Market structures perfect & imperfect competitions

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MARKET STRUCTURES Prepared by:Sajan N Thomas

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What are markets? •In common parlance, by market is meant a place where commodities are bought and sold at retail or wholesale prices. • In Economics however, the term “Market” does not refer to a particular place as such but it refers to a market for a commodity or commodities. It refers to an arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods.

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Markets

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What is ‘marketstructure’ • Market structure is the characteristics of a market. • We focus on those characteristics which affect the nature of competition and pricing

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Type of MarketStructures

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Alternative Market Structures •The four market structures • perfect competition • monopoly • monopolistic competition • oligopoly

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Type of market Numberof firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted Differentiated Builders, restaurants Downward sloping, but relatively elastic Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

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Perfectly competitive market Pure Competi tion Large Numberof buyers and sellers Homogene ous products Free entry and exit

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REVENUE AND COSTCURVES UNDER PERFECT COMPETITION

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SHORT PERIOD EQUILIBRIUMunder Perfect Competition

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LONG PERIOD EQUILIBRIUMunder Perfect Competition

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IMPERFECT COMPETITION

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MONOPOLY • Literally monopolymeans one seller. • ‘Mono’ means one and ‘poly’ means seller. • One firm is the sole producer or seller of a product which has no close substitutes. • Thus monopoly is negation of competition.

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Features of monopoly •Single producer or seller • There is no close substitute for the product • There is no freedom of entry • The monopolist is a price maker • The monopolist aims at maximisation of his profit

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Indian railway –a monopoly

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Source and Typesof Monopoly • Control of inputs • Economies of scale • Patents • Legal Restrictions • Entry Lags

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Short run &Long run Equilibrium of the Monopolist

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PRICE DISCRIMINATION • Sometimes,a monopoly firm might charge different prices to different groups of buyers. • This pricing technique is called price discrimination.

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Degrees of PriceDiscrimination Prof. A C Pigou has distinguished between three forms of price discrimination, namely; • First degree price discrimination (different price to each of its customers) • Second degree price discrimination (discriminate according to quantities consumed) • Third degree price discrimination (different prices to each sub market)

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Price discrimination of the first degree •The monopolist discriminates price not only between different consumers but also between the different units of purchase by a given consumer. • He extracts the maximum possible price for each unit of his output. • The monopolist has complete knowledge about the market demand curve. • He can charge the maximum price which a consumer is ready to pay for purchasing a given quantity. Price discrimination of the second degree • Price does not differ for each unit of purchase. • The consumer is made to pay one price upto a certain amount of purchase and another price for purchases exceeding this amount. • This is known as the principle of block pricing. Price discrimination of the third • A particular consumer pays a particular price, irrespective of the amount of his purchase.  But the price differs between different consumers (or different

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Monopolistic Competition • Itis that form of market in which there are large numbers of sellers selling differentiated products which are similar in nature but not homogenous. • Eg., the different brands of soap - these are closely related goods with a little difference in odour, size and shape. • It is a combination of perfect competition and monopoly

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Features of monopolisticcompetition

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Equilibrium of theFirm – Monopolistic market Short run Long run

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OLIGOPOLY

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Meaning • Oligopoly isa market situation in which there are few firms producing either differential goods or closely differential goods. The number of firms is so small that every seller is affected by the activities of the others.

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Features of oligopoly

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COLLUSIVE OLIGOPOLY • Thereexists usually some form of understanding among the oligopolists in a particular industry. • This understanding or agreement among the oligopolists may be either tacit or formal.

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Collusions are oftwo main types: • (i) Cartels and • (ii)Price leadership.

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THE KINKED DEMANDTHEORY OF OLIGOPOLY • It has been observed that many oligopolistic industries exhibit an appreciable degree of price rigidity or stability. • That is, in many oligopolistic industries prices remain sticky or inflexible, and there is no tendency on the part of the oligopolists to change price of the commodity by them even if the economic conditions undergo a change. • The most popular explanation is the so-called kinked demand curve hypothesis.

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KINKED DEMAND CURVE

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DUOPOLY

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Meaning pf duopoly •It is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market.

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Monopsony • Monopsony denotesa market condition when there is solitary consumer of a product or service. • Eg: a supermarket which is a sole buyer of fruits from a regions

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Bilateral Monopoly • Bilateralmonopoly denotes a market condition in which a solitary manufacturer of merchandise faces a solitary purchaser of that commodity

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Duopsony • An economiccondition, similar to a duopoly, in which there are only two large buyers for a specific product or service. Members of a duopsony have great influence over sellers and can effectively lower market prices for their supplies Eg: In a local market where there are only two leading milk companies collecting milk from farmers

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Oligopsony • An oligopsonyis a market form in which the number of buyers is small while the number of sellers in theory could be large. • This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers. • It contrasts with an oligopoly, where there are many buyers but few sellers.

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Example of oligopsony

Market structures perfect & imperfect competitions

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