UNIT 5 MARKET STRUCTURE

-Nehal Kapadia

WHAT IS MARKET?

According to Benham, market is in which buyers & sellers are in close contact with one another, either directly or through dealers, that the price obtainable in one part of the market affects the prices paid in other parts.

CLASSIFICATION OF MARKET
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Classification by the area (Local, regional, national & international market) Classification by the nature of transaction (Spot & future market) Classification by the volume of business (Wholesale & retail market) Classification by the status of seller (Primary, secondary & terminal market) Classification on the basis of time (Very short, short & long period market) Classification by the regulation (Regulated & unregulated market) Classification on the basis of market structure (Perfect competition, monopoly, monopolistic competition, oligopoly)

Competition, market structures and business decisions Market structures

WHAT IS THE MARKET STRUCTURE?

The competitive environment in the market for any product is the market structure faced by the firm

Is measured in terms of
the number of the actual buyers and sellers plus potential entrants Barriers to entry and exit Capital requirements Price v/s Non-price competition Product differentiation Production methods

Competition, market structures and business decisions Market structures

The firm in competitive markets

Non-perfect competition

Perfect competition

Monopoly Monopolistic competition Oligopoly

Competition, market structures and business decisions Market structures Perfect competition competitive markets

Large number of sellers & buyers Profit maximiser Identical product Very small share of the market Price-taker Produces a homogeneous product Perfect information No barriers to entry (legal, technological, or resource) No technical progress Demand curve is horizontal (P=AR=MR) No opportunity for abnormal profit in long run

SHORT RUN & LONG RUN EQUILIBRIUM

Equilibrium = AR=MC Short run equilibrium with Abnormal profits (AR>ATC) Short run equilibrium with Normal profits (AR=ATC) Short run equilibrium with Partial losses (AR<AVC or AR=AVC) Short run equilibrium with Full losses (AR<ATC) Long run equilibrium with Normal profits (LAR=LATC)

Competition, market structures and business decisions Monopoly Market structures

Single seller & large number of buyers One firm in industry Profit-maximiser Faces downward sloping demand curve (P=AR but >MR) One product No close substitutes Price-maker No restrictions on resources Restriction on entry and/or exit Imperfect dissemination of information Opportunity for abnormal profits in long-run

SHORT RUN & LONG RUN EQUILIBRIUM

Equilibrium = AR=MC Short run equilibrium with Abnormal profits (AR>ATC) Short run equilibrium with Normal profits (AR=ATC) Short run equilibrium with Partial losses (AR<AVC or AR=AVC) Short run equilibrium with Full losses (AR<ATC) Long run equilibrium with Abnormal profits (LAR>LATC)

Competition, market structures and business decisions Market structures

onopolistic competition

Large number of sellers & buyers Fairly close substitutes Product differentiation

Selling cost
Demand curve is neither horizontal nor very steep Normal profit in the long run Concept of group by Chamberlin Each of the sellers is a monopolist of its particular product Such a monopolist is enjoying a monopoly power and making economic profit during only a short period of time

from the introduction of unique product or technology

until such a technology becomes available to rivals, or until a new more innovative product is introduced by a rival.

SHORT RUN & LONG RUN EQUILIBRIUM

Equilibrium = AR=MC Short run equilibrium with Abnormal profits (AR>ATC) Short run equilibrium with Normal profits (AR=ATC) Short run equilibrium with Partial losses (AR<AVC or AR=AVC) Short run equilibrium with Full losses (AR<ATC) Long run equilibrium with Normal profits (LAR=LATC)

Competition, market structures and business decisions Market structures Oligopoly

Oligopoly Market Characteristics Few sellers.

Homogenous or unique products. Interdependence.

Advertising & selling cost. Restricted entry and exit.

Imperfect dissemination of information. Competition

Opportunity for above-normal (economic) profits in long-run equilibrium. Indeterminate demand curve or kinked demand curve (Paul Sweezy)

Price rigidity Examples of Oligopoly National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc.

Local retail markets for gasoline, food, specialized services, etc.