UNIT – 3 LESSON – 16 MARKET                                                   STRUCTURES                                  ...
While all of us often use the word-Market’, we-do Donot realize that very few, markets possess a well defined place in a g...
includes firms and individuals currently engaged in Buying and selling but alsothe potential entrants.CLASSIEFICATION OF M...
above it is also clear that all these market structures can be classified in only twofundamental forms-Perfect Competition...
o     n                             little  r     o                                            i Auto                     ...
various governmental agencies working on road building activities of these, just onecustomer, CIL takes nearly 60% of the....
steel plants. On the other hand, when one comes to re-rolling mills which take the steelbillets or bars as input, the mini...
In far away markets (from Gujarat to Kerala, for example) the transport costs can be quitehigh. Customers located in such ...
Thus, one may find numerous local soap makers but there are substantial entry barriers to anew national brand penetrating ...
6 Aluminium    7 Ball-point pens    8 Colour Television SetsTHE ROLE OF GOVERNMENT POLICY,All governments, whether in Indi...
FOR SELF-ASSESSMENT TEST1. List and explain the factors that determine the element of competition in a market for   either...
column by specifying the type of competition that is most likely to prevail in theseindustries.S.No.    Name of Industry  ...
POINTS TO PONDER                                            __________________________________                            ...
Types of market  Traditionally markets are classified into four    types:    Perfect competition    Monopoly competition  ...
Monopolistic competition     Monopolistic competition a term coined by      E.M. Chamberlin implies a market structure    ...
Monopolistic competition     Monopolistic competition a term coined by      E.M. Chamberlin implies a market structure    ...
Monopolistic competition     Monopolistic competition a term coined by      E.M. Chamberlin implies a market structure    ...
Monopolistic competition     Monopolistic competition a term coined by      E.M. Chamberlin implies a market structure    ...
Upcoming SlideShare
Loading in …5
×

Market stracture

562 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
562
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
5
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Market stracture

  1. 1. UNIT – 3 LESSON – 16 MARKET STRUCTURES Learning outcomesAfter studying this unit, you should be able to: Define Market Know different types of market structure Distinguish between perfect competition, monopoly, and monopolistic competition Relate national income and economic welfare Know per capita as an indicator of economic welfareINTRODUCTION: Now we are starting the third unit. This unit will give you all the details of thedifferent market structure. After reading this unit you will be able to know aboutthe different types of markets.The number of firms and the level of product differentiation are useful parameters forclassifying various market structures. The level of competition also gets influenced byproduct and production related factors, potential competitors, number of buyers and theirbehaviour and the governmental policies. We are now ready to analyze the various marketforms in greater detail. That will be attempted in the subsequent units in this block.Meaning of market: A market is a group of people and firms which are in contact withone another for the purpose of buying and selling some product. It is not necessary thatevery member of the market be in contact with each other.Markets and competition
  2. 2. While all of us often use the word-Market’, we-do Donot realize that very few, markets possess a well defined place in a geographical area orhave a postal address. The Bombay, Stock Exchange is, one such market with a buildingand an area earmarked for transacting shares.The central phenomenon in the functioning of any market is competition. Competitivebehavior is molded by the market structure of the product under consideration. Itis therefore necessary to have a thorough understanding of this concept.Meaning of Market structure: A simple definition of this concept can be found inPappas and Hirschey (1985).According to them "Market structure refers to the number and size distribution of buyersand sellers in the market for a good or service. The market structure for a product not
  3. 3. includes firms and individuals currently engaged in Buying and selling but alsothe potential entrants.CLASSIEFICATION OF MARKET STRUCTURES: Markets are traditionally classifiedinto four basic types. These are :Perfect competition is characterized by a large number of buyers and sellers ofan essentially identical product. Each member of the market, whether Buyer or seller, isso small in relation to the total industry volume that he is unable to influence the price ofthe product. Individual buyers and sellers are essentially price takers. At the ruling pricea firm can sell any quantity. Since there is free entry and free exit, no firm can earnexcessive profits in the long run.Monopoly: In this situation there is just one producer of a product. The firm hassubstantial control over the price: Further, if product is differentiated and if there are nothreats of new firms entering the same business, a monopoly firm can manage to earnexcessive profits over along period.Monopolistic competition : It is coined by E.M. Chamberlin “implies a market structurewith a large number of firms selling differentiated products”. The differentiation may bereal or is perceived so by the customers. Two brands of soaps may just be identical butperceived by customers as different on some fancy dimension like freshness. Firmsin such- -a market structure have some control over price! By and large they are unableto earn