ECO 204 WK 5 Final Paper – Market Structures

Market Structures

ECO 204: Principles of Microeconomics

Market Structures

A Market structure is the attributes of any type of market, which are comprised of four major market structures: monopoly, oligopoly, perfect and monopolistic competition. Each structure differs in respect to number of firms involved, products created, barriers to entry/exit and government intervention and control. Within these structures are a wide number of characteristics which is my goal to discuss in detail. In addition, I will also discuss the inner workings of these market structures to include entry barriers, competitive pressures, price elasticity, government interaction and import/export trading. To start, lets discuss the main market structures and provide examples of each.

Major Market Structures Defined

A monopoly is defined as a single seller with no close substitutes, where a certain product is created by only one firm or multiple firms brought together via mergers (Amacher & Pate, 2013). A perfect example would be an electric company such as Entergy, which operate in the southern region of the United States. Any company that offers a one-of-a-kind product, and have no real competition can be considered a monopoly, regardless of how many companies may merge with another so long as the product does not change.

Oligopoly is a structure in which few firms compete imperfectly. In other words, a market structure in which there are only a few firms available so the market is dominated by the few companies in those specific markets (Amacher & Pate, 2013). The airline industry is a great example of an oligopoly. Though there are many airlines to choose from, the major airline industrial giants are American Airlines, United, Delta and Southwest. Size, reputation, longevity and amenities is what makes these airlines considered an oligopoly.

Perfect competition is the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry. For this to be considered “perfect,” there are several prerequisites to fit the category. First the market must have many buyers and sellers. Next, the homogenous product must be produced by every firm. Third, there must be free entry and exit of firms, meaning firms have free access to the market to create and distribute the product, and if things do not sell as predicted those same markets can exit the market without penalty. Next, Consumers have impeccable and continuously updated knowledge of the market. Furthermore, government intervention is non-existent, no additional costs to advertising or marketing exists and each firm earns normal profits, to which no additional profits are to be gained making all parties equal (Amacher & Pate 2013). This structure is truly theoretical, as it brings the assumption that all firms and products are the exact same. Fast food restaurants such as McDonalds, Burger King and Wendy’s are great examples of a perfect competition because while they all have different names they all sell the same type of product.

Finally, Monopolistic competition is described as an industry composed of several sellers, however each of these sellers offer a differentiated product, meaning a good or service that has real or imagined characteristics set apart from other goods or services (Amacher & Pate, 2013), or simply put, made unique. Popeyes and Church’s chicken for example sell a similar product, however due to the way those products are made sets them apart from each other. Moving forward, we will discuss the influence of entry barriers into the market.

High Barriers of Entry/Competitive Pressures

Barriers to entry are obstacles that keep new firms from entering an industry, so for monopoly and oligopoly structures barriers to entry are high thus new entry is controlled for firms attempting to get a foot in. Short run profits for these structures are above par with open market structures. For monopoly the product is offered in a way the marginal revenue is aligned with marginal cost, and in turn profit is maximized. Respectfully, the pricing for oligopoly structures is set between max profit and lowered unit costs. So, both monopoly and oligopoly favor long term profits because they’re protected by high barriers to entry so new firms cannot enter the race and threaten their profit (Heger & Kraft, 2008).

Though there exists to be high barriers to entry within the market, there are in fact competitive pressures. For monopolies the government would regulate price to protect the public interest. Furthermore, the government can also open the market allowing new competition, forcing the monopoly to maintain fair pricing of their products and services. For oligopoly, capital requirements would prevent new companies access to the market due to lack of support compared to existing companies. Existing firms with long standing reputations have earned loyal customer support making it difficult for starter companies in the same industry.

Consumer Preferences

As a consumer, I would prefer a perfectly competitive market structure to purchase goods, and an oligopoly structure to sell. No barriers exist for perfectly competitive structures, so as a consumer I would have multiple purchasing options due to the large variety of sellers in the industry. Regardless of who I choose to purchase from, the firms would make a fair and neutral profit, and the prices would be regulated due to lack of competitive pressure from one another. As a seller, I would choose oligopoly because the top seller in the industry regulates the prices while the runner up companies below follow suit. If that company fails to deliver than it would only allow opportunity for other companies the advantage in sales.

