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Market structure refers to nature of a market and examines its characteristics, including customers, costs, and competition. Generally, markets are divided into four structure types: oligopoly, monopoly, monospony, and perfect competition. Monopoly, oligopoly, and monospony are types of imperfect competition that exist in contrast to the perfect competition market structure. Market structures are used by marketers and economists to make predictions about the economic future of a business or market.
Perfect competition can also be called pure competition. The perfect competition environment is theorized to be one that creates the lowest price for the consumer. In a perfect competition system, every merchant can get into the market for free. There are a number of buyers and sellers offering essentially the same product engaging in price wars and attempting to offer the lowest price to the consumer.
Oligopoly is a market structure involving a relatively small number of sellers on the market who can control the price of their goods. When an oligopoly results in collusion, or secret deals, among the participating companies, the result can be control of prices. An example of a well-known oligopoly would be the gasoline industry, in which only a few companies dominate the market and have the opportunity to collude to control prices. An oligopoly usually forms either because the cost of getting into a business is high or because rich competitors dominate the market with a big product promotion budget.
A monopoly is a market structure in which one company has all of the market, or nearly all of it. Though it is often seen as a forced market structure condition, a monopoly does not always have to be caused by unsavory competitive practices; it can sometimes happen by itself. When a monopoly happens because everybody else supplying a product or service has gone out of business, this is called a natural monopoly. A monospony is a market condition in which there is one buyer with many options offering the same product or service. In these cases, the buyer tends to have more power because the business is vital to the seller.
Changes in technology and business can transform the market structure of an industry. The oligarchic market that houses the record industry has seen a transformation with the advent of home computers bearing simple recording technology combined with the development of the Internet. Previously, the high cost of recording equipment and development and promotion gave the record industry control over the music market. With new, cheaper technology, an Internet-savvy recording hobbyist with some extra money can now build a fan base and get money for her work without the help of a record company or contract.