What Are Market Types? Four Types Of Markets To Build A Business

A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Market Type	Description	Characteristics	Examples
Perfect Competition	A market with many small firms selling identical products.	– Large number of buyers and sellers – Homogeneous products – Perfect information – No barriers to entry or exit	Agricultural markets, stock exchanges
Monopoly	A market dominated by a single seller with no close substitutes.	– Single seller – No close substitutes – High barriers to entry – Price maker (control over prices) – Limited consumer choice	Local utility companies, patents, copyrights
Oligopoly	A market dominated by a few large firms that compete strategically.	– Few large firms – Interdependence – Product differentiation (often) – Strategic behavior – Barriers to entry and exit	Automobile, airline, and telecommunications industries
Monopolistic Competition	A market with many firms selling similar but not identical products.	– Many firms – Differentiated products – Limited market power – Some control over prices – Relatively easy entry and exit	Restaurants, clothing brands, personal care products
Duopoly	A specific type of oligopoly with two dominant firms.	– Two large firms – Interdependence – Strategic behavior – Limited competition – Barriers to entry	Boeing and Airbus in the aircraft manufacturing industry
Monopsony	A market with a single buyer that has significant control over prices and quantities.	– Single buyer – Many sellers – Price maker for inputs – Significant control over quantities purchased	A large retailer purchasing goods from suppliers
Bilateral Monopoly	A market with one seller and one buyer, both with significant market power.	– Single seller and single buyer – Bilateral monopoly power – Negotiation of prices and quantities – Unique and specialized transactions	Labor unions negotiating with employers

Why does it matter to understand the market type?

Understanding the market type will change the way you’ll need to structure the organization, whether or not you’ll need outside funding and how to position your business in the marketplace.

Course: The FourWeekMBA Business Model Innovation Flagship Course

Market types in classic economics

In classic economics, there are four main types of markets:

Monopoly

In a monopoly, there is a single supplier for a product/service, thus able to influence market demand.

One example is how Google dominated the search market.

And how it turned Google into the most profitable advertising machine ever created.

Oligopoly

In this scenario, a few suppliers control the market demand.

Take the car industries, which for decades has been dominated by a few key global players, which pretty much determined the market.

Perfect competition

In this scenario, buyers and sellers are present in equal measure.

The classic example is a restaurant business, in a local neighborhood, competing with many other restaurants across each other.

The restaurant business is a clear example of perfect competition, where it gets harder and harder to differentiate as more and more restaurants offer the same thing.

Monopsony

In this scenario, a single buyer influenced the market demand.

Think of how in the rocket industry, the US government is the primary buyer (even though private contractors recently entered the industry).

Market types in the startup world

Entrepreneur and professor Steve Blank usually defines market types according to four main contexts.

Existing market

In this case, both demand and supply are established.

Meaning there are already various established companies that have developed the market, and therefore also the customer is well-defined.

Thus, a new entrant selling a product won’t have to explain to existing customers what the product is about.

This type of market is typical in industries that have already matured in a way. Thus their structure is based on well-defined companies and customers.

As I’ll explain, in this type of market, bootstrapping (thus growing the company via customer acquisition) might be the norm unless you’re trying to come up with a whole new solution for that existing market.

In the case in which you’re using disruptive technology to enter this existing market, you might need massive bottom-up traction.

Take the case of how OpenAI has used ChatGPT to completely redefine the search market (which had been the same for decades) through conversational interfaces.

Resegmented market

In this scenario, the market exists and it’s also already developed. However, that is dominated by one or a few players.

Thus, for the new entrant, it will be extremely hard to compete against the dominant players.

In this type of market, as we’ll see, niching down (identifying a very small audience to start from) is a very effective strategy.

In fact, the last thing you want to do is to compete against a large company with massive economic resources.

Instead, a smart approach is that of identifying value gaps.

So, all the possible ways in which you can add value in the market that the dominant player can’t.

For instance, a search player like DuckDuckGo has entered the market by targeting users interested in privacy.

Which a player like Google can’t focus on, as its whole business model is based on tracking users to sell ads.

Other answer engines like Perplexity AI, Neeva, and You.com are using the same strategy to enter the search market.

This bottom-up disruption can be very powerful, as a niche can organically turn into the future dominant market!

New market

Here competitors do not exist and it’s very hard to define the customer.