Price Elasticity of Demand

Price elasticity of demand is the measure of responsiveness of the quantity demanded to change in price (Amacher & Pate, 2013). In other words, the demand for an item is based on the fluctuation of the cost for that item. Perfect competition has a perfectly elastic demand curve, meaning when the price changes, so then does the demand. The impact of a change in one’s firm’s output of market price reflects not only that firm’s market share but also the elasticity of market demand (Johnson & Peter, 1967). For monopolies, since firms set the price we can assume that the marginal revenue equals marginal cost. With this the firm can break even during long term as the demand increases as well as the price. For oligopolies it’s the opposite, whereas if one company raises its prices, then the demand would decrease allowing other companies which sell the same product to have the upper hand making oligopoly inelastic as well.

Government Role in the Market Structure

As stated earlier, there is no government intervention in a perfect competition. This is due to regulation by existing companies regulating the price of goods to stay in the fight. However, the government can use quantative restrictions and trade facilitation measures such as quotas and tariffs on imports from other countries who wish to sell goods internationally (Mavroidis, 2016). Furthermore, barriers such as this also come in forms of licensing restrictions, patents and franchise rights issued by the government. Other laws such as domestic preference laws require the government to favor domestic suppliers when purchasing items for government owned agencies or programs. The concept behind these laws are so that foreign suppliers have great competition with domestic suppliers (Amacher & Pate, 2013).

Oligopolies are closely monitored by the government for possible collusion practices to include tacit collusion, which is defined as unorganized and unstated attempts by informally coordinated oligopolic competitors to practice joint actions. To combat this, U.S. Antitrust laws have been put in place making collusion illegal, as well as making this act harder and costly to exercise and deter attempts to perform these acts. (Amacher & Pate, 2013).

Effect of International Trade on Market Structure

Free international trade offers other countries to trade across borders, allowing increase to supplies of goods and services. In concept, the increase in suppliers worldwide provides potential for decrease in prices. This provides a higher level of economic well-being that comes partly from greater production when nations specialize and partly from mutually beneficial exchange (Amacher & Pate, 2013). This works hand in hand with perfect competition, since the international trade would only increase the competition since more firms are selling the same product, and consumers have the pleasure of choosing a myriad of products from those sellers.

With Oligopoly, since barriers to entry are naturally high, international trade would introduce existing foreign companies. This new introduction would cause a reduction in price and profits for the companies within the oligopoly (Bagwell & Staiger, 2001). This could make way for new competing foreign companies opportunity to gain rapport by establishing a customer base, increasing prices and inviting that company to become part of the oligopoly. Countries with monopoly power in the global market may seek to place restrictions on exports in order to facilitate price discrimination across different foreign buyers (Mavroidis, 2016). When governments open markets, monopolies are faced with international trade, reducing barriers and increasing supply. In turn governments support the cheaper price to reduce the overall market price.


The Market Structure is a vast world consisting of a variety of conditions that define different types of markets. In this paper I have discussed the main four types of market structures and provided examples of the same. Furthermore, I have discussed price elasticity, barriers to entry and exit, law of demand and government intervention.


Mavroidis, P. C. (2016). The Regulation of International Trade : The WTO Agreements on Trade in Goods. Cambridge, Massachusetts: The MIT Press.

A.C. Johnson, J., & Peter, H. (1967). Price Elasticity of Demand as an Element of Market Structure. The American Economic Review, (5), 1218

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies [Electronic version]. Retrieved from

Heger, D., & Kraft, K. (2008). Barriers to Entry and Profitability. ZEW-Centre for European Economic Research Discussion Paper, 08-071.

Karlsen, R. W., & Pettyfer, M. A. (2011). Monopolies. [electronic resource] : theory, effectiveness and regulation. Hauppauge, N.Y. : Nova Science Publishers, c2011.

Kyle, B., & Robert W., S. (2001). Strategic Trade, Competitive Industries and Agricultural Trade Disputes. Economics And Politics, (2), 113.