Market Structure

Market structure refers to the characteristics of a market that determine how price, quantity, and surplus are distributed among firms and consumers — principally the number of sellers, the degree of product differentiation, and the conditions for entry and exit. Topic 2 organises the major structures into a ladder from maximum to minimum market power: monopoly (single seller, pure price maker), oligopoly (few sellers, strategic interaction), monopolistic competition (many sellers, differentiated products), and perfect competition (many sellers, homogeneous product, price takers).

The Lerner Index $L = (P - MC)/P = 1/E$ translates this taxonomy into a single number: $L = 0$ at Perfect Competition, $L \to 1$ at maximum monopoly power. As the number of Cournot competitors increases, the equilibrium converges toward the competitive benchmark. See Topic 2 — Equilibrium in Different Market Structures for the full ladder and welfare comparisons.

When to use

Identify market structure before choosing an equilibrium model. The key diagnostic questions are: how many firms are there; are products homogeneous or differentiated; do firms compete on price or quantity; is there a first mover? The answers map directly to Bertrand, Cournot Competition, Stackelberg Model, or Monopoly — each with distinct price, quantity, and profit predictions.