Economic theory reasons that market structure, defined as the organizational characteristics of a market, exerts a strategic influence on pricing and on the nature of competition within the market. Among the structural dimensions of a market area: (1) degree of interdependency among sellers and buyers; (2) condition of entry; (3) degree of product differentiation; and (4) demand elasticity. All of these factors, according to economic theory, have an impact on competition in a market.

Seller Interdependency

The extent of competition in an industry depends to an important degree upon the structural features of the market. The closer the structure is to the monopoly-like structure, the greater the likelihood that the industry will be characterized by monopoly-like performance. In an opposite manner, as structure approximates the conditions of the competitive model, the oligopoly market is more likely to display competitive-like performance.

In analyzing the state of competition in a market, economists are interested in observing the degree of interdependency among the sellers. Interdependency is, however, a qualitative factor and cannot be directly measured. As a result, economists have employed measures of seller concentration as indirect measures of the degree of seller interdependency in a market. Seller concentration is defined as the proportion of an industry's economic activity accounted for by the N largest sellers in the industry. Economic activity is often represented by value of shipments, assets, or employment. High levels of concentration, the upper limit being a monopoly where a single firm controls the entire output, represent high degrees of interdependency, while low concentration levels would indicate less interdependency. It should be emphasized