prospects,” Marketing Letters, 2: 253-266.

Elrod, Terry, and Michael P. Keane. (1995). “A Factor Analytic Model for Representing the Market Structure in Panel Data,” Journal of Marketing Research, 32: 1-16.

Erdem, Tulin. (1996). “A Dynamic Analysis of Market Structure Based on Panel Data,” Marketing Science, 15 (4): 359-378.

Fotheringham, S.A. (1988). “Consumer Store Choice and Choice Set Definition,” Marketing Science, 7: 299 -310.

Green, Paul E., and John L. McMennamin. (1973). “Market Position Analysis.” In Marketing Manager’s Handbook. Ed. Steuart Henderson Britt. Chicago: The Dartnell Corporation.

Green, Paul E, and Donald S. Tull. (1988). Research for Marketing Decisions. Englewood Cliffs, New Jersey: Prentice-Hall.

Grover, Raj and V. Srinivasan. (1987). Simultaneous Approach to Market Segmentation and Market Structuring,” Journal of Marketing Research, 24 (May): 139-53.

Grover, Rajiv and Vithala R. Rao. (1988). “Inferring Competitive Market Structure Based on a Model of Interpurchase Intervals,” International Journal of Research in Marketing, 5: 55-72.

Gupta, Sunil. (1991). “Stochastic Models of Interpurchase Time with Time Dependent Covariates,” Journal of Marketing Research, 28 (February): 1-15.

Hoch, Stephen J., Xavier Dreze and Mary E. Purk. (1994). “EDLP, Hi-Lo, and Margin Arithmetic,” Journal of Marketing, 58 (October): 16-27.

Howard, Ronald A. (1964). “System Analysis of Semi-Markov Processes,” IEEE Transactions on Military Electronics:114-124.

Kahn, Barbara E. and David C. Schmittlein. (1989). “Shopping Trip Behavior: An Empirical Investigation,” Marketing Letters, 1 (1): 55-69.

Kahn, Barbara E. and David C. Schmittlein. (1992). “The Relationship Between Purchases Made on Promotion and Shopping Trip Behavior,” Journal of Retailing, 68 (Fall): 294-315.

Kamakura, Wagner and G.J. Russell. (1989). “A Probabilistic Choice Model for Market Segmentation and Elasticity Structure,” Journal of Marketing Research, 26: 379-390.

Kau, Ah Keng and A.S.C. Ehrenberg. (1984). “Patterns of Store Choice,” Journal of Marketing Research, 21 (November): 399-409.

Kim, Byung-Do and Kyungdo Park. (1997). “Studying Patterns of Consumer’s Grocery Shopping Trip,” Journal of Retailing, 73 (4): 501-517.

Kumar, V. and Robert P. Leone. (1988). “Measuring the Effects of Retail Store Promotions on Brand and Store Substitution,” Journal of Marketing Research, 25 (May): 178-85.

Popkowski, Leszczyc and Frank M. Bass (1998). “Determining the Effects of Observed and Unobserved Heterogeneity on Consumer Brand Choice,” Applied Stochastic Models and Data Analysis, 14: 95-115.

Popkowski, Leszczyc and Harry J.P. Timmermans. (1997). “Store Switching Behavior,” Marketing Letters, 8 (2): 193-204.

Sinha, Ashish. (2000). “Understanding Supermarket Competition Using Choice Maps,” Marketing Letters, 11 (1): 21-35.

Uncles, Mark D. and Andrew S.C. Ehrenberg. (1988). “Patterns of Store Choice: New Evidence from the USA.” Pp. 272-299 in Neil Wrigley (Eds.), Store Choice, Store Location and Market Analysis. London: Routledge.

Uncles, Mark D. and Kathy A. Hammond. (1995). “Grocery Store Patronage,” International Review of Retail, Distribution and Consumer Research, 5 (3), 287-302.

Vilcassim, Naufel J. and Dipak C. Jain. (1991). “A Semi-Markov Model of Purchase Timing and Brand Switching Incorporating Explanatory Variables and Unobserved Heterogeneity,” Journal of Marketing Research, 28 (February): 29-41.

