Market Structure

Types of Market
There are four types of market
1)Perfect Competition market
2)Imperfect Competition or
Monopolistic Competition market
3)Monopoly Market
4)Oligopoly Market

Introduction
An oligopoly is a market structure
characterized by:
Few firms
Either standardized or differentiated
products
Difficult entry
Mutual interdependence
Selling cost
Indeterminate demand Curve.

Kinds of Oligopoly
Oligopoly is broadly classified in two
categories-:
1.Collusive oligopoly
2.Non collusive oligopoly

Contd.
Oligopoly without product
differentiation or pure oligopoly.
Oligopoly with product differentiation
or differentiated oligopoly.

Collusive Oligopoly
It is a form of market in which there
are few firm in the market and all
decide to avoid competition through
a formal agreement.
There are two type of collusive
oligopolyA.Cartel Model
B.Price leadership model

Collusive oligopoly models

A. Cartel models
Firms jointly fix the price & output policy
through agreement.
It is a formal agreement in which
oligopolistic after consultation & discussion
agree to observe certain common rule of
conduct in regards to price output etc.
under this they make written agreement
which may also provide for penalties to
those who violate the agreement.
Agreement may be either open or closed.

Contd.
Price Leadership models
One firm set the price and others follow it.
There is a tacit agreement between
oligopoly firm. Under tacit agreement
,without any face to face contact,
consultation, discussion they come to have
some understanding between themselves &
pursue a uniform policy with regards to
price output etc.

Three types price leadership

model
1. Price leadership by low cost firm
2. Price leadership by dominant firm
3. The Barometric price leadership

Non Collusive oligopoly

It is a form of market in which there
are few firm in the market & each
firm pursues its price and output
policy independent of the rival firm.

Non - Collusive Model

1) Cournot s Duopoly Model
2) Bertrands Duopoly Model
3) Edgeworth Duopoly Model
4) Chamberline Duopoly Model
5) Sweezy Duopoly Model (Kinked
demand curve)

Cournots Duopoly Model

Propounded by Augustin Cournot in
1838.
Assumption
1.Two firm
2.Identical goods
3.Cost of production is zero
4.Market demand is fully known
5.Duopolists act independently i.e each
duopolist believe that regardless of his
action & there effect upon market price,
the rival firm will keep its output constant.
(adjusting variable is output.)

Contd..
Equilibrium in the Cournot model
Given that each seller assumed that
others output is unaffected by his
own decision, they would adjust price
and output until a position of
equilibrium is reached.

Bertrands Duopoly Model

Assumption
1)The producers first set the price of
product & then produce the output which
demanded at that price. Thus , adjusting
variable is price.
2)Each producer believe that his rival will
keep his price constant at the present
level what ever price he might himself set.
3)Producer know that he can capture the
whole market by undercutting his rival.

contd
In Bertrand model of price war( i.e the
process of undercutting) will go on
until the price falls to the level of unit
cost of production beyond that the
price can not be curtail because in
that case total cost would exceeds
total revenue.
Thus Bertrands model equilibrium is
achieved when market price is equal
to average cost of production.

Kinked Demand Curve

Theory
Propounded by sweezy.
Theory states that, each oligopolist
believe