In this case, a major effort goes into developing the market in the first place.

For instance, a master in developing new markets has been Apple, that thourhg its business platform strategy has created the most valuable business ecosystem in the world.

Market development indeed is one of the hardest things in business.

As it requires a combination of bottom-up product adoption, which entails also the commercial viability of the technology, combined with distribution, to enhance the amplification of the new product to gain enough traction to create a whole new market!

Creating and dominating new markets is the dream of most tech businesses, and yet, only a few are really capable of this achievement.

Most companies instead can do well in all other types of markets.

Clone market

In this type of market, due to geographical or cultural barriers, a business model can be cloned and transposed.

Take the case of how Baidu of the early days copied and pasted the playbook of Google.

Or perhaps how, these days, China’s BYD is copying and pasting Tesla’s playbook!

Defining your market type

There are many other ways we can categorize the kind of market we are in.

But it’s important to start with a simple exercise in mind, to understand the territory in which you’re operating. 

For that matter the market type will determine:

• The time to market for our product/service and whether you can test quickly and cheaply.
• The market readiness to accept our product/service and thus the way you’ll need to structure our organization to market that product.
• Positioning.

Let’s look at each of those based on the market type.

Time to market: how long will it take to launch?

Market types influence also the time to market because if you’re operating on an existing, defined market, with defined demand and existing players, in most cases the product you’re trying to build might comprise technology, know-how and its components that might be easily available.

In that case, the time to market might be relatively short, thus it’s possible to build a product/service with little financial resources.

And based on it, we can answer the following:

Do we need venture capital or external funding?

In a new market or resegmented market (and in some cases in a clone market) the company you’re trying to build might actually need external funding, be it government funding, venture capital, a product development roadmap within a larger organization or as a joint venture.

The primary reason is it’s very hard to get any feedback from the market, as there are no well-defined customers in the first place.

Think of companies, that as of now are trying to build a viable business in the blockchain forming industry. Those companies, in most cases, will need funding, as the technology and application might be sounding but not ready yet to be marketed.

Can we talk to potential customers?

In the opposite scenario, where there is an existing market with well-defined rules, customers and competitors, and where the product you’re trying to build is not complex, or technologically advanced, you can demo it quickly to potential customers, thus you better bootstrap it.

Experimental process: can we get ahead of feasibility?

Imagine the case the product will be ready in a few years, are we still sure it makes sense to test it in the first place?

The market might change quickly, and what works today might not work in the future. Indeed, timing is extremely important and running tests on products that might be ready in a few years might be a waste.

Does it mean you won’t need testing before launch? You do need to test whether there is at least interest from the market or to figure whether the product you developed is the right commercial use case (among the potential applications it can have).

Indeed, among the greatest failures for new products are lack of interest from potential customers, poor distribution and inability to generate excitement around a potential new product (demand generation).

Therefore, while testing a product before starting the development is great for those products who are not creating new industries in the first place (think of a product that improves 2x compared to existing alternatives).

For those products who are creating whole new industries, it becomes harder to use an experimental process where it’s possible to gather feedback from existing customers (there are no existing customers).

In some of these scenarios, venture capitalists, governments or organizations with massive budgets are betting on the future. For instance, if you take a company like Alphabet, within it has an investment arm, placing bets on how the future might look like.

Whether the market will like it, it’s not an issue. The primary issue is whether it will work; if it will create a new market and how big that might be.

Market readiness: are we still talking enterprise?

When building up a valuable business there are several steps to take, depending on the stage your company is at and the complexity of the product and how ready is the market to accept that product.

Some of the questions you want to answer when dealing with market readiness are about the kind of organization structure you need to build a successful company based on the customer type.

In that case, you need to understand whether you’ll need to deal with a large enterprise customer, or you can push the product already as a consumer product.

In short, in a new market, there might be a few key customers, before the market expands and reaches its peak. And as it does you might be able to move from enterprise product to consumer product.

But in between, you will need to understand the market type to structure your organization.

Are we investing in marketing and automation?

In general, if a product can be launched on a large existing market, it can work well as a consumer product. Thus, at the organizational level, it makes more sense to structure the organization around marketing and product development to build a large customer base (consumer product/platform/service).

Do we need salespeople instead?

If in a market there are a few clients, mostly made of complex organizations or large businesses, in that case, you better structure your organization with competent salespeople, able to close deals and product development instead will be about a tailored product, customized to clients’ need (enterprise product/platform/service).

