Types of Market (Market) based on its structure – Market can be defined as a place where sellers meet with their potential buyers to conduct transactions of buying and selling goods or services.
The “place” referred to here can be a “real” place like a traditional market that can meet in person or a “Virtual” place that we usually know with the term online shop or e-commerce.
In economics, the market can also be interpreted as a system where the law of supply and demand that leads to the production of goods and services. This offer can include natural resources, capital, labor, goods and services. Whereas Demand includes purchases made by consumers, businesses / organizations and governments.
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In its classification, markets can be classified into 4 main types based on their structure or usually referred to as 4 types of market structures.
The market structure basically refers to the nature and level of competition in the market for goods and services. There are a number of determinants of market structure for goods and services, namely the number and nature of sellers, the number and nature of buyers, the nature of products, conditions or freedom of entry and exit from the market, and the scale of the economy.
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Market Types based on its Structure
Market types according to the structure include the Monopoly Market, Oligopoly Market, Monopolistic Competition Market, and Perfect Competition Market.
1. Monopoly Market
Monopoly Market is a market structure where a single company controls the entire market. In this scenario, the company has the highest level of market power because consumers have no alternative. As a result, monopolies often reduce output to raise prices and get more profit.
In general, the characteristics of a monopoly market are maximizing profits, being able to set prices, there are high barriers to entry and exit and there is only one company that dominates the entire market.
From a community perspective, a monopoly is a form of structure that is undesirable for most people because it will produce lower output and higher prices compared to competitive markets. Therefore, the structure of the Monopoly market structure is often regulated by the government.
The Oligopoly Market describes a market structure that is dominated by only a small number of companies that produce limited competition. Companies can compete with one another or collaborate. By doing that, they can use their collective market power to raise prices and get more profit.
The characteristics of this oligopolistic market structure are that all companies maximize profits, oligopolies can set prices, there are obstacles to entry and exit in the market, products may be homogeneous or inhomogeneous, and there are only a few companies that dominate the market.
But until now, no one has clearly defined the exact number of companies that dominate this market. Generally, there are 3 to 5 dominant companies as a benchmark for this oligopoly market.
Examples of the oligopoly market can be seen in the market for game console devices. This market is dominated by three strong companies namely Microsoft, Sony, and Nintendo. That makes them all have significant market power.
3. Personal Monopoly
Monopolistic competition is a market structure where a large number of small companies compete with each other. However, unlike in perfect competition, companies in this monopolistic competition sell similar but slightly different products. That gives them a certain level of market power that allows them to charge higher prices within a certain range.
Characteristics of this Monopolistic Competition include all companies maximizing profits, free entry and exit, companies selling different products, consumers can choose one product over another.
The Characteristics of Monopolistic Competition are basically closer to reality when compared to perfect competition. However, this market structure does not produce an optimal level of output because the company has more power and can influence market prices to some degree.
4. Perfect Competition
Perfect competition describes a market structure in which a large number of small companies compete with each other. In this scenario, one company does not have significant market power.
As a result, the industry as a whole produces an optimal level of output because there are no companies that can influence market prices.
The characteristics of Perfect Competition include all companies maximizing profits, all companies free to enter and exit the market, all companies sell goods that are identical (homogeneous), there is no consumer preference.
With these Characteristics, it is very clear that we will almost never find perfect competition in reality. However, this is an important aspect because the Perfect Competition market is the only market structure that can (theoretically) produce socially optimal levels of output.