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Market Structure:

Definition of Market Structure:


Those characteristics of the market that significantly affects the behavior and
interaction of buyers and sellers
Things to be considered in Market Structure:

Number and size of sellers and buyers


Type of product
Conditions to entry and exit
Transparency of information

The interconnected characteristics of a market, such as the number and relative


strength of buyers and sellers and degree of collusion among them, level and forms
of competition, extent of product differentiation, and ease of entry into and exit
from the market
Types of market structure are
(1) Perfect competition:
many buyers and sellers, none being able to influence prices.
Homogenous product
Free entry to and exit from the industry
Transparent and free information
(2) Oligopoly:
several large sellers who have some control over the prices.
Standardized or differentiated products
Entry is hard
2.1 Duopoly, a special case of an oligopoly with two firms.
(3) Monopoly:
A single seller
Unique product: no close substitute for the firms product
The firm is the price maker
Entry and exit is blocked
3.1. Natural monopoly: A firm is a natural monopoly if it is able to serve the
entire market demand at a lower cost than any combination of two or more
smaller, more specialized firms.
(4) Monopsony: single buyer with considerable control over demand and prices.
(5) Monopolistic competition:
Multiple firms produce similar products
Firms face down sloping demand curve
Profit maximization occurs when MC = MR
Quick Reference to Basic Market Structures
Market Structure

Perfect Competition

Seller
Entry
Barriers

No

Seller
Number

Many

Buyer Entry
Barriers

No

Buyer
Number

Many

Quick Reference to Basic Market Structures


Market Structure

Monopolistic
competition
Oligopoly

Seller
Entry
Barriers

No
Yes

Seller
Number

Many
Few

Buyer Entry
Barriers

No
No

Buyer
Number

Many
Many

Oligopsony

No

Many

Yes

Few

Monopoly

Yes

One

No

Many

Monopsony

No

Many

Yes

One

Characteristics of Different Market Structures

1.Perfect Competition
Pure or perfect competition is rare in the real world, but the model is important
because it helps analyze industries with characteristics similar to pure competition.
Examples of this model are stock market and agricultural industries.
Characteristics
1. Many sellers: there are enough so that a single sellers decision has no impact on
market price.
2. Homogenous or standardized products: each sellers product is identical to its
competitors.
3. Firms are price takers: individual firms must accept the market price and can
exert no influence on price.
4. Free entry and exit: no significant barriers prevent firms from entering or leaving
the industry.
Demand
The individual firm will view its demand as perfectly elastic. A perfectly elastic
demand curve is a horizontal line at the price. The demand curve for the industry is
not perfectly elastic, it only appears that way to the individual firms, since they
must take the market price no matter what quantity they produce. Therefore, the
firms demand curve is a horizontal line at the market price.
Marginal revenue (MR) is the increase in total revenue resulting from a one-unit
increase in output. Since the price is constant in the perfect competition. The
increase in total revenue from producing 1 extra unit will equal to the price.
Therefore, P= MR in perfect competition.
Profit-Maximizing Output

Efficiency
1.

2.

Allocative efficiency means that resources are used for producing the
combination of goods and services most wanted by society. For example,
producing computers with word processors rather than producing manual
typewriters.
Productive efficiency means that least costly production techniques are used
to produce wanted goods and services.

Productive efficiency: occurs where P= min ATC.


Allocative efficiency: occurs where P = MC

2.Monopoly Competition
Monopoly means a market where there is only one seller of a particular good
or service.

Characteristics

Only one single seller in the market. There is no competition.

There are many buyers in the market.

The firm enjoys abnormal profits.

The seller controls the prices in that particular product or service and is
the price maker.

Consumers dont have perfect information.

There are barriers to entry. These barriers many be natural or artificial.

The product does not have close substitutes.

Advantages of monopoly

Monopoly avoids duplication and hence wastage of resources.

A monopoly enjoys economics of scale as it is the only supplier of


product or service in the market. The benefits can be passed on to the
consumers.