Positioning: broad, niche or microniche?

In most cases, when a new brand is getting built the more it starts from a niche (unless you have massive budgets to burn) the better it will be able to grow organically.

That’s because none knows your company, and before it can scale, it needs an experimental stage, where it can gather feedback from a larger and larger audience.

However, positioning can be also defined by market types. A complex product in a new market will need to be defined by providing as much value as possible to a microniche, or a small set of customers.

A product launching on an existing market, which has well-defined demand, consumers and understanding of the product offered can be also tackled broadly.

The exception to all rules

In late 2019, Elon Musk launched the Cubertruck, which redefines the whole concept of the truck, not only from a functional standpoint but from a cultural standpoint.

If you are Elon Musk you can do that. And in any case, also Tesla is leveraging on existing know-how and distribution.

Thus, also in this exception, there are three key points to account for:

• Demand generation: Elon Musk is a celebrity, able to tap on a massive audience, and he’s built a name for launching breakthrough products.
• Tapping on existing know-how: While Tesla is redefining the concept of what a truck means (this is more cultural than functional), it is also tapping on existing facilities and know-how. In short, it has lower feasibility issues than, say, a company launching such a product from scratch.
• Tapping on existing distribution: Elon Musk also leverages an existing customer base eager to get hold of the next Tesla cool car.

Key takeaways

• Market types tell us the structure of the interactions between a group of consumers and producers, what’s the balance between those and if they are well defined in the first place.
• Market types can be classified in various ways. In classic economics, we have four types of markets (monopoly, oligopoly, perfect competition, monopsony). In the startup world, we can also redefine them according to the definition of potential customers (new markets, resegmented markets, existing markets, and clone markets).
• Market types will help us understand what kind of organization we are going to build based on time to market, the type of customer we’ll deal with and whether we’ll need external funding or we can bootstrap the business. Market types will also help in defining the positioning of our brand.

Key Highlights of Market Types and Their Significance:

• Market Type Definition: A market type refers to how consumers and producers interact within a given context. It’s determined by factors like consumers’ readiness to understand the product, the complexity of the product, the size of the existing market, and its potential for future expansion.
• Importance of Understanding Market Type:
  • Organizational Structure: Understanding the market type influences how you structure your organization.
  • Funding Needs: It determines whether external funding (venture capital, government funding, etc.) is needed or if bootstrapping is feasible.
  • Positioning: Market type influences how you position your business in the marketplace.
  • Time to Market: It affects the time it takes to launch a product or service.
  • Market Readiness: It informs the approach to marketing, automation, sales, and customer engagement.
• Classic Economics Market Types:
  • Monopoly: A single supplier dominates the market, influencing market demand. Google’s dominance in the search market is an example.
  • Oligopoly: A few suppliers control the market demand. The automobile industry, dominated by key global players, is an example.
  • Perfect Competition: Many buyers and sellers exist, often offering similar products. The restaurant industry exemplifies perfect competition.
  • Monopsony: A single buyer influences market demand, as seen in the rocket industry with the US government’s role.
• Market Types in the Startup World:
  • Existing Market: Both demand and supply are established, with defined customers. Common in mature industries, where product improvements or new solutions are needed.
  • Resegmented Market: The market exists but is dominated by a few players. Niche strategies and identifying value gaps are effective in this scenario.
  • New Market: No competitors exist, and the market needs development. Requires bottom-up product adoption, technological viability, and distribution.
  • Clone Market: Market models can be transposed due to geographical or cultural barriers.
• Factors Influenced by Market Type:
  • Time to Market: Depending on the market type, time to market for a product or service may vary.
  • Funding Needs: New and resegmented markets may require external funding, while existing markets could be bootstrapped.
  • Experimental Process: Experimental testing and feasibility are influenced by the product’s readiness and market type.
  • Market Readiness: Market type affects whether the product can be marketed as a consumer or enterprise product.
  • Positioning: Market type guides whether to focus on a broad audience, niche, or micro-niche.
• Exception: Elon Musk’s Cybertruck launch is an exception due to his celebrity status, leveraging existing know-how and distribution.
• Key Takeaways:
  • Market types define interactions between consumers and producers.
  • They can be classified based on classic economics or startup contexts.
  • Market types impact organizational structure, funding needs, positioning, time to market, market readiness, and more.
  • Understanding market types is crucial for successful business strategy and growth.

