Types of Market: How Market Plays An Important Role?

In general, a market comprises buyers and sellers. They meet at a common place to exchange goods and services in exchange for money. In other words, where a buyer and seller meet and a successful transaction happens. Thanks to technology, a market can now either be physical or virtual. Here in this article, we will discuss types of market and how it plays an important role in growing small businesses.

But, why does one need to study a market or its types? Why it is so important?

Here, we have covered all the imported relevant information about the market and its types. It’s not just a place where people trade, a lot is happening and you need to know about it in the field of marketing.

So, What is a Market?

In layman’s language, a market can be defined as a medium whereby parties engage in exchange. One sells goods and services in exchange for money from buyers. According to Investopedia, the market can be defined as a place where two parties can gather to facilitate the exchange of goods and services.

So, a market can be further differentiated based on its nature.

There are different markets comprising varying sellers and buyers. They form different structures, hence creating a type of market with comparable characteristics.

List of 5 Different Types of Market

There are primarily five major types of market: Perfect Competition, Monopoly, Oligopoly, Monopolistic Competition, and Monopsony.

1. Perfect Competition

A general market with many buyers and sellers. It’s the most common market with several buyers and sellers. In such a type, theoretically, it is never possible for a seller to affect the current selling price in the market. As already there are so many sellers, buyers will always have other choices.

2. Monopoly

It’s a market where only one seller exists but has many buyers. In a monopoly market system, the seller can sell its goods or services at the prices he decides to. No competition exists in a monopoly market and the buyer is bound to pay whatever the seller charges.

3. Oligopoly

In an oligopoly market, the sellers are limited but not one, unlike a monopoly. In such a market, there is an infinite number of buyers but only a handful of sellers. Here the pricing is not controlled by a single seller, but without proper diligence often oligopolists team up to manipulate pricing like a monopoly market.

4. Monopolistic Competition

It can be defined by combining the market-defining monopoly and perfect competition. In monopolistic competition, there are several sellers but are different. They produce or sell different items in a perfectly competitive market. So, again the price is largely controlled by the sellers unlike in a competitive market.

5. Monopsony

Like a single seller, there are markets where only a singer buyer exists. Theoretically, monopsony can be defined as a market with only one buyer for a particular product or service but has different sellers offering the same. Here the buyer has the power to choose the best price for the same product.

These are the theoretical definitions of different types of markets. So, why it is really important to understand a market before starting a business?

Why It’s Important to Understand the Types of Market?

When you choose to start a business, a lot of related factors play an important role. This includes the type of market you operate in. You can either start a business by offering a product or a service. Now, the rest depends on what you offer in that specific market.

Supposedly you produce ham. They are of great quality and your pricing is also affordable.

But will that work in a market that has no demand?

Definitely no.

But what if there’s demand, but the market has a lot of similar producers? So, understanding the type of market is crucial for any new business.

It’s not only limited to a new business but a growing or successful business should also keep researching what’s changing. In a market like now aided by unlimited options and availability, a business should capitalize on its target very carefully.

How Does a Market Help to Grow a Business?

Understanding the type of market offers you all the gaps i.e. business opportunities. In the last example, there’s a ham producer who wants to enter a perfectly competitive market with a lot of sellers producing the same type of product.

One needs to find out what a market misses out on which he wants to offer. Maybe the ham sold in the market comes with a lesser shelf life.

The new producer can now focus on something which is not available in this market, longer shelf life. He can invest in quality packaging to offer a longer shelf life for his in the market.

With an understanding of the market, he is going to sell his ham will offer him an added advantage with a special USP. While no ham seller in this market was offering a longer shelf life, he can sell his ham against the competition with something this market misses out on.

Getting to know a market before starting a business opens up new possibilities. This helps you grow in an already competitive market. The same applies to any type of product or service.

Market Structure: Seller Entry Barriers

In a monopoly or oligopoly market structure, a new seller cannot enter the market easily. There are a lot of barriers and even the existing producers create a lot of problems. Also due to an established market and steady flow of distribution of services or products, a new seller finds it very difficult to exist in such a situation.

The least competitive markets are oligopoly and monopoly.

Due to the absence of any solid competitor or producer, the sellers become very strong in the market. In such markets, regulatory bodies should make sure that the prices or production are not manipulated.

Market Structure: Buyer Entry Barriers

Practically such markets don’t exist, but in a monopsony market structure, there’s a limited number of buyers with multiple producers. You can distinguish between the market structures by comparing the number and size of buyers and sellers in the market.

The other factors affecting a market structure are the type of goods and services being sold.

To sum up, studying the type of market helps you to understand the ‘market potential’ and how one should be selling goods or services in a particular market.