6.1: Market Structure

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Martin Medeiros
Chabot College

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We established in the first module that economics is simply the study of choice. But before choices can be made a goal or objective must be clearly identified. For the microeconomic section of this course the goal for a firm is profit maximization*. For the next three modules we focus on the choice(s) which lead to profit maximization.

*Note

There are legitimate goals in business other than profit maximization. Some businesses set out to achieve social or environmental goals. Whose is to say that one goal is more important or worthy than another?

Market structure is one of the most important topics in microeconomics. Its importance comes from its relevance to everyday decision making in business.

Market structure is simply a measure of competitiveness in an industry. Every firm belongs to an industry and every industry belongs to a specific market structure (see figure 1)

A diagram of a companyDescription automatically generated

Figure 1

Firms in industries with one type of market structure face a different level of competition than firms in industries with other market structures.

Sometimes firms produce more than one product and compete in more than one industry. In this case, one would not identify an industry at the firm level but at the product level. See figure 2.

A diagram of a companyDescription automatically generated

Figure 2

Think of market structure as a thermometer. One end shows hot (i.e., a lot of competition) and the opposite end shows cold (i.e., no competition). See figure 3.

A ruler with text and numbersDescription automatically generated with medium confidence

Figure 3

The market structure with the highest level of competition is called perfect competition. The one with the lowest level (actually, there is no level because there is no competition) is called monopoly.

Perfect competition is a market structure where there are many firms producing an identical good. Firms in this market structure can freely leave and enter the industry. These three characteristics (many firms, identical product, and free entry/exit) mean that firms are locked in fierce competition. No one firm is large enough or unique enough to hold a dominant position within the industry for any significant length of time.

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