Warshaw, Paul R. (1980). “Predicting Purchase and Other Behaviors from General and Contextually Specific Intentions.” Journal of Marketing Research 17 (February): 26-33.

Wind, Yoram J. (1977). “The Perception of a Firm’s Competitive Position.” In Behavioral Models for Market Analysis. Eds. Franco M. Nicosia and Yoram Wind. Hinsdale, IL: Dryden Press.

Yadav, Manjit S. (1995). “Bundle Evaluation in Different Market Segments: The Effects of Discount Framing and Buyers’ Performance Heterogeneity.” Journal of the Academy of Marketing Science 23 (3): 206-215.

Demographic mapping helps bank meet Community Reinvestment Act requirements Related Categories: Demographics, Market Studies, Secondary Research Demographics, Market Studies, Secondary Research, Financial Industry, Sampling, Financial/Investment/Banks, Demographic Analysis, Demographic Database, Demographic Profiles, Mapping

Data Use: CHAID response modeling and segmentation Related Categories: Market Studies, Statistical Analysis, Data Analysis Market Studies, Statistical Analysis, Data Analysis, Consumer Research, Market Segmentation Studies

Extensive data analysis keeps a Michigan health care provider competitive Related Categories: Market Studies, Statistical Analysis, Data Analysis Market Studies, Statistical Analysis, Data Analysis, Health Care, Health Care (Healthcare), Hospitals, Mapping, Quantitative Research, Health Care (Healthcare) Research

Research encourages a comprehensive redesign of Blue Nun packaging Related Categories: Competitive Intelligence, Demographics, Market Studies, Product Research, Secondary Research, Market/Category Evaluations, Market Statistics Competitive Intelligence, Demographics, Market Studies, Product Research, Secondary Research, Market/Category Evaluations, Market Statistics, Advertising Research, Brand/Image Research, Business/Product Development, Concept Research, Consumer Research, Focus Groups, Food/Sensory Research, Moderators, Name Development, One-on-One, Package Research, Panels, Promotion Research, Recruiting, Research Industry, Retail Industry, Sampling, Beverage, Consumer Services, Consumers, Packaged Goods, Research Industry, Advertising Effectiveness, Brand Equity, Brand Identity, Brand/Image Tracking, Brand Loyalty Studies, Brand Positioning Studies, Brand Share Studies, Concept Development, Marketing Research Consultation, Consumer Promotion Research, Consumer Research, Corporate Image Studies, Demographic Profiles, Exploratory Research, Incentive Payment & Processing, Recruiting-Qualitative, Graphics Research, Image Studies, Low Incidence Screening, Mapping, Market Forecasting, Market Opportunity Studies, Market Segmentation Studies, Marketing Research-Full Service, Name Research, Product Development Research, New Venture Analysis, Omnibus Surveys-Consumers, Package Development Research, Packaging Testing, Site Selection Analysis, Brand/Image Development, Low Incidence Research, Qualitative Research, Market Feasibility Studies, Focus Groups, Marketing Research-General

Quickonomics

The Four Types of Market Structure

Four basic types of market structure characterize most economies: perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has its own set of characteristics and assumptions, which in turn affect the decision-making of firms and the profits they can make.

It is important to note that not all of these market structures exist in reality; some of them are just theoretical constructs (which can be really useful in economics sometimes). Nevertheless, they are critical because they help us understand how competing firms make decisions. With that said, let’s look at the four market structures in more detail.

1. Perfect Competition

Perfect competition describes a type of market structure where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market share or market power. As a result, the industry as a whole produces the socially optimal level of output because none of the firms can influence market prices.

Perfect competition is defined by the following characteristics:

• All firms maximize profits
• Entry and exit to the market are free (i.e., no barriers to entry or exit)
• All firms sell entirely identical (i.e., homogenous) goods
• There are no consumer preferences.

By looking at those assumptions, it becomes obvious that we will hardly ever find perfect competition in reality. This is important to note because it is the only market structure that can (theoretically) result in a socially optimal level of output.

Probably the best example of an almost perfectly competitive market we can find in reality is the stock market. If you are looking for more information on different types of competitive firms, you can also check our post on perfect competition vs. imperfect competition .

2. Monopolistic Competition

Monopolistic competition also refers to a type of market structure where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar but slightly differentiated products. That gives them a certain degree of market power despite small market shares, which allows them to charge higher prices within a specific range.

Monopolistic competition is defined by the following characteristics:

• All firms are profit-maximizing
• Firms sell differentiated products
• Consumers may prefer one product over the other (however, they are still very close substitutes).

Note that those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure no longer results in a socially optimal level of output because the firms have more power and can influence market prices to increase their total revenue and profit at the expense of the consumers.

An example of monopolistic competition is the market for cereals. There is a vast number of different brands (e.g., Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals.

3. Oligopoly

An oligopoly describes a market structure that is dominated by only a small number of firms that serve many buyers. That results in a state of limited competition. The firms can either compete against each other or collaborate (see also Cournot vs. Bertrand Competition ). By doing so, they can use their collective market power to drive up prices and earn a higher profit.

An oligopoly market is defined by the following characteristics:

• Oligopolies can set prices (i.e., they are price-makers)
• Barriers to entry and exit exist in the market
• Products may be homogeneous or differentiated
• Only a few firms dominate the market.

Unfortunately, it is not clearly defined what a “few firms” means precisely. As a rule of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, we can look at the gaming console industry. This market is dominated by three powerful companies: Microsoft, Sony, and Nintendo. That leaves all of them with a significant amount of market power.

4. Monopoly

A monopoly refers to a type of market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as it supplies the entire demand curve and consumers do not have any alternatives. As a result, monopolies often reduce output to increase prices and earn more profit.

A monopoly is defined by the following characteristics:

• The monopolist is profit-maximizing
• It can set the price (i.e., it is the price-maker)
• There are high barriers to entry and exit
• Only one firm dominates the entire industry.

From the perspective of society, most monopolies are not desirable because they result in lower outputs and higher prices compared to competitive markets. Therefore, they are often regulated by the government.

An example of a real-life monopoly could be Monsanto. This company trademarks about 80% of all corn harvested in the US, which gives it a high level of market power. You can find additional information about monopolies in our post on monopoly power .

Frequently Asked Questions (FAQ)

How do real-world markets deviate from the ideal types of market structures outlined in the theory, especially in dynamic industries like technology.

Real-world markets often blend characteristics from different theoretical models, especially in dynamic sectors like technology, where innovation and strategic behaviors create more complex scenarios than those described by pure market structures.

What role does government regulation play in shaping and maintaining these market structures, and how do these regulations impact competition?

Government regulations are pivotal in shaping market structures, employing antitrust laws and policies to foster competition, prevent monopolistic dominance, and protect consumer interests, thereby influencing the competitive landscape.

How do market structures evolve over time with technological advancements and changing consumer preferences?

Market structures are not static; they evolve over time as a result of technological advancements, shifts in consumer preferences, and changes in regulatory landscapes. These evolutions can disrupt existing market equilibriums, leading to the emergence of new business models and the decline of others.

There are four basic types of market structure in economics: perfect competition, imperfect competition, oligopoly, and monopoly. Perfect competition describes a market structure where a large number of small firms compete against each other with homogeneous products. Meanwhile, monopolistic competition refers to a type of market structure where a large number of small firms compete against each other with differentiated products. An Oligopoly describes a market structure where a small number of firms compete against each other. And last but not least, a monopoly refers to a type of market structure where a single firm controls the entire industry.

Related Posts

• Macroeconomics

The Demographic Transition Model

• Microeconomics

The Economics Of Advertising

What is game theory.

To provide the best experiences, we and our partners use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us and our partners to process personal data such as browsing behavior or unique IDs on this site and show (non-) personalized ads. Not consenting or withdrawing consent, may adversely affect certain features and functions.

Click below to consent to the above or make granular choices. Your choices will be applied to this site only. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen.