excessive profits in the long run. Since the whole structure operates on perceivedproduct differentiation entry of new firms cannot be prevented. Hence, abovenormal profits can be earned only in the short run.Oligopoly is a market structure in which a small number of firms account for the wholeindustrys output. The product mayor may not be differentiated. For example only 5 or 6firms in India constitute 100% of the integrated steel industrys output. All of, themmarket almost identical products. On the other hand, passenger car industry with onlythree firms is characterized by marked differentiation in products The .nature of products issuch that very often one finds entry of new firms difficult. Oligopoly is characterized byvigorous competition where firms manipulate both prices and volumes in an attempt tooutsmart their rivals. No generalization can be made about profitability scenarios.PARAMETERS OF MARKET STRUCTURES: Now its clear that all themarket structures use only two parameters as distinguishing factors-number offirms and degree of product differentiation. Other factors like product characteristicsand entry of new firms are also important but these determine the level ofcompetition in a given market structure.In the real situation we will only find the imperfect market situation, and other marketsituations like perfect competition, monopoly, and oligopoly are all myth. From the
  4. 4. above it is also clear that all these market structures can be classified in only twofundamental forms-Perfect Competition and Imperfect Competition. Under thisclassification Monopoly, Oligopoly and Monopolistic Competition are treated as specialcases of markets which are less than perfect. Thus these forms illustrate the degree ofimperfection in a market by using the number of firms and product differentiationas basic criteria. A convenient and effective classification scheme depicting types of competitive market structures is shown in the diagram. A close look at the diagram reveals that most real world markets are neither perfectly competitive or perfectly monopolistic. Most industries that we come across can be classified in the realm of imperfect competition.Types of Competition o o oKind of Competition Number f Part of Degree f Methods f Producers and Economy Control Marketing o Wher Over Degree f e Price Dif Product - Prevalent. ferentiatio n ManPerfect competition y A few None Market producers o : agricultural exchange r identical industries auction products ManImperfect competition: y Toothpastes, producers tradMany differentiated : retail e; re osellers many al r conglo- Advertisin fancied merates some g difference i qualit s n and y product rivalry: administered priceOligopoly Few Steel, s producers : aluminum
  5. 5. o n little r o i Auto difference n s, Fe product w machinery producers : some differentiation of products SinglComplete monopoly e A few Considerable Promotional produce r: utilities and Unique "institutional" product public- without close relations Substitutes advertisingFACTORS DETERMINING THE NATURE OF COMPETITIONAs we have seen that the number of firms and product differentiation are extremely crucial in determining the nature of competition in a market. It has been tactically assumed that there are a large number of buyers. What would happen if there are several firms producing a standardized product but only one buyer? Obviously, the buyer would control the price, he will dictate how much to buy from whom. The entire price volume decision takes on a different qualitative dimension. Similarly, product features and characteristics the nature of production system the possibility of new entrants in a market have profound impact on the competitive behavior of firms in a market. Since the entry of new entrants has special relevance in business behavior we reserve it to the next section and deal with other issues in the present one.Effect on buyer We have already referred to the case where there is only one buyer. Suchsituation is defined as monopoly. For example, there are just six firms in Indiamanufacturing railway wagons all of which supply to just one buyer The Railways. Sucha situation can also exist in a local labor market where a single large firm is the onlyprovider of jobs for the people in the vicinity. A recent example is the newpetro- chemicals complex that is coming up in the rural parts of coastal Maharashtra.More frequently encountered in the Indian markets is a case of a few large buyers,defined as Oligopoly. The explosives industry which makes detonators and commercialexplosives has three major customers Coal India Ltd. (CIL), Department of Irrigation and
  6. 6. various governmental agencies working on road building activities of these, just onecustomer, CIL takes nearly 60% of the. industrys output. There are about 10 firms. In theindustry which negotiate prices and quantities with CIL to finalize their short term-plans.Most industries manufacturing heavy engineering equipment are typified in India by afew manufacturers and few buyers with the Government being the major one. Price andvolume determination in such products often takes the form of negotiation across tablerather than the operation of any market forces. Since the members in the whole, marketinclusive of buyers and sellers are not many very often they know each other. In othersituations like the consumer goods firms have no direct contact with their customers.Production CharacteristicsMinimum efficient scale of production in relation to the overall industry output andmarket requirement sometimes playa major role in shaping the market structure. Whythere are no more than say , 5 or 10 integrated steel plants even in an advanced country likethe U.S.A. can be partly explained by this factor. Since the minimum economic size of sucha steel plant is a few million tones, the entire world steel industry can have no more thanJOO efficient and profitable firms. Thus every country has only a handful of
