MARKET STRUCTURE

UNIT 4
MARKET: -
Market refers to a whole region where buyers
and sellers of a commodity are in contact with
each other to effect purchase and sale of the
commodity.

Bases of Markets: - Economists have defined

and classified markets on the following basis:

a)The number of buyers and sellers of the

commodity.
b)The nature of the commodity produced by the
seller.
c)Freedom in the movement of goods and
factors of production.
d)Knowledge of the buyers and sellers
regarding prices in the market.
F
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PERFECT COMPETITION/MARKET: -
Perfect competition refers to a market situation where
there are very large number of buyers and sellers
dealing in a homogeneous product at a price fixed by the
market. Example- in recently, perfect competition has
never existed.

Features of Perfect Competition-

1. Very large number of Buyers and Sellers- There are
very large number of buyers and sellers of the
commodity in the market. The number of sellers and
buyers are so large that the share of each seller is
insignificant in the total supply and share of buyer is
insignificant in total purchase. Under such conditions,
price of a commodity is determine by the market forces
of demand & supply and each buyer & seller has to
accept the same price. As a result uniform price
prevails in the market.
2.Homogeneous Product- The products offered
for sale in the market are homogeneous, i.e., the
product is identical in all respects like size, shape,
quality, colour etc. Since each firm produces
100% identical products, their products can be
perfectly substituted for each other. No
individual firm is in the position to chare a
higher price for its product.

3.Freedom of Entry and Exit- Every seller has the

freedom to enter or exit the industry. This means
that any new firm is free to start production, and
that any existing firm free to stop production and
leave the industry. It implies that all firms will
earn only normal profit in the long run. A firm
can earn abnormal profits or losses in the short
run.
4.Perfect knowledge among buyers
and sellers- Both buyers and sellers
are fully informed about the market
price. Its implication is that no firm is
in position to charge a different price
and no buyer will pay a higher price.
As a result a uniform price prevail in
the market.

5.Perfect mobility of factors of

production- Factors of production
(land, labour, capital &
entrepreneur) can freely move from
one place to the other as well as from
one firm to other. The factors are
free to move to the industry in which
they get the best price.
6.No selling (Advertisement) cost-
As we know, firms are selling
homogeneous products and they are
perfect substitutes, so advertisement
cost is involved in perfect
completion.
7.No transportation costs- In order to
ensure uniform price in the market,
it is assumed that transportation
costs are zero. A producer can sell
his product at any place and a buyer
can buy it from the place he likes.
Pure Competition and Perfect Competition:
- The competition is said to be ‘Pure
Competition’
when the 3 fundamental conditions exist:

1. Very large number of Buyers and Sellers

2. Homogeneous Product
3. Freedom of Entry and Exit
‘Perfect Competition’ is a wider concept. For
the market to be perfectly competitive , in
addition to 3 fundamental conditions, 4
additional conditions must be satisfied:

2. Perfect knowledge among buyers and

sellers
3. Perfect mobility of factors of production
4. No selling (Advertisement) cost
5. No transportation costs
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AR (Demand Curve) and MR Curves of a firm under

Perfect Competition: - In perfect competition, a firm can sell
any amount of output at a given market price. It means firm’s
additional revenue (MR) from the sale of the commodity will
be just equal to the market price (i.e. AR). Hence, average
revenue and marginal revenue become equal (AR=MR) and
constant in the situation. Consequently, AR (or Demand
Curve) and MR curve will be same and would be horizontal or
parallel to X-axis. This is shown the following figure.
A Firm under Perfect Competition is Price-Taker and not a
Price-Maker: -
In a perfect competition market, the price of a commodity is
determine by the demand and supply of the whole industry. Here
the group of firms collectively are known as industry. Under perfect
competition, an individual firm cannot influence the price on its own
as its share in total market supply is negligible. Price is determined
at the point where market demand curve intersects market supply
curve. Therefore, the industry is called price maker. This is shown in
the following figure.
 MONOPOLY: -
The word MONOPOLY is made of two words MONO+POLY. Here ‘Mono’
means one and ‘Poly’ means seller, thereby the literal meaning of the word
monopoly is one seller or one producer.

Monopoly refers to a market situation where there is a single seller selling a

product which has no close substitute. For example Railway in India.

Features of Monopoly: -
1. Single Seller: - Under monopoly, there is single seller selling the product. As a
result, the monopoly firm and industry are one and the same thing and
monopolist has full control over the supply and price of the product.
2. No close substitute: - The product produced by a monopolist has no close
substitute. So, the monopoly firm has no fear of competition from new or
existing products.
3. Restrictions on Entry and Exit: - There exists strong barriers to entry of
new firms and exit of existing firms. As a result, monopoly can earn abnormal
profits and losses in long run. These barriers may be due to legal restrictions
like licencing or patent rights or due to restrictions created by firms in the form
of cartel.
4. Price Discrimination: - A monopolist can sell its product at different prices to
different customers. It is known as ‘Price Discrimination’.
5. Price maker: - In case of monopoly, firm and industry are one and the same
thing. So, firm has
complete control over the industry output. As a result, monopolist is a
price-maker and fixes its own price. It can influence the market price by
iii. changing the supply of the product.
i. Government licencing – It means that before a firm can enter
an industry it needs to take permission from the government.
By not granting licences to new firms, government aims to
assure that only one firm operates in the market.
ii. Patent Rights – When a firm or producer gets official
recognition that no one else can produce the product or
technology developed or invented by this firm, it is patent
rights. It is to promote and recognise the research and
development work by the firms and to cover their risk. The
period for which patent rights are granted is known as patent
life. It may be for 15 to 20 years.
Cartel – In order to earn the maximum profits, sometimes
producers of a particular product, keeping their individual
identity, come together and make one organisation, which is
termed as cartel. The
 most famous example of cartel is ‘Organisation of Petroleum
Exporting Countries (OPEC)’, which led to virtual monopoly in
the market for oil.

