• Market structure refers to the characteristics of a market that influence the nature of competition and pricing.
• It describes how different firms in the market interact with one another, the level of competition, and the type of products or services offered.
• Understanding market structures helps determine the behaviour of firms in the market, including pricing strategies, product offerings, and market entry barriers.

Types of Market Structure

There are four main types of market structures in economics:

1. Perfect Competition

   • In a perfectly competitive market, there are many small firms, all selling identical products.
   • No firm has any control over the price, and there is free entry and exit from the market.
   • Characteristics:
     • Large number of buyers and sellers.
     • Homogeneous (identical) products.
     • No barriers to entry or exit.
     • Perfect knowledge among buyers and sellers.
     • Firms are price takers.
   • Role of Advertising:
     • Advertising plays no role as products are identical and consumers have perfect information.
     • At Best, advertising in this type of market can be aimed at enlarging the overall market size — for example, by encouraging more people to use the product category as a whole, not to promote one brand over another. “Sunday ho ya Monday, Roz Khao Ande.” 
   • Example: The market for agricultural products, like wheat or rice, where many farmers sell identical products at market-determined prices.

2. Monopoly

   • A monopoly exists when a single firm controls the entire market for a product or service.
   • There are high barriers to entry, and no close substitutes are available for the product.
   • Characteristics:
     • One seller (firm) controls the market.
     • No close substitutes for the product.
     • High barriers to entry.
     • The firm is a price maker, setting the price higher than in competitive markets.
   • Role of Advertising:
     • Advertising is mainly informative or used to maintain public goodwill and expand demand.
   • Example: In many countries, a public utility company, like water or electricity providers, may operate as a monopoly.  Indian Railways uses ads to inform about new routes or public safety campaigns.

3. Monopolistic Competition

   • This market structure features many firms that sell differentiated products (products that are similar but not identical).
   • There is some control over prices due to product differentiation, but barriers to entry are relatively low.
   • Characteristics:
     • Many sellers.
     • Product differentiation (each firm offers a slightly different product).
     • Some control over prices.
     • Low barriers to entry and exit.
     • Non-price competition (e.g., advertising, branding).
   • Role of Advertising:
     • Advertising is crucial to differentiate products and build brand preference.
   • Example: The market for fast food, where many restaurants offer similar products (burgers, pizzas), but with differences in taste, quality, and branding (e.g., McDonald’s vs. Burger King).

4. Oligopoly

   • An oligopoly exists when a few large firms dominate the market.
   • These firms may sell identical or differentiated products and have significant control over pricing.
   • Firms in oligopolistic markets often engage in strategic behaviour, such as price fixing, advertising battles, or collusion.
   • Characteristics:
     • Few large firms dominate the market.
     • High barriers to entry.
     • Products may be either homogeneous (e.g., oil) or differentiated (e.g., cars).
     • Firms are interdependent; the actions of one firm affect the others.
     • There is potential for collusion (e.g., price-fixing agreements).
   • Role of Advertising:
     • Advertising is used strategically to capture market share and counter rivals.
   • Example: The automobile industry, where a few major players (e.g., Ford, Toyota, BMW) control a large portion of the market.
   • Note: An oligopolistic firm cannot decide the price it wishes to charge as well as the quantity it wishes to sell at the same time. An oligopolistic firm takes into consideration the competitors’ actions and counteractions because of a strong interdependence among the competitive firms.

Summary of Market Structures: