Business Economics · Price Determination in Different Markets

Comparing Market Structures and Pricing Practices

Q: What is the difference between monopoly and monopsony?

A monopoly has a single seller of a product. A monopsony has a single buyer, for example one employer hiring most of the local labour. Both have market power, but on opposite sides of the market.

Q: What is duopoly with an example?

Duopoly is a market with only two sellers. Each firm's decisions affect the other. A market where two firms supply the whole of a product in a region is a common textbook example.

Q: Which market structure is the most efficient?

Perfect competition is taken as the efficiency benchmark. In equilibrium, price equals marginal cost and, in the long run, equals minimum average cost. Other structures tend to have higher prices and lower output.

Q: Is monopolistic competition the same as monopoly?

No. Monopolistic competition has many sellers, differentiated products and free entry. Monopoly has one seller and barriers to entry.

Updated 1 October 2026 · Fact-checked

Market structures differ in the number of sellers, product type, entry barriers and control over price. Perfect competition gives P = MC and the most efficient outcome. Monopoly, monopolistic competition and oligopoly give sellers price power. To solve MCQs, spot the feature given in the question, then match it to the structure.

Understand Comparing Market Structures and Pricing Practices

A market structure describes how a market is organised. The main features are the number of buyers and sellers, whether products are identical or differentiated, how easy it is to enter or leave, and how much control a firm has over price.

In perfect competition, there are very many sellers and the product is homogeneous. Entry is free. Each firm is a price taker, so its demand curve is horizontal and P = AR = MR. In monopoly, there is one seller, no close substitutes and barriers to entry. The firm is a price maker and its demand curve slopes downward, so MR is below AR.

In monopolistic competition, there are many sellers with differentiated products and free entry. Firms have some price power, but it is limited by close substitutes. In oligopoly, there are few sellers and they depend on each other. Firms often avoid price changes, which is why the kinked demand curve idea is used. Duopoly is the special case of oligopoly with exactly two sellers.

The buyer side can also be concentrated. A monopsony is a market with a single buyer, for example one large employer hiring labour in a town. A monopoly is one seller. A monopsony is one buyer. Oligopsony means a few buyers. Bilateral monopoly means one seller facing one buyer.

On efficiency, perfect competition in long-run equilibrium produces at P = MC and at minimum average cost. Monopoly sets MR = MC, but price is above MC, so output is lower and price is higher than under competition. Monopolistic competition has price above MC and excess capacity in the long run. Firms in monopoly, monopolistic competition and oligopoly are said to have market power.

Key formulas to remember

Profit-maximising rule (all structures): MR = MC, with MC cutting MR from below; Every profit-seeking firm uses this rule. The structure only changes what MR looks like.
Perfect competition: P = AR = MR = MC (equilibrium); Long run also gives P = minimum AC and zero abnormal profit.
Monopoly: P > MR, and at equilibrium P > MC; Price is read from the demand curve (AR) at the MR = MC output.
Monopolistic competition, long run: P = AC, P > MC; Normal profit only, because of free entry. Output is below the minimum-cost level.
Lerner index of market power: L = (P − MC) ÷ P; Zero under perfect competition. Higher values mean more market power.
Terms to remember: Monopsony = 1 buyer; Duopoly = 2 sellers; Oligopoly = few sellers; Oligopsony = few buyers; Most MCQs test these definitions directly.

How to solve Comparing Market Structures and Pricing Practices questions

Use this method for any MCQ that asks you to identify or compare market structures.

1Read the question and underline the clue: number of sellers or buyers, product type, entry, or price control.
2Decide if the clue is about sellers or buyers. One buyer means monopsony, not monopoly.
3Match the clue to a structure. Identical product and free entry means perfect competition. Differentiated product and many sellers means monopolistic competition.
4If the question is about price or output, recall the rule: P = MC for perfect competition, P > MC for the others.
5For efficiency questions, perfect competition is the benchmark. The others produce less and charge more.
6Check absolute words like 'always' or 'only'. Eliminate options that overstate.
7If two options remain, pick the one that matches the exact definition from the chapter.

Quickest way: Clue-to-structure matching

When to use it: Use this for one-line definition or identification MCQs, which take under a minute.

Memorise a one-line clue for each: many + identical = perfect; one seller = monopoly; many + differentiated = monopolistic; few + interdependent = oligopoly; two sellers = duopoly; one buyer = monopsony.
Match the key word in the question to the clue and mark the option.
Eliminate options with the wrong count (for example 'two buyers' or 'many sellers' for a duopoly).
For price comparisons, remember that perfect competition gives the lowest price (P = MC). The others (monopoly, oligopoly, monopolistic competition) give a price above MC. Do not assume a fixed ranking among them.
A wrong answer costs 0.25 marks, so guess only after you have eliminated at least one or two options. With two options left, guessing still has positive expected value (0.5 × 1 − 0.5 × 0.25 = 0.375 marks).

Common mistakes in Comparing Market Structures and Pricing Practices

Treating monopsony as the same as monopoly.
The names look alike and both involve a single party.
Fix: Monopoly has one seller. Monopsony has one buyer. Link 'sony' with buying.
Saying a monopolist can fix both price and quantity freely.
Students read 'price maker' as unlimited power.
Fix: The monopolist chooses one point on the demand curve. Setting a higher price reduces quantity sold.
Writing P = MR for monopoly.
The perfect competition rule is applied everywhere.
Fix: P = MR holds only for a price taker. For a monopolist with a downward-sloping demand, MR < P.
Calling duopoly a type of monopoly.
The prefix 'duo' and 'mono' are confused.
Fix: Duopoly is a form of oligopoly with two sellers. Both firms depend on each other.
Believing monopolistic competition has no competition.
The word 'monopolistic' suggests a monopoly.
Fix: It has many sellers and free entry. Monopolistic only refers to the brand-based price power.
Assuming every non-competitive market earns abnormal profit in the long run.
Students link market power with permanent profit.
Fix: Under monopolistic competition free entry removes abnormal profit in the long run. A monopoly can keep it due to entry barriers.

Worked examples

Example 1

A town has only one factory that hires all the local workers. Which market form is this on the labour side? (a) Monopoly (b) Monopsony (c) Duopoly (d) Oligopoly

Show the solution

The factory is a single buyer of labour.
Workers are the sellers of labour, and there are many of them.
A single buyer is called a monopsony.
Monopoly refers to one seller. Duopoly and oligopoly refer to a few sellers.

Answer: (b) Monopsony

Example 2

In the long-run equilibrium, which market structure has price equal to marginal cost? (a) Perfect competition (b) Monopoly (c) Monopolistic competition (d) Oligopoly with a kinked demand

Show the solution

Perfect competition has P = MR since each firm is a price taker.
The firm sets MR = MC, which gives P = MC.
In monopoly, MR is below P, so P is above MC.
In monopolistic competition, the demand curve slopes downward, so P is above MC.
In oligopoly, P is generally above MC because firms face a downward-sloping demand curve.

Answer: (a) Perfect competition

Example 3

A market has two firms selling petrol-like fuel. Each firm must consider the other's reaction before changing price. This market is best described as: (a) Perfect competition (b) Monopolistic competition (c) Duopoly (d) Monopsony

Show the solution

The market has exactly two sellers.
They are interdependent, as each reacts to the other.
Two sellers in an interdependent market is a duopoly, a special case of oligopoly.
Perfect and monopolistic competition have many sellers. Monopsony is about a single buyer.

Answer: (c) Duopoly

Exam tips

Definition-type MCQs are common, so memorise the seller and buyer counts for each form.
Expect comparison questions on price, output and efficiency. Treat perfect competition as the benchmark.
Watch for 'always' and 'never' in options. Market structure statements usually have conditions.
Be ready for 'which is not a feature' questions. Check each feature against the structure one by one.
Link this topic with the chapters on monopoly and oligopoly so the details stay consistent.

Practice questions from Price Determination in Different Markets