AR (Demand curve) and MR curves of a Monopoly firm: -

Demand of the product is not in the control of monopoly firm. In
order to increase the output to be sold, monopolist will have to
reduce the price. Therefore, monopoly firm faces a downward
sloping demand curve. As we know, in monopoly market there is
no close substitute for its product, The AR (or Demand Curve) is
STEEPER.
MONOPOLISTIC COMPETITION: -
Monopolistic competition refers to the market situation in which there are large
number of firms which sell closely related but differentiated products. For example-
market for products like soap, toothpaste,

A.C. etc.

Features of Monopolistic Competition: -

1. Many/large number of sellers: - There are large number of firms selling closely
related, but in some way differentiated products. Each firm acts independently
and has a limited share of market. So, an individual firm has limited control over
the market price.
2. Product Differentiation: - Product differentiation refers to differentiating the
product on the basis of brand, size, colour, shape etc. This gives some monopoly
power to an individual firm to influence market price of its product.
3. Freedom of Entry and Exit- Every seller has the freedom to enter or exit the
industry. This means that any new firm is free to start production, and that any
existing firm free to stop production and
leave the industry. It implies that all firms will earn only normal profit in the long
run. A firm can earn abnormal profits or losses in the short run.
4. Lack of Perfect knowledge: - Due to the availability of various differentiated
products in the market it is very difficult for the buyers to gain perfect knowledge
about the market and this leads to exploitation of buyers as well as the part of
sellers.
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5. Lack of perfect mobility of Factors: - Under monopolistic market

factors of production cannot move freely from one place to another
since different prices prevail for the same factor of production.

6. Selling Costs: - Selling costs refer to the expenses incurred on

marketing, sales promotion and
advertisement of the product. Such costs are incurred to persuade the
buyers to buy a particular brand of the product in preference to
competitor’s brand.
7. Independent Price Policy: - A firm under monopolistic competition is
neither a price-taker nor a price-maker. However, by producing a
unique product or establishing a particular reputation, each firm has
partial control over the price.

AR (or Demand Curve) and MR of a Monopolistic Competition: -

AR and MR curves facing a firm under monopolistic competition a

downward sloping FLATTER
curve. Demand curve is negatively sloped as more quantity can be sold
only at a lower price.
OLIGOPOLY: -
Oligopoly refers to a market situation in which there are a few
firms selling homogeneous or differentiated products. For
example- Market for products like cold drink, automobiles, steel,
cement etc.

Features of Oligopoly: -
1. Few Firms: - There are few large firms. The Exact number of
firms is not defined. Each firm produces a significant portion of
the total output. There exists severe competition among different
firms and each firm try to manipulate both prices and volume of
production to outsmart each other.
2. Interdependence: - Interdependence means that action of one
firm affect the actions of other firms. A firm considers the
action and reaction of the rival firms while determining its price
and output levels.
3. Indeterminate of Demand Curve: - In an oligopolistic market when a
firm lowers down the price to promote its sale, it affects other firms
also. Hence, as a reaction, rival firms also start to reduce their prices.
The exact behaviour pattern of a producer cannot be determined with
certainty. So, demand curve faced by an oligopolist is indeterminate
(uncertain) and therefore is Kinked shaped.

4. Group Behaviour: - Sometimes in an oligopolistic market, firms enter

into a collusion and work as
a group. Through this arrangement firms try to maximise their profits.
When they work independently, there is price-war, they might agree
on a price which may be profitable to all.

5. Non-price Competition: - The firms in oligopoly try to avoid price

competition for the fear of price
war. They follow the policy of price rigidity. Price rigidity refers to a
situation in which price tends to stay fixed irrespective of changes in
demand and supply conditions. Firms use other methods like
advertising, better services to customers, etc. to compete with each
other.
6. Very Difficult Entry of New Firms: - In oligopoly it is very difficult
to enter in the market because of many reasons like high capital
requirement, patent issue etc.
Nature of the Product: - The
firms under oligopoly may produce
homogeneous or differentiated
(heterogeneous) product. If the
firms produce a homogeneous
product (like cement, LPG
cylinders etc.) the industry is
called a Pure or Perfect
oligopoly. If the firms produce a
differentiated product (like soft
drinks, automobiles etc.) the
industry is called Impure or
Imperfect oligopoly.
 Types of Oligopoly: -
1.Collusive Oligopoly: - When
the firms enter into agreements
regarding a uniform price
output policy to be persuade
by them, it is called collusive
oligopoly.
2.Non-collusive Oligopoly: -
When firms in an oligopoly
market freely compete with
each other and do not enter in
agreement regarding price and
output, it is termed as
non-collusive oligopoly.