Market Structure• Refers to the components of a market expressed in terms of1. Number of buyers & sellers2. Price taker or price maker buyers3. Entry & exit conditions4. Price vs. non price competition5. Equilibrium of the firm6. Buyer’s knowledge on the products etc…
Features of Perfect Competition Large number of buyers & sellers Freedom of entry & exit Homogeneous or Identical product Price-taker Perfect information No barriers to entry (legal, technological, resource) No technical progress No investment lag - Immediate implementation of production decisions Firms demand curve, Price line, AR & MR curve are equal
Equilibrium for a Perfect Market Firm• Equilibrium condition is MC=MR• Short run condition: firm makes losses due to easy entry of other firms• Long run condition: all the firms make normal profits
Features of Monopoly• One firm in industry• Downward sloping demand curve, AR & MR curve• No close substitutes• Price-maker• No restrictions on resources• Blockaded entry and/or exit• No close competitors
Types of Monopoly• Resource based monopoly• Government promoted monopoly• Natural monopoly
Price & Output of Monopoly firm• Equilibrium condition: MR=MC• Short run profits: Super Normal Profits and also some times Losses.• Long run profits: Super Normal Profits
Price Discrimination• A monopoly firm can adopt price discrimination as a rational plan of action in its profit maxi plan.• It depends on the monopoly firm’s ability to separate the customers based on their willingness to pay.• There can be 3 types of discrimination in monopoly market.
Types of Price Discrimination1. First Degree:Charging different prices based on their ability to pay for the products.2. Second Degree:Charging different prices based on their ability to buy products in bulk but not per unit.3. Third Degree:Charging different prices based on the ability of the manufacturer to classify his customers into various segments.
Monopolistic Competition• Large number of buyers & sellers• Free entry & exit• Price maker• Product differentiation• Advertising
Price & Output of Monopolistic firm• Equilibrium condition: MR=MC• Short run profits: Super Normal Profits for some firms, normal or zero economic profits for few firms and also losses for newly entered firms.• Long run profits: Normal Profits or Zero Economic profits
Oligopoly market• Few sellers but large in size• Price rigidity• Advertising• Identical products• Monopoly power for each firm• Interdependency of firms
Collusive Oligopoly• When firms operating in a oligopoly agree to each other about the price and output that each firm has to follow is called Collusive Oligopoly.• Cartel is the market behavior in which all the firms operating in a market act in the similar manner.• Price Leadership is a market condition where in one firm acts as a leader and set the price for product and all others follow firm’s price.