Market Structure is the one of the important elements to understand how market will function determine the behavior of firms in the market and the outcome that will be produced by the market. In economics term, market structure is the number, size, kind and distribution of buyers and sellers. According to Porter (1985), another tool to analyse a company's market structure, which includes the bargaining power of buyers, bargaining power of suppliers, threat of new competitors' entering into the market, threat of substitutes and intensity of competition. Four types of market types or structures are perfect competition, monopoly, oligopoly and monopolistic competition.
Monopolistic competition is a mixture of perfect competition and monopoly, because they sharing some of the features of each. Competitive markets provide effective results, monopoly markets show risk losses. Monopolistic competition is somewhere in between, not as efficient as pure competition but less risk loss than a monopoly. In monopolistic competition market has three fundamental characteristic which is; many buyer and seller, seller offer a differentiated product and seller can easily enter or exit the market.
In monopolistic competition there are many firms in the market but not as many as in perfect competition market. In perfect competition, the existing of many buyer and seller influence the market price but in monopolistic competition seller cannot influence the market price. Monopolistic firms face non-price competition and firm have some power to control their own production price. This is because goods that are produced can be differentiated from one another. Therefore, even though firms raise the price, there are still customers will purchase the goods they produce. On the other hand, if firms reduce the price, sales can be increased but will not be able to attract all the customers from competitors. Monopolistic firms have the freedom to enter and exit the industry quite easily. This is because new firms can produce different types of goods. Usually new firms succeed in entering a monopolistic market by producing goods that are better in quality, they run promotions and also advertise. The personal computer industry in Malaysia can be said to be in the monopolistic competition market. There are many brands in the market such as Compaq, Acer, Apple, DELL, Toshiba and so on.
Lastly is Oligopoly market. Oligopoly is a market where there are a few sellers and buyers and firm are influence which one another. These markets are not monopoly because there is more than one seller, but there also not a monopolistic competitor either. In other word, there are a few firm dominate the market. For example, in the city there is many of restaurants, this situation we called as the 'market meals' under monopolistic competition. But, if we define as the 'Thai restaurant in the city' there may be one or two restaurant. So, this few market we categorize as an oligopoly market.
Others characteristic of oligopoly is goods that they produced are same or almost the same. So that, price are depends on the cooperation among the firm. They have the power to set high price toward their product. On the other hand, if firm not give the cooperation, the price in the market will be kept lower and less stable. There are big barriers to entry by new firms to join the oligopoly. This doesn't mean that new firms cannot enter the market, but those firms will face difficulties such as the need for huge capital investment and old firms that already have secure position in the market. In an oligopoly market, firm are not competed with their product price but normally by their advertisement. The good advertising will get customers who are loyal to their product and also can increase their sales. The objective of make an advertisement is to explain, persuade or influence their customer about the product and also can help to maintain their relationship. Example of oligopoly in Malaysai is petroleum industry. They are categorizing as an oligopoly because there are few firms that control the market such as Shell, Petronas, Esso and so on. This firm are competed among them to control market. They also depend on each other to decide the selling price.
Overall, we are discussing about four type of market structure which is perfect competition, monopoly, oligopoly and monopolistic competition. The difference for each market structure can be determined by looking at characteristics such as the number of firms in the industry, the similarity or standardization of good they produced, the way firm decide the price, the barrier to enter and exit each market and the freedom to make decisions. By understanding each characteristic, we can understand the behavior of the firm.