Due to the fact that monopolies make lot of profits, it can be used for
research and development and to maintain their status as a monopoly.

Monopolies

may

use

price

discrimination

which

benefits

the

economically weaker sections of the society. For example, Indian railways


provide discounts to students travelling through its network.

Monopolies can afford to invest in latest technology and machinery in


order to be efficient and to avoid competition.

Disadvantages of monopoly

Poor level of service.

No consumer sovereignty.

Consumers may be charged high prices for low quality of goods and
services.

Lack of competition may lead to low quality and out dated goods and
services.

Classification / Kinds / Types of Monopoly


1. Perfect Monopoly
It is also called as absolute monopoly. In this case, there is only a single
seller of product having no close substitute; not even remote one. There is
absolutely zero level of competition. Such monopoly is practically very rare.

2. Imperfect Monopoly
It is also called as relative monopoly or simple or limited monopoly. It refers
to a single seller market having no close substitute. It means in this market,
a product may have a remote substitute. So, there is fear of competition to
some extent e.g. Mobile (Cellphone) telcom industry (e.g. vodaphone) is
having competition from fixed landline phone service industry (e.g. BSNL).

3. Private Monopoly
When production is owned, controlled and managed by the individual, or
private body or private organization, it is called private monopoly. e.g. Tata,
Reliance, Bajaj, etc. groups in India. Such type of monopoly is profit oriented.

4. Public Monopoly
When production is owned, controlled and managed by government, it is
called public monopoly. It is welfare and service oriented. So, it is also called
as 'Welfare Monopoly' e.g. Railways, Defence, etc.

5. Simple Monopoly
Simple monopoly firm charges a uniform price or single price to all the
customers. He operates in a single market.

6. Discriminating Monopoly
Such a monopoly firm charges different price to different customers for the
same product. It prevails in more than one market.

7. Legal Monopoly
When monopoly exists on account of trade marks, patents, copy rights,
statutory regulation of government etc., it is called legal monopoly. Music
industry is an example of legal monopoly.

8. Natural Monopoly
It emerges as a result of natural advantages like good location, abundant
mineral resources, etc. e.g. Gulf countries are having monopoly in crude oil
exploration activities because of plenty of natural oil resources.

9. Technological Monopoly
It emerges as a result of economies of large scale production, use of capital
goods, new production methods, etc. E.g. engineering goods industry,
automobile industry, software industry, etc.

10. Joint Monopoly


A

number

of

business

firms

acquire

monopoly

position

through

amalgamation, cartels, syndicates, etc, it becomes joint monopoly. e.g.


Actually, pizza making firm and burger making firm are competitors of each
other in fast food industry. But when they combine their business, that leads
to reduction in competition. So they can enjoy monopoly power in market.

Pure Monopoly
Pure monopoly exists when a single firm is the sole producer of a product for which
there are no close substitutes. Examples are public utilities and professional sports
leagues.
Characteristics
1. A single seller: the firm and industry are synonymous.
2. Unique product: no close substitutes for the firms product.
3. The firm is the price maker: the firm has considerable control over the price
because it can control the quantity supplied.
4. Entry or exit is blocked.
Demand Curve
Monopoly demand is the industry or market demand and is therefore downward
sloping. Price will exceed marginal revenue because the monopolist must lower
price to boost sales and cannot price discriminate in most cases. The added
revenue will be the price of the last unit less the sum of the price cuts which must
be taken on all prior units of output. The marginal revenue curve is below the
demand curve.
Efficiency
1. Productive efficiency: occurs where P= min ATC.
2. Allocative efficiency: occurs where P = MC.

MONOPOLISTIC COMPETITION
Monopolistically competitive markets have the following
characteristics:

There are many producers and many consumers in the market, and no
business has total control over the market price.

Consumers perceive that there are non-price differences among the


competitors' products.

There are few barriers to entry and exit.[4]

Producers have a degree of control over price.