Table of Contents

What is market structure, types of market structures, monopolistic markets characteristics, oligopoly characteristics, perfectly competitive market characteristics, final thought, market structure: definition, types, features and fluctuations.

You all must have read about the immense scope of markets in economics textbooks. But what does market structure look like in the real world? Market structure can be categorized based on the competition levels and the nature of markets. Let’s look into the details of market structure in this article. 

Market structure refers to the way that various industries are classified and differentiated in accordance with their degree and nature of competition for products and services. It consists of four types: perfect competition, oligopolistic markets, monopolistic markets, and monopolistic competition.

According to economic theory, market structure describes how firms are differentiated and categorized by the types of products they sell and how those items influence their operations. A market structure helps us to understand what differentiates markets from one another.

In economics, market structure is the number of firms producing identical products which are homogeneous. The types of market structures include the following:

• Monopolistic competition, also called competitive market, where there is a large number of firms, each having a small proportion of the market share and slightly differentiated products.
• Oligopoly, in which a market is by a small number of firms that together control the majority of the market share.
• Duopoly, a special case of an oligopoly with two firms.
• Monopsony, when there is only one buyer in a market.
• Oligopsony, a market in which many sellers can be present but meet only a few buyers.
• Monopoly, in which there is only one provider of a product or service.
• Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.
• Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.

Become a Business and Leadership Professional

• Top 10 skills in demand Business Analysis As A Skill In 2020
• 14% Growth in Jobs Of Business Analysis Profile By 2028

Business Analyst

• Industry-recognized certifications from IBM and Simplilearn
• Masterclasses from IBM experts

Post Graduate Program in Digital Marketing

• Joint Purdue-Simplilearn Digital Marketer Certificate
• Become eligible to be part of the Purdue University Alumni Association

Here's what learners are saying regarding our programs:

Assistant Consultant at Tata Consultancy Services , Tata Consultancy Services

My experience with Simplilearn has been great till now. They have good materials to start with, and a wide range of courses. I have signed up for two courses with Simplilearn over the past 6 months, Data Scientist and Agile and Scrum. My experience with both is good. One unique feature I liked about Simplilearn is that they give pre-requisites that you should complete, before a live class, so that you go there fully prepared. Secondly, there support staff is superb. I believe there are two teams, to cater to the Indian and US time zones. Simplilearn gives you the most methodical and easy way to up-skill yourself. Also, when you compare the data analytics courses across the market that offer web-based tutorials, Simplilearn, scores over the rest in my opinion. Great job, Simplilearn!

Allan Joaquin

Senior copywriter , ami group.

Completing the PGP in Digital Marketing course and gaining knowledge in the field allowed me to service new clients who needed consultancy on digital marketing strategies. I was also able to increase my revenue by 50%.

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation.

These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller’s financial need to cover its costs. In other words, competition can align the seller’s interests with the buyer’s interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.

Monopolistically competitive markets have the following characteristics:

• There are many producers and many consumers in the market, and no business has total control over the market price.
• Consumers perceive that there are non-price differences among the competitors' products.
• There are few barriers to entry and exit.
• Producers have a degree of control over price.

The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.
• Ability to set price: Oligopolies are price setters rather than price takers.
• Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.
• Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
• Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering the market to capture excess profits.
• Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).
• Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
• Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm's effects on market conditions is so negligible as to be safely ignored by competitors.
• Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition
• Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
• Zero entry and exit barriers – A lack of entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market.
• Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
• Perfect information - All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products.
• Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
• Profit maximizing - Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.
• Homogenous products - The qualities and characteristics of a market good or service do not vary between different suppliers.
• Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry.
• Property rights - Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer.

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly and pure monopoly. The main criteria by which one can distinguish between different market structures are the number and size of producers and consumers in the market, the type of goods and services being traded and the degree to which information can flow freely.

If you have good ideas about different markets and their specific characteristics, making a career in Marketing will be a good option for you. Become a Digital Marketing expert with the help of the professional certificate , offered by IMT Ghaziabad in collaboration with Simplilearn. Get a holistic understanding of the digital marketing field by exploring topics like SEO , Social Media , PPC , Web Analytics , and Marketing Analytics . Sign-up today and start learning! 

Get Free Certifications with free video courses

Business and Leadership

Business Analysis Basics

Digital Marketing

Introduction to Digital Marketing Fundamentals Course

Learn from Industry Experts with free Masterclasses

Finance management.

Financial Modeling statistical functions in Excel

Career Information Session: Find Out How to Become a Business Analyst with IIT Roorkee

Recommended Reads

Free eBook: Agile and Scrum Salary Report

Structure in C

Implementing Stacks in Data Structures

Data Scientist Resume Guide: The Ultimate Recipe for a Winning Resume

A Comprehensive Guide on How to Do Market Research

A Comprehensive Look at Queue in Data Structure

Get Affiliated Certifications with Live Class programs

• PMP, PMI, PMBOK, CAPM, PgMP, PfMP, ACP, PBA, RMP, SP, and OPM3 are registered marks of the Project Management Institute, Inc.

Company Filings | More Search Options

Company Filings More Search Options -->

• Commissioners
• Reports and Publications
• Securities Laws
• Commission Votes
• Corporation Finance
• Enforcement
• Investment Management
• Economic and Risk Analysis
• Trading and Markets
• Office of Administrative Law Judges
• Examinations
• Litigation Releases
• Administrative Proceedings
• Opinions and Adjudicatory Orders
• Accounting and Auditing
• Trading Suspensions
• How Investigations Work
• Receiverships
• Information for Harmed Investors
• Rulemaking Activity
• Proposed Rules
• Final Rules
• Interim Final Temporary Rules
• Other Orders and Notices
• Self-Regulatory Organizations
• Staff Interpretations
• Investor Education
• Small Business Capital Raising
• EDGAR – Search & Access
• EDGAR – Information for Filers
• Company Filing Search
• How to Search EDGAR
• About EDGAR
• Press Releases
• Speeches and Statements
• Securities Topics
• Upcoming Events
• Media Gallery
• Divisions & Offices
• Public Statements
• Market Structure
• Visualizations

Research and Analysis - Market Structure

Data highlights, reports on security-based swaps.

• Report on Security-Based Swaps (Issued on November 17, 2023) Report (pdf, 381kb), November 17, 2023
• Report on Security-Based Swaps (Issued on March 20, 2023) Report (pdf, 661kb), March 20, 2023
• Report on Security-Based Swaps (Based on Trade State Data for March 31, 2022) - Report (pdf, 284kb), July 15, 2022

White Papers

• Staff Report on Algorithmic Trading in U.S. Capital Markets White Paper (pdf, 860 kb), August 5, 2020
• Study of Correlation Impact on Credit Default Swap Margin using a GARCH-DCC-copula Framework Research Note (pdf, 1 mb), November 13, 2019
• Empirical Analysis of Liquidity Demographics and Market Quality For Thinly-Traded NMS Stocks Research Note (pdf, 3.8 mb), April 2018
• An application of agent-based modeling to market structure policy: the case of the U.S. Tick Size Pilot Program and market maker profitability White Paper (pdf, 1.9 mb), December 2017

Additional white papers, economic analyses and working papers are available on the DERA website .

Many documents on the SEC web site are in Portable Document Format (PDF). This format requires a browser plug-in for viewing. If this is not already installed on your computer, you can download the free Adobe Reader from Adobe.com for viewing PDF files.

Modified: Nov. 17, 2023

The Federal Register

The daily journal of the united states government, request access.

Due to aggressive automated scraping of FederalRegister.gov and eCFR.gov, programmatic access to these sites is limited to access to our extensive developer APIs.

If you are human user receiving this message, we can add your IP address to a set of IPs that can access FederalRegister.gov & eCFR.gov; complete the CAPTCHA (bot test) below and click "Request Access". This process will be necessary for each IP address you wish to access the site from, requests are valid for approximately one quarter (three months) after which the process may need to be repeated.

An official website of the United States government.

If you want to request a wider IP range, first request access for your current IP, and then use the "Site Feedback" button found in the lower left-hand side to make the request.