Types of Market

Market, in economics, refers to market structures that are different from each other on the basis of degree and nature of competition. A number of factors can determine the type of market in an economy. These factors could be the number of buyers and sellers, ease of entry and exit in the market, degree of differentiation of goods and services, and more. Primarily there are four types of markets on the basis of these factors.

Types of Market

Following are the main types of markets:

Monopoly

In a pure monopoly, there is only one seller for a particular product or service. The monopoly firm has complete control over that market. Or, we can say, the monopoly firm determines the price and supply of the product and services in that market. Consumers don’t get many choices in such a market, which is why such a market is undesirable. Also, market forces become irrelevant in such a market structure.

The monopoly firm has a sole claim to the ownership of the resources, as well as on patents, copyright, and licenses. Moreover, such a structure features high initial setup costs. And this discourages other firms from entering the market. This type of market, however, is scarce in reality.

Microsoft, Windows, and DeBeers and diamonds are good examples of such a market.

Oligopoly

This type of market features a few companies. Though there is no clarity on the number of firms in this market, there are usually three to five dominant firms that set the norm. Other firms follow the norms set by the dominant firms. Since there are a few firms, the strategy of one firm depends on the other. For example, if one company reduces the price of its product, others may be forced to cut prices as well.

Another distinctive feature of this market is that firms in this market can choose to compete with each other or collaborate. If the firms collaborate, they are able to set prices to maximize profits. Also, there are barriers to entry in this market, and this makes it harder for new firms to enter the market.

The steel, Aluminum, and Film industries are good examples of this type of market.

Perfect Competition

This is the most popular type of market where there are many number of sellers and buyers. Usually, most sellers are small sellers who compete with each other for the buyers. There is no one big seller that can influence the price and supply in the market. So, we can say that the firms are price takers and buyers are the price setters.  

Other features of this market are that sellers sell (homogeneous) goods and services, and there is no entry or exit barrier. Also, buyers have all the information on the products they are buying, including the price and branding. In a perfectly competitive market, the demand and supply forces help in determining the prices and supply of the goods and services in the market.

Foreign exchange and agricultural markets are good examples of such a market.

Monopolistic Competition

This type of market is more realistic and popular in the real world. It is the combination of monopoly and competitive market.

Such a market has many buyers and sellers who don’t offer homogeneous goods and services. The products that they offer are similar, but they are slightly different from each other. In the market, both consumers and sellers enjoy some degree of power. Buyers get choices, while sellers enjoy some power to charge a marginally higher price as they differentiate their product from others.

This market features comparatively low entry and exit barriers, and strategies made by one firm have minimal impact on others. Restaurants, hotels, and pubs are good examples of this type of market.

The below table will help to explain the above types of markets in an easy and simple manner.

	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
No. of Sellers	Many	Less than firms in perfect competition	Few	One
Type of Product	Homogeneous	Differentiated	Differentiated	Single
Entry Barrier	No	Low	High	Very High
Price Control	No	Low	Low	High
Example	Farm products	Retail stores	Steel, Aircraft	Utilities

Other Types of Market

Apart from the above four main types of market, there are three more markets. These markets are less popular, but it is important for the reader to know about them. These markets are:

Oligopsony

Such a type of market features a couple of big buyers. This characteristic of the market gives power to the buyers over the vendors, as well as allows them to push the prices down. Supermarkets are a good example of this. For instance, Walmart has such a big customer base that it can put pressure on vendors to reduce the price of the product.

Natural Monopoly

Such a monopoly comes into existence because of massive start-up costs or huge economies of scale in a specific industry. Usually, such a firm is the primary supplier of a good or service to an industry or a region. Thus, such a market has a high entry and exit barrier for potential contenders.

Generally, such monopolies exist in industries that need technology or similar factors to operate. The utility service industry, like water, electricity, sewer services and more, are a good example of such a monopoly. 

Monopsony

It is a market where there is just one buyer. Such a market is common in regions where one company buys all the goods or services offered in that region. For example, a flour company buys all the wheat that farmers produce in a specific region. Or, a sugar factory buys sugarcane from all the local farmers.