Major characteristics
There are six characteristics of monopolistic competition (MC):

Product differentiation

Many firms

No entry and exit cost in the long run

Independent decision making

Some degree of market power

Buyers and Sellers do not have perfect information (Imperfect


Information

Under monopolistic competition there is freedom of entry and exit. Thus


under monopolistic competition it is found that both the features of
competition and monopoly are present. In India, for example, we find the
monopolistic competition. In India there are a number of manufacturers
producing different brands of tooth paste viz Colgate, Pepsodent. Promise,
Close-up, Prudent and Forhans etc.

The manufacturer of Colgate has got the monopoly of producing it. Nobody
can produce and sell tooth paste with the name Colgate. But at the same
time he faces competition from other manufactures of tooth paste as their
products are close substitutes of Colgate tooth paste. Thus we find that
monopolistic competition is the real market structure than either pure
competition or monopoly.

Chamberlin develops three distinct model of equilibrium under monopolistic


competition.

When competition takes place only through the entry of new firms.
When competition takes place only through price variation (price

cutting).
When competition arises through price variation and new entry.

Demand Curve
The firms demand curve is highly elastic, but not perfectly elastic. It is more elastic
than the monopolys demand curve because the seller has many rivals producing
close substitutes; it is less elastic than pure competition, because the sellers
product is differentiated from its rivals.

Oligopoly
Oligopoly exits where few large firms producing a homogeneous or differentiated
product dominate a market. Examples are automobile and gasoline industries.
Characteristics
1. Few large firms: each must consider its rivals reactions in response to its
decisions about prices, output, and advertising.
2. Standardized or differentiated products.
3. Entry is hard: economies of scale, huge capital investment may be the barriers to
enter.

An oligopoly is market form in which a market is dominated by a small


number of sellers (oligopolists). The word is derived from the Greek for few
sellers. Oligopolies can result from various forms of collusion which reduce
competition and lead to higher prices for consumers.
1. Few Sellers
2. Homogeneous or differentiated products
3. Entry is possible but difficult
4. Interdependence
5. Uncertainty
6. Indeterminateness
7. Price rigidity
8. Non price competition
9. Tendency to form cartel
10. Close substitutes

Demand Curve
Facing competition or in tacit collusion, oligopolies believe that rivals will match any
price cuts and not follow their price rise. Firms view their demands as inelastic for
price cuts, and elastic for price rise. Firms face kinked demand curves. This analysis
explains the fact that prices tend to be inflexible in some oligopolistic industries.
Efficiency
3. Productive efficiency: occurs where P= min ATC.
4. Allocative efficiency: occurs where P = MC.

Monopolistic Competition Compared to Perfect Competition


Perfect competition and monopolistic competition are two types of
economic markets
TERM

Perfect competition
A type of market with many consumers and producers, all of whom
are pricetakers

The key difference between perfectly competitive markets and


monopolistically competitive ones is efficiency.
KEY POINTS

Perfectly competitive markets have no barriers of entry or exit.


Monopolistically competitive markets have a few barriers of entry and exit.

The two markets are similar in terms of elasticity of demand, a firm's


ability to make profits in the long-run, and how to determine a
firm's profit maximizing quantity condition.

In a perfectly competitive market, all goods are substitutes. In a


monopolistically competitive market, there is a high degree of
productdifferentiation.

Demand curve in a perfectly competitive market

Monopoly and perfect competition are antipoles of each other and they differ in following ways:
(1) Under competition, variation in output has no effect on price and thus, marginal revenue is
equal to price. But if the monopolist wants to sell more, he must reduce price and, therefore,
MR < P for every output level.
(2) Under competition a firm can sell as much as it likes at the current price. Therefore,

(3)
(4)
(5)

(6)
(7)
(8)

the average revenue curve of the firm is a straight line parallel to the horizontal
axis and it is perfectly elastic. But under monopoly the average revenue or demand
curve is downward sloping and we have elastic demand (ep > 1). Equilibrium can
occur with ep = 1, when total cost is constant and MC = 0.
Monopoly price is higher than competitive price.
Monopoly output is lower than competitive output.
For competitive equilibrium the marginal cost curve must be strictly upward sloping.
But monopoly equilibrium is possible with any shape of MC curve since demand
curve is not horizontal. However, we cannot have any equilibrium when MC curve
falls more steeply relative to MR curve (i.e. second order condition).
Under perfect competition the firm in the long-run makes only normal profits but
under monopoly the firm can get super normal profits even in the long-run.
Since, even in the long-run, the monopolists demand curve remains sloping
downward, it cannot be tangent to average cost curve at of AC minimum. It implies
that the firm will produce less than its optimum output level in the long-run.
Monopolies are also likely to be inefficient and slow to introduce technological
change. Pure competition forces each firm to be either efficient or perish.

Price discrimination
Price discrimination is selling a good or service at a number of different prices, and
the price differences is not justified by the cost differences. In order to price
discriminate, a monopoly must be able to
1. be able to segregate the market
2. make sure that buyers cannot resell the original product or services.
Perfect price discrimination is a price discrimination that extracts the entire
consumer surplus by charging the highest price that consumer are willing to pay for
each unit.
As a result, the demand curve becomes the MR curve for a perfect price
discriminator. Firms capture the entire consumer surplus and maximize economic
profit.

PRICING STRATEGIES
Pricing Factors
Pricing is one of the most important elements of the marketing mix .
Pricing a product too high or too low could mean a loss of sales for
the organisation.
Pricing should take into account the following factors into account:
1. Fixed and variable costs.
2. Competition
3. Company objectives
4. Proposed positioning strategies.
5. Target group and willingness to pay
An organisation can adopt a number of pricing strategies, the pricing strategy will
usually be based on corporate objectives.

GOVERNMENT INTERVENTION AND PRICING


Government plays a vital role in influencing the business and prices. Government can influences the
prices in following manner:
(1) Reservation:
It limits the spheres of investment by reserving the industry for small scale, public and cooperative sector
As prior to liberalization Petroleum, Telecommunication, Coal, Power, etc. were the monopoly
of Public Sector, but liberalization bring new investment opportunities for private sector as
now only two sector railways and atomic energy are reserved for public sector.
Bharti Telecom , Reliance and TATA are big players in Telecommunication
Aviation is no more an Govt. monopoly
dozen of private players are there as Sahara Airlines, Kingfisher Airlines, Spicejet, Air Deccan
etc., host of new player
(2) Licensing:

License is an very effective tool in the hands of Govt. to regulate the business.
Higher the level of licensing in a country , higher the govt. intervention in the pricing.

industry may have to acquire license from different other authorities as Pollution control
board, ISI, Ministry of Environment and Forest, Food and Drug Administration etc.
(3) Expansion:

Government can give the opportunity to the business house to expand to its height and can
even limits its expansion programmes

Thus the level of investment and production capacity is on the mercy of Govt
(4) Foreign Direct Investment:
It is the Govt. who decides , whether MNC can invest in a country or not. Because of Govt.
policy there are very few MNCs inIndia.
Even companies like IBM and Coca Cola had to leave India because of Govt. policy.
(5) Import and Export Policy:
With a small declaration Govt. can open and close various avenues for export and import
Till 1991, India followed a protectionist policy and protected the industry from import through
various tools. But now policy has been changed and import is easy.
(6) Taxes:

Through taxes also Government regulates the industry


Govt. usually impose high rate of tax on the industry which it dont want to encourage as after
independence very high excise was imposed on product like ACs, Automobile etc
no tax on production of products reserved for small scale industry
Govt. even provide subsidy as on Fertilizer and Tractor and other farm equipment.
(7) Supply of Money:
(8) Supply of FOREX :
(9) Incentives:
(10)
Administered Pricing:

Price Elasticity of Demand


1.
Price elasticity of demand is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service
to a change in its price
Price Elasticity of Supply
1.
Price elasticity of supply is a measure used in economics to show the
responsiveness, or elasticity, of the quantity supplied of a good or service to
a change in its price or cost.

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