The interconnected characteristics of a market, such as the number and relative strength of the buyers and sellers, degree of collusion among them, level and forms of competition, extent of product differentiation and ease of entry and exit in the market describes the Market Structure.
The structure of the market refers to the number of firms in the market, their market shares, and other features which affect the level of competition. Market Structures are distinguished mainly by the level of competition that exists between the firms operating in the market. Hence Market Structures are classified in terms of presence or absence of competition. When competition is absent the market is said to be concentrated.
In Economics, Markets are classified according to the structure of the industry serving the market. Industry structure is categorised on the basis of Market Structure Variables which is believed to determine the extent and characteristics of competition
Those variables which have received the most attention are, number of buyers and sellers, extent of product substituatability, costs, ease of entry & exit, and the extent of mutual interdependence.
In the traditional framework, these structural variables are distilled into the following taxonomy of Market Structures.
Perfect Competition, in which the market consists of a very large number of firms producing homogeneous products.
Monopolistic Competition, also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share.
Oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share.
Monopoly, where there is only one provider of a product or service.
Oligopsony, a market dominated by many sellers and few buyers.
Monopsony, When there is only one buyer in the market.
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.
Market Structure is important as it affects the market outcomes through it's impact on the motivations, opportunities and decisions of economic actors participating in the market.
The goal of economic market structure analysis is to isolate & study each of this effect in an attempt to explain and predict market outcomes.