  7. 7. steel plants. On the other hand, when one comes to re-rolling mills which take the steelbillets or bars as input, the minimum efficient size comes down considerably, and giventhe existing demand, several firms can be seen to operate.Further, the minimum size does not remain constant but changes drastically withtechnological advancements, When technical changes push up the economic size ofa plant one notices that the number of firms decline over time. This can be noticed insome process industries like synthetic fibre. Conversely, technological innovations maymake it possible for smaller sized. plants to become economically viable. In such a casea lot of new entrants come and soon the market becomes highly competitive. Notice thepersonal computers entry in India.Apart from minimum plant size factors like availability of the required rawmaterial, Skilled labour etc. can also mould the market structure. Presently only oneIndian source (IPCL) provides all the raw material for plastic products. Like wise,enough skilled people are not available work on the sophisticated machines. Thesefactors sometimes restrict output and push up prices even though adequate marketpotential for expansion exists.Product CharacteristicsThe above example referred to market situations with CTV and detergent powderas product examples. Both these markets have many firms and the productsare differentiated. But in case of CTV, there are no close substitutes (BWTV) being apoor one, whereas, there are many substitutes to a detergent powder (bar soaps; chips,cakes). Therefore one notices more violent competition in the detergent Market than inthe CTV. market. In the CTV industry firms are competing with each others products butin the detergent market the firms are competing with other substitute products aswell. Of course you may remind us of the customer income constraint but evenwith that there should be no difficulty in appreciating the differences in the degree ofc6mpet1tiveriess in these two markets. Similarly when two locations are connected byroad and rail, firms engaged in passenger bus service are not only computing withthemselves but also with an alternate mode of transport. . .The physical characteristics or a product can also influence the competitive structure ofits market. If the distribution cost is a major element in the cost of a product, competitionwould tend to get localised. Within a given region firms would compete andmake attempts to set up several plants around all the major markets in a bid toshow there presence in all the territories. Similarly, for perishable products, thecompetition is invariably localConflict between physical characteristics and minimum economic size,An interesting question arises in the case of a product like cement . for reason ofminimizing the transport costs on raw materials, most cement plants in the country arelocated near mine sites. A large efficient plant near a mine site can manufacture cement atthe optimum cost, but the local demand is never large enough. If such a plant has to sell
  8. 8. In far away markets (from Gujarat to Kerala, for example) the transport costs can be quitehigh. Customers located in such areas will always buy cement at a much higher price.The government partly offsets this by using the mechanism of levy price which is thesame throughout the country.BARRIERS TO ENTRYIn a classic book J .S. Bain (1956) analyzed the character and significance of thecondition of entry in manufacturing industries. Till that time, most analyses ofhow competition works gave little. emphasis to the force of the potential orthreatened competition of possible new competitors. The attention was simplyfocused on the competition among firms already established in an industry. Lately,however the meaning of competition is inclusive of potential entrants.The existence or otherwise of entry barriers in a given industry has profound impact onits performance and the behavior of firms in it.If has been found that the firms in an industry are always worried about the possibility ofa new entrant. If the existing number is few then the degree of insecurity will becorrespondingly higher. To be sure, the existing firms, especially in an oligopoly, have ..some advantages over the potential, entrant. But, because of the threat of new entrants,the existing members cannot, exploit these advantages (by raising prices continuously)beyond a point. What that point is and when the new entrants would find it profitable tobreak the entry barriers are also not known. One thing is clear, that this potentialcompetition always puts a check on the pricing strategies of oligopolists.What can act as an entry barrier?Anything that retains the competitive advantages of the existing firms in an industry canact as a barrier to those desirous of entering it. Some of the commonlyencountered aspects are indicated below.High Initial InvestmentA new passenger car plant with a capacity to assemble say 50,000 automobilesper annum can cost around Rs.1O0,crores. You know that not many firms have thecapacity to mobilize resources of that order. Naturally, there are high entrybarriers to the automobile market due to high level of initial investment. For similarreasons, one does not find too many integrated steel plants coming up too often. On theother hand, it takes only a few lakhs of rupees to set up a biscuit making unit.The barrier on account of investment is quite low in such industries.Economies of Scale in Non-production ActivitiesScale economies are not restricted to manufacturing. These extend to distribution,marketing and advertising. Consumer products like soaps, toothpastes displayconsiderable economies of scale in marketing and distribution. A nation-wide presence inthese industries presupposes an efficient and penetrating distribution network, high orderof brand related marketing skills and ability to service a fairly differentiated product line.
  9. 9. Thus, one may find numerous local soap makers but there are substantial entry barriers to anew national brand penetrating the market. Technology, Patents and Research The ability to possess and commercially exploit certain specialized technology is one more source of entry barrier. Specially chemicals, drugs, plastics are some of the industries where the difficulty of developing a new. product or a process is well understood. These are knowledge related factors. It is very difficult to penetrate an industry where a few existing firms have a strong research base and a large pool of product related patents. New entrants in such industries are often the employees of the existing firms breaking away to form a new entity. Switching Costs Take an industry like earthmoving machinery. For such an industry each firm has a few large customers like contractors, project authorities or coal mines. Consider that a customer has a fleet of say 10 machines of a given brand. When he replaces one machine or augments his fleet, more likely the choice would fall on the same brand. For him it means a familiar machine, known operational details, already trained operators and a host of other things like spare parts stocks. Thus, the cost of switching to a new brand can be fairly high, These costs can act as entry barriers. Along with earthmoving machines the customer also has related equipment like loaders and dump trucks which he had purchased on the ground of compatibility with a given brand of the main machine. . Take the case IBM. Why does every other personal computer.(PC) that one come as across claims to be an IBM compatible. It has to be so, because all the software is developed by using IBM standards. The PC cannot work without software. By developing industry level standards, IBM has created high switching costs in an attempt to create entry barriers. You will have notice a that in oligopoly situations, firms should strive towards creating high entry barriers, if the industry does not possess those necessary characteristics. This is precisely what happens. If there are low entry barriers, new firms enter soon and the profitability of the existing firms drops. Notice the state of the pocket calculator industry. There, are virtually no entry barriers and with the existence of cheap smuggled products, it is impossible to create them. As a result, most large firms are almost out of this market leaving it open for the small scale units. Activity 7 The table below lists some industries Indicate in column 3 whether the entry barriers are high or low. Give reasons in column 4.S.No. Name of the Industry Entry Barriers Reasons1 Computer Software2 Mainframe computers3 Oil-field chemicals4 CNC machine tools 5 Breakfast cereals
  10. 10. 6 Aluminium 7 Ball-point pens 8 Colour Television SetsTHE ROLE OF GOVERNMENT POLICY,All governments, whether in India or abroad, impose taxes and duties. What is special about the Indian governmental policies is their ability to control price, ,quantity of production, distribution choice of product, location and almost every business decision of a firm. Some reference to these have been made in the previous sections. Presently we shall see the role of government policy in a synoptic way. Later, a full unit in Block No. 5 will talk about the regulatory environment in detail. ," Through its industrial licensing policies the Central Government has control over the following business decisions:1 Choice of the product2 Scale of production (capacity)3 Location of production4 Choice of technologyThe policy on foreign collaborations also regulates the aspects pertaining to choiceof technology. Import policies can have significant impact on the types and quantities ofraw materials that would become available for production. Choice of machinery is alsoguide by the import regulations in force.Through levy of customs and excise duties, the price of the end products as well as theraw materials gets affected. Some industries like sugar aluminum, steel, edible.oils, cement are subject to price controls. These are administered through various Actsand, the job of determining prices is often entrusted to the Bureau of IndustrialCosts and Prices under the Ministry of Industry. Firms in these industries are thus partlyguided by market forces and partly by the Ministry in regard to their pricing decisions.Apart from these, several state governments have their regulations for promoting(or restricting ) the growth bf certain industries. All things considered, the job ofthe business manager is made quite difficult in the Indian environment.Ironically, government steps ill to correct certain imperfections in the market butin the process adds a few of its own. The existence of many industries with only fewfirms is mainly attributable to the government policies which have acted as entrybarriers for a long period of time. The picture is changing rapidly. There are fairchances that in the future market related forces would operate more on the price volumedecisions of the firms, than the government, policy related factors.
  11. 11. FOR SELF-ASSESSMENT TEST1. List and explain the factors that determine the element of competition in a market for either a product or a factor.2. in the nature of prevailing competition that decides the classification of a market into perfect and imperfect. Based on your analysis, comment on the degree of perfection in the following markets 1) Labour market in Dubai 2) Capital market in India, 3) Computer market in India 4) Bombay stock market 5) Wholesale vegetable market in a city like Delhi3 What do you mean by the term -"barriers to entry"? State and explain the factors thatcause such barriers.4 In theory, we talk about barriers to entry in practice ( in India ) we have barriers toexit our sick units are not allowed to die a natural death. Comment.5 In what ways, does monopolistic competition differ from perfect competition?Give real world examples to illustrate your answer. (You may re-do the same questionwhen you have run down the entire readingmaterial of the present Block.)6 Review your understanding of the followingterms: a) .Cut-throat-competition .2) Oligopoly / Duopoly3) Bilateral monopoly4) Duopsony/Oligopsony5) Product differentiationf ) Price volume decision7 Write a lucid essay on the "Determinants of Price-Output Decisions".Activity a) Identify monopoly industries in the public sector and private sector manufacturing and services sectors.………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..……………………………………………………………………………………………………………… 2) The table below gives information on some Indian industries which exhibit "different degrees of imperfection in their market structures. Fill in the last
  12. 12. column by specifying the type of competition that is most likely to prevail in theseindustries.S.No. Name of Industry Number of firms Type of competition1 Tractor 102 Vanaspati (ghee) . 223 Edible oil 36004 Sugar 3265 Cigaretts 56 Caustic soda 247 Passenger cars 38 Commercial vehicles 119 Cement 4010 Earthmoving equipment 1011 Soaps 2012 Synthetic detergents 16Sources: Centre for Monitoring Indian Economy, Bombay c) All the firms in the sugar and cement industries produce almost identical products and there are many firms. Price control prevails in these industries. Each firm in the industry must sell a part of the output at a price determined by the government. In what way the performance of these industries would differ from say the caustic soda industry where no such price control exists? - ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ………………………………………………..…………………………………………… …………………………………………………………………………………..………… ……………………………………………………………………………………………… A ) Obtain information about the Freight Equalis31ion Scheme in steer and analyse its impact on the price of various steel products in different locations. ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ………… B ) Describe compitetive situation in the market for a product with one dominant buyer and one dominant seller.
  13. 13. POINTS TO PONDER __________________________________ _ MARKET a market is a group of people and firms which __________________________________ are in contact with one another for the _ purpose of buying and selling some product. It is not necessary that every member of the market be in contact with every other __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ Market structure _ Market structure refers to the number and size distribution of buyers and sellers in the market for a good or service. __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ _ __________________________________ _
  14. 14. Types of market Traditionally markets are classified into four types: Perfect competition Monopoly competition Monopolistic competition Oligopoly competition __________________________________ _ Perfect competition Perfect competition is characterized by a large ___________________________________ number of buyers and sellers of an essentially identical product. Each member of the market, whether Buyer or seller, is so ___________________________________ small in relation to the total industry volume that he isIndividual buyers and sellers arethe product. unable to influence the price of ___________________________________ essentially price takers. At the ruling price a firm can sell any quantity. Since there is free entry and free exit, no firm can earn ___________________________________ excessive profits in the long run. ______________ M ______________ o n _______ o p ______________ o ______________ l _______ y Furthe differentiated and if there can manage toIn the monopoly situation there is just one producer of a r, if are no threats of new earn excessive product. The firm has substantial control over the price: produc firms entering the same profits over along t is business, a monopoly firm period.
  15. 15. Monopolistic competition Monopolistic competition a term coined by E.M. Chamberlin implies a market structure with a large number of firms selling ___________________________________ differentiated products. Firms in such- -a market structure have some control over price! By and large they are unable to earn ___________________________________ excessive profits in the long run
  16. 16. Monopolistic competition Monopolistic competition a term coined by E.M. Chamberlin implies a market structure with a large number of firms selling ___________________________________ differentiated products. Firms in such- -a market structure have some control over price! By and large they are unable to earn ___________________________________ excessive profits in the long run
  17. 17. Monopolistic competition Monopolistic competition a term coined by E.M. Chamberlin implies a market structure with a large number of firms selling ___________________________________ differentiated products. Firms in such- -a market structure have some control over price! By and large they are unable to earn ___________________________________ excessive profits in the long run
  18. 18. Monopolistic competition Monopolistic competition a term coined by E.M. Chamberlin implies a market structure with a large number of firms selling ___________________________________ differentiated products. Firms in such- -a market structure have some control over price! By and large they are unable to earn ___________________________________ excessive profits in the long run

×