market structures economists identify several market structures including perfect competition monopolistic competition duopoly oligopoly and monopoly we can identify the key differences in each market form which revolve around knowledge barriers to entry number of firms product differentiation level of competition price level of profits efficiency levels and welfare for perfect competition knowledge is complete there are no barriers to entry there are infinite numbers of competitive firms products are identical firms are price takers super normal profits are available in the short run but not long run firms are allocatively efficient in both the short run and long run but only productively efficient in the long run and welfare is maximized firms operating under conditions of perfect competition take their price from the whole market or industry in the short run supernormal profits are possible however supernormal profits encourage new entrants shifting industry supply and pushing down price eventually supernormal profits are eroded for monopolistic competition knowledge is only partial and asymmetric minor barriers to entry exist there are large numbers of independent firms products are differentiated firms are price makers and can vary prices super normal profits are available in the short run but not long run firms are not allocatively or productively efficient in the short run and long run and there is a welfare loss as price is greater than marginal cost in the long run new firms will be attracted into the market by the thought of super normal profits this increases competition for existing firms some consumers will switch to these new entrants and demand for the product of existing firms will fall existing firms that cannot differentiate themselves will leave the market this process continues so that the marginal firm operates just where marginal revenue equals marginal cost and only makes normal profits at price p1 for duopoly and oligopoly knowledge is only partial and not symmetrical with firms able to control information major barriers to entry exist there are just a few interdependent firms products may be differentiated firms may engage in collusion price tends to remain sticky supernormal profits are likely firms are not allocatively or productively efficient and there is a welfare loss as price is greater than marginal cost the oligopolist faces two demand scenarios firstly when demand is elastic to a price increase and secondly when a demand is inelastic to a price drop profit maximization occurs where mc cuts mr which is the vertical section between a and b the level of profit depends upon the position of the atc curve for monopoly knowledge is asymmetric with a monopolist able to control information major barriers to entry exist including limit pricing vertical integration along the supply chain and control of key resources including infrastructure firms are price makers super normal profits are likely firms are not allocatively or productively efficient and there is a welfare loss as price is greater than marginal cost given the likelihood that monopolists may act against the interests of consumers and the national economy they may be nationalized or tightly regulated through price controls profit controls and special taxes setting standards finding anti-competitive practices and establishing competition regulators such as the federal trade commission in the us and the competition and markets authority in the uk