Fundamentals: Market Structures (Overview)
Market structure types is among the most fundamental of all concepts studied by Econ students. It is also one of the most useful for consumers to understand.
And yet, market types seems to be one of the least understood by US consumers who have never studied Economics. For that reason, I think I may provide the greatest value by providing a cursory overview and non-technical explanation of market types.
Understanding the different types of market structure can help consumers make better purchasing decisions and recognize markets and mechanisms that work against them.
The Market Structure Continuum
Market structures exist on a continuum that extends from Perfect Competition to Monopoly. These types have different levels of competition and efficiency.
Efficiency? There are at least 2 types of efficiency that relate to markets. I'm considering addressing these efficiencies in other blog posts. For now, let's hold efficiency as the degree to which value is maximized for the buyer where value = utility / price. Let me know in the comments if you'd like a drill-down on market efficiencies in future blog posts (Pareto Efficiency is a very interesting topic).
Click the links in the table below to read about each market type.
|
Market Structure |
Examples |
Efficiency / Inefficiency* |
Advantage |
|
N/A (Strawberries?) |
Perfect Efficiency |
Buyer |
|
|
Imperfect Competition |
Milk, wheat, crude oil |
High Efficiency |
Buyer |
|
Monopolistic Competition |
Jeans, wine, state govt (US) |
Moderate Efficiency |
Buyer (weak) / Seller |
|
Oligopoly |
Beer (US), sodas, gasoline (retail, US), mass media (US) |
Inefficiency |
Seller (strong) |
|
Duopoly |
Political parties (US) |
High Inefficiency |
Seller (strong) |
|
Monopoly |
Gas (retail), electrical (retail), cable TV (retail), standard letter delivery (USPS), national defense, migration control |
Extreme
Inefficiency** |
Seller
(overwhelming) |
* we cannot always predict how humans will behave, we should note that the efficiency and inefficiency mentioned here are probabilistic. There may be deviations from these levels of efficiency within each category. These gradations are left intentionally vague and should be read as “most likely” or “expected” levels of efficiency.
** Monopolies are so inefficient that legal regulation is often put in place to reduce inefficiency. Some examples of regulatory mechanisms are the FAA, FCC, US Congress, county or state utilities commissions, etc. Some regulation creates monopolies: USPS enjoys a legal monopoly on standard letter delivery, the US Constitution guarantees the federal govt a monopoly on national defense and control of migration (including tourism and passport issuance).
Perfect Competition is virtually never seen in the real world. The closest example used in classrooms today is that of strawberries in North America. But this may change; This market type is inherently unstable and fleeting -- on those rare occasions when perfect competition comes into existence, it often quickly degrades into imperfect competition or monopolistic competition.
Examples of Monopoly, on the other hand, are relatively easy to find: National defense, application of justice, use of force, and migration control are all examples of pure monopolies enjoyed by the state. (Although one might argue that the implicit regulation by US Congress spoils these examples -- making them "regulated monopolies" and not "pure monopolies".)
What Is a Market?
Here we will consider a "market" to be any context in which people exchange something of value for some other thing of value. We won't be constrained here to discussion only of exchanges that involve money. Some transactions involve alternate forms of money. Others may not involve money at all, yet remain of keen interest to Economists because they involve an exchange of resources between people or economic entities -- a trade.
Here in the US, the US dollar (US $) is our money. But I'm sure the reader can see that gold and silver may be used as money to purchase goods or services in certain cases, right? (Even though these things are no longer actual money, here in the US.)
Other items that have been or could be used as money are: scrip, cigarettes (by POWs or prisoners), bead and shells (by Native Americans), votes, drugs, sex, etc.
Let's not get distracted by what a buyer offers as payment to a seller, the key thing that makes a market transaction is a quid-pro-quo -- an explicit exchange of one thing for another -- a trade.
Market Structure Mutation Process:
Many markets maintain the same structure indefinitely. Others transform or mutate, usually from more competitive structure to less competitive, more monopolistic structures.
The process by which more highly-efficient, competitive markets degrade into less-efficient markets is one that we would like to focus on. This is a sub-topic that may be counter-intuitive to the non-Econ student, but me be of the most value to understand.
We hope the reader isn't too shocked or antagonized by some of the ideas we will offer here. Some readers who may be emotionally invested in sale shopping and coupon clipping may find it disconcerting to learn that these mechanisms are signals of less-competitive markets and monopoly power which works against the buyer -- by participating in these markets, they may be sabotaging themselves and other consumers.
Other readers who may be invested in product differentiations like "organic" or "vegan", may be saddened to learn that these product distinctions are used to move staple products from competitive markets toward less-competitive, more monopolistic markets. This isn't a legitimacy judgement of these labels -- whether these labels are legitimate or fraudulent, they are certainly used to create product differentiation, which is a defining feature of less-competitive, more monopolistic markets (which shift advantage to the seller).
Sources:
Investopedia, "Examples of Oligopolies"
Science Daily, "Chumash Indians were using highly worked shell beads as currency 2,000 years ago"
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