Related Concepts	Description	When to Apply
Perfect Competition	Perfect Competition is a market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, ease of entry and exit, and no market power. In perfect competition, firms are price takers, meaning they cannot influence market prices and must accept the prevailing market price as given. Likewise, consumers have full information about product prices and qualities and can make rational purchasing decisions based on price and utility. Perfect competition serves as a benchmark for analyzing market efficiency, consumer welfare, and resource allocation.	– When analyzing market efficiency or evaluating consumer welfare in competitive industries. – Particularly in understanding the characteristics of perfect competition, such as price-taking behavior, market equilibrium, and allocative efficiency, and in exploring techniques to apply perfect competition theory, such as supply-demand analysis, elasticity calculations, and market structure assessments, to assess the competitiveness of markets, determine market outcomes, and predict the effects of policy interventions or market interventions on consumer choice, producer behavior, and economic welfare.
Monopoly	Monopoly is a market structure characterized by a single seller or producer that dominates the entire market for a particular product or service. In a monopoly, the monopolist faces no competition and has significant market power to control prices, output levels, and market entry. Monopolies can arise due to barriers to entry, such as patents, economies of scale, or government regulations, and can result in higher prices, reduced consumer choice, and allocative inefficiency. Monopoly regulation aims to prevent abuses of market power and promote competition in markets.	– When assessing market power or evaluating pricing strategies in monopolistic industries. – Particularly in understanding the characteristics of monopoly, such as price-setting behavior, output restrictions, and deadweight loss, and in exploring techniques to analyze monopoly behavior, such as market concentration indices, pricing models, and consumer surplus calculations, to assess the effects of monopolistic practices on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to promote competition, innovation, and consumer choice in monopolistic markets.
Monopolistic Competition	Monopolistic Competition is a market structure characterized by many competing firms that offer differentiated products or services. In monopolistic competition, firms have some degree of market power to set prices above marginal cost but face competition from close substitutes and potential entry of new firms. Product differentiation allows firms to differentiate their offerings through branding, advertising, or product features, enabling them to charge higher prices and earn positive economic profits in the short run. Monopolistic competition can lead to product diversity, innovation, and non-price competition among firms.	– When analyzing product differentiation or evaluating market competition in heterogeneous industries. – Particularly in understanding the characteristics of monopolistic competition, such as product differentiation, price-setting behavior, and short-run versus long-run equilibrium, and in exploring techniques to assess monopolistic competition, such as market surveys, demand estimation, and brand valuation, to identify competitive strategies, market trends, and consumer preferences and to predict the effects of entry, exit, or product innovation on firm profitability, market shares, and consumer surplus in monopolistically competitive markets.
Oligopoly	Oligopoly is a market structure characterized by a small number of large firms or producers that dominate the market for a particular product or service. In oligopolistic markets, firms compete with a few rivals and face interdependence in pricing, output decisions, and strategic interactions. Oligopolies can arise due to barriers to entry, economies of scale, or collusion among firms, and can result in price rigidity, non-price competition, and strategic behavior among competitors. Oligopoly regulation aims to prevent anti-competitive practices and promote market efficiency and consumer welfare.	– When analyzing strategic interactions or evaluating market concentration in concentrated industries. – Particularly in understanding the characteristics of oligopoly, such as strategic interdependence, collusion potential, and price leadership, and in exploring techniques to study oligopoly behavior, such as game theory models, strategic pricing analysis, and market concentration measures, to assess the effects of oligopolistic competition on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to promote competition, deter collusion, and protect consumers in oligopolistic markets.
Duopoly	Duopoly is a market structure characterized by two dominant firms or producers that dominate the market for a particular product or service. In duopolistic markets, firms compete head-to-head and face strategic interactions in pricing, output decisions, and market entry. Duopolies can arise due to economies of scale, technological advantages, or strategic alliances among firms, and can result in price competition, product differentiation, and market segmentation. Duopoly regulation aims to prevent collusion and promote competition and innovation in markets.	– When assessing market rivalry or evaluating duopolistic strategies in two-firm industries. – Particularly in understanding the characteristics of duopoly, such as strategic rivalry, price leadership, and collusion risks, and in exploring techniques to analyze duopoly behavior, such as Cournot-Nash equilibrium, Bertrand competition, and Stackelberg leadership, to assess the effects of duopolistic competition on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to foster competition, deter anti-competitive practices, and enhance consumer choice in duopolistic markets.
Natural Monopoly	Natural Monopoly is a market structure characterized by economies of scale that result in a single firm or producer being able to supply the entire market at the lowest cost. In natural monopolies, the average total cost declines over the entire range of market demand, allowing the incumbent firm to operate efficiently and profitably without facing competition. Natural monopolies often arise in industries with high fixed costs, such as utilities, telecommunications, or infrastructure, where duplication of facilities is economically inefficient. Natural monopoly regulation aims to prevent monopoly abuse and promote efficiency and affordability in essential services.	– When assessing market structure or evaluating regulatory policies in utility or infrastructure industries. – Particularly in understanding the characteristics of natural monopoly, such as economies of scale, cost structure, and pricing regulation, and in exploring techniques to regulate natural monopolies, such as rate-of-return regulation, price caps, and incentive mechanisms, to ensure fair competition, efficient resource allocation, and consumer protection in natural monopoly industries and to balance the trade-offs between monopoly efficiency and consumer welfare in regulated markets.
Regulated Monopoly	Regulated Monopoly is a market structure where a single firm or producer operates in a monopolistic market but is subject to government oversight and regulation to protect consumer interests and promote economic efficiency. In regulated monopolies, the government sets prices, controls entry, and monitors quality to prevent monopoly abuse, ensure fair competition, and promote universal access to essential services. Regulated monopolies often operate in industries with natural monopolies, such as utilities, transportation, or postal services, where private competition is impractical or inefficient. Regulation aims to balance the interests of consumers, producers, and society in regulated markets.	– When evaluating market performance or analyzing regulatory frameworks in monopolistic industries. – Particularly in understanding the characteristics of regulated monopoly, such as price regulation, quality standards, and universal service obligations, and in exploring techniques to regulate monopolies, such as price caps, profit controls, and performance incentives, to ensure efficient resource allocation, consumer protection, and public welfare in regulated markets and to design policies or interventions to achieve social objectives and economic efficiency in monopolistic industries while balancing the interests of consumers, producers, and regulators.
Bilateral Monopoly	Bilateral Monopoly is a market structure characterized by a single buyer (monopsony) facing a single seller (monopoly) in a transactional relationship. In bilateral monopolies, both the buyer and seller have significant market power to negotiate prices, terms, and quantities, leading to strategic interactions and bargaining outcomes. Bilateral monopolies can arise in industries with few suppliers and buyers, such as agricultural markets, labor markets, or supplier-dominated industries, where transactions are bilateral and subject to bargaining or negotiation. Bilateral monopoly regulation aims to prevent market abuses and promote fair and efficient transactions between buyers and sellers.	– When analyzing market power or evaluating bargaining strategies in buyer-seller relationships. – Particularly in understanding the characteristics of bilateral monopoly, such as bargaining power, price determination, and transaction outcomes, and in exploring techniques to regulate bilateral monopolies, such as price mediation, contract enforcement, and antitrust enforcement, to ensure fair competition, efficient resource allocation, and consumer welfare in bilateral monopoly markets and to design policies or interventions to prevent market distortions and promote competitive outcomes in transactional relationships between buyers and sellers.
Contestable Market	Contestable Market is a market structure characterized by low barriers to entry and exit, where firms can enter or leave the market easily and compete with existing firms without significant sunk costs or penalties. In contestable markets, potential competition constrains the behavior of incumbent firms, even if they hold monopoly or oligopoly power, by threatening to enter the market and compete away excess profits. Contestable markets can exhibit competitive outcomes and efficient resource allocation despite the presence of dominant firms, as long as entry and exit are unconstrained and potential competition is credible. Contestable market theory challenges the traditional view that market structure alone determines market behavior and outcomes.	– When assessing market contestability or evaluating entry barriers in concentrated industries. – Particularly in understanding the characteristics of contestable markets, such as entry conditions, competitive threats, and incumbent behavior, and in exploring techniques to analyze contestable markets, such as contestability tests, entry-exit dynamics, and market structure assessments, to identify opportunities for entry, predict market responses, and assess the effects of market liberalization or deregulation on market competition, efficiency, and consumer welfare in contestable markets.

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