MARKET

MORPHOLOGY
WHAT ALL IS THERE
IN A MARKET ?
Inside a market structure…
 Products – goods/services
 Prices
 Buyers and Sellers
 Distributors/transporters
 Regulators (govt. agencies, laws etc.)
 Credit providers, insurers, advertisers…
POSSIBILITIES
 Perfect Competition

 Monopolistic Competition

 Oligopoly

 Monopoly
Features of Perfect Competition
 Very large number of sellers
 Very large number of buyers
 Homogeneous product
 No barrier to entry or exit
 Complete knowledge
 No interference by government
 No transport cost/ No selling
cost
Think…

Examples of products
which fit in this market
form
Price and output determination in
SR

 All firms are price-takers; not

price makers
 Price is determined in the
industry by market forces
 Firms follow marginal
equivalency rule
 Firms may earn abnormal
profit/ normal profit /incur loss
 EQUILIBRIUM

Graphical Representation
Price and output
determination LR
 In long run; firms have freedom
of entry and exit.

 Hence , no possibility of
abnormal profit or loss; only one
possibility i.e. NORMAL PROFIT

 P = AR = MR = AC = MC
OPTIMUM OUTPUT Vs.
EQUILIBRIUM OUTPUT
 A firm’s optimum output is that
output where its per unit cost is the
lowest. Such firm is called technically
efficient.
 A firm’s equilibrium output is that
output where it maximizes profit.
Such firm is called economically
efficient
 In PC in LR, optimum Q = equm. Q
 PC ensures best utilization of
resources
MONOPOLISTIC
COMPETITION

 Large number of sellers; very

large number of buyers
 Product differentiation
 Freedom of entry and exit
 Selling cost
 Excess capacity
Price and Output determination

 In Short Run – what are the

possibilities ?

 In long run - what happens?

 SELLING COSTS
 Total cost = Production cost +
Selling cost

 How much should a firm spend on

advertisement?

 Why is selling cost considered a

‘waste of monopolistic
competition’?
MONOPOLY
 One seller; many buyers
 Unique product
 No freedom of entry and exit
 Firm is the industry
 Monopolist is a price-maker in a
limited sense
 AR and MR curves are downward
sloping
 P = AR > MR
Can you think of some
monopolies?
How are monopolies
formed?
Possible reasons
 Government action

 Control over ‘vital’ raw material

 Unique technology

 Driving competitors out by

efficiency

 Natural monopolies
Price and output determination in
simple monopoly

 In short run, a monopolist may

earn abnormal profit, or normal
profit or incur loss; but in
reality, the most likely case
would be that a monopolist
earns abnormal profit.
 In long run, a monopolist
always earns abnormal profit.
Comparing monopoly with
perfect competition
Given same costs, a monopolist
will charge a higher price than a
perfectly competitive firm; and
sell a smaller output than
perfectly competitive firm
 Pm > Pc
 Qm < Qc
Price Discrimination
 The pricing strategy when a firm
charges different prices (for the
same product) from different
buyers

 Have you ever experienced it? Give

examples.

 Why does a firm indulge in price

discrimination?
 OLIGOPOLY
 Few discernable sellers; many
buyers
 Homogeneous or heterogeneous
product
 Restricted entry/exit
 Interdependence
 Indeterminate Solution
 Oligopoly Models

 Collusive

 Non - Collusive
COLLUSIVE MODELS

 CARTELS

 PRICE LEADERSHIP
CARTELS
 When oligopoly firms collude to make
price fixing agreements they give rise to
cartels
 Why are cartels formed? Improves
aggregate profits
 What makes them unstable? Individual
profits get hurt; Governmental
action/consumers’ may revolt
Price Leadership Model
 Dominant firm leadership

 Low cost firm leadership

 Barometric firm leadership

NON COLLUSIVE MODELS

 PRICE RIGIDITY MODEL

 COURNOT MODEL
Price Rigidity Model
 1939; Paul Sweezy
 Competitors react differently to
price rise and fall initiated by
one of them in oligopoly market
 Explains short run price
stickiness in oligopoly markets
 Aka Kinked demand curve model
COURNOT MODEL : Assumptions
 Two independent firms
 Product is homogeneous
 Cost of production is zero
 Each firm faces a downward sloping linear
demand curve
 Each firm expects no reaction from the other
to its actions
 Both the firms are naïve
Results
 Price charged is smaller than
the monopoly price and larger
than the PC price

 Output produced is larger than

the monopoly output but
smaller than the PC output
CHAMBERLIN MODEL
 Same assumptions except that
the firms are no longer naïve

 Highest possible price is

charged

 Output sold is less then the

Cournot duopoly output
GAME THEORY
 Game Theory : An analytical tool for
making decisions in situations
involving interdependence

 Game - A decision making situation

involving competition among players to
gain maximum payoff
 Games may be –
 Simultaneous

 Sequential
 PRISONER’S DILEMMA

Bunty

Do not Confess Confess

Do not
1,1 10,0
Confess

Bublee

Confess 0,10 5,5

Prisoner’s dilemma involves
Dominant Strategy

A prisoner’s dilemma arises

when all rivals possess
dominant strategies and in the
dominant strategy equilibrium
they are all worse off than if
they had cooperated in making
their decisions.
A final look at the
market possibilities
 Market No. of sellers Entry barrier Nature of
to sellers product

Perfect Many, small, None Homogeneous

competition independent

Monopoly One Huge Homogeneous

Monopolistic Many; virtually None Differentiated

competition independent

Oligopoly Few; Substantial Either

interdependent
 UNIT V

COMPLETED