In most economic textbooks and lessons we teach four market structures. Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. And we tend to get told that these structures are completely independent and unique from each other. However, this can cause some confusion amongst students, especially those who actually stop and think about it for a minute or two!
Firstly it is fairly obvious that no firm in the real world necessarily has all the characteristics of one of these market structures. For example take a small restaurant in medium sized town. What market structure does it belong to? Well, there will be lots of other restaurants, there are some barriers to entry and exit, there is some customer loyalty etc. So that suggests it is Monopolistic. But what if it is the only Thai restaurant in that town? Does that make it a monopoly? What about customers’ ability to drive to other towns? Now it may face 1000s of competitors is it therefore perfect competition? What if it part of a chain of restaurants? Is it now oligopoly?
Simply put a firm rarely has all the characteristics of a single market structure and teaching the market structure as being complete discreet from each other isn’t always very helpful.
Far better is to think of it as a continuum. Down one end you have the theoretical idea of a perfectly competitive market and down the other a firm with true monopoly power. In between you have the monopolist and oligopoly. Most firms will fit broadly into one category but will no doubt have characteristics of the others depending on how you think about the market. (An obvious example is geographical scale, a firm can have a local monopoly but be part of a monopolistic structure at wider geographical scale.)
Thinking about it this way is also useful when it comes to essays. You won’t get caught up worrying that the firm or industry you are writing about doesn’t have all the characteristics of specific market structure. Rather you can embrace the complexity of it and start to debate which structure is most suitable. This is good as it leads you into that higher order evaluative thinking that examiner love!