Two firms can face identical costs and behave completely differently. One prices at cost and makes just enough to stay in business; the other charges double and makes a fortune. Nothing about their factories explains it. What differs is the market around them: how many rivals they have, how easily new firms can arrive, and whether customers can tell one product from another. Market structure is the study of how those conditions determine behaviour.
Three features define a market structure. The number of firms, which determines whether any one of them can influence price. The ease of entry and exit, which determines whether high profits attract competitors. And whether the product is identical across firms or differentiated, which determines whether customers will switch on price alone. Everything else follows from these three.
Monopoly
A market dominated by a single seller, protected by barriers to entry, which is able to set the price rather than accept a market price.
A competitive market has many firms selling similar products with easy entry. No single firm can raise its price without losing customers to rivals, so each accepts the price the market sets. Profits are competed away over time, because whenever they rise above the normal level new firms enter. The results for consumers are low prices, choice and pressure on firms to be efficient. The costs are that firms may be too small to reach economies of scale, and may lack the profit needed to fund research.
A monopoly faces no direct competitor. Barriers to entry keep rivals out: legal barriers such as patents and licences, control of an essential resource, very high set-up costs, brand loyalty built by advertising, or economies of scale so large that a newcomer producing on a small scale cannot match the incumbent's costs. A monopolist can restrict output and charge a higher price than a competitive industry would, so consumers pay more and get less. Against that, a monopolist may achieve lower costs through economies of scale, and its protected profits may fund innovation that competitive firms could not afford.
Monopoly questions are almost always two-sided and answers that treat monopoly as simply bad cap out in the middle bands. The two arguments that lift an answer are economies of scale, which can make a single large firm cheaper than several small ones, and the funding of research, which is why patents deliberately create temporary monopolies. Say what the monopolist does with its profit, not only that it earns it.
Measuring how concentrated a market is
An industry has total annual sales of $800 million. The four largest firms sell $260m, $180m, $100m and $60m. Calculate each firm's market share and the four-firm concentration ratio, then comment on what it suggests.
Which is the strongest barrier to entry protecting a monopoly?
In a competitive market, what happens when existing firms earn unusually high profits?
Draw a demand and supply diagram for a competitive industry in equilibrium. On a second diagram beside it, show what happens to price and quantity if the industry were taken over by a single monopolist that restricted output.
The comparison is the point: the monopolist produces less and charges more. Keep the demand curve identical on both diagrams, because the change is in the supply side and the market's willingness to pay has not altered. This is the intuitive version of a comparison made precisely with cost and revenue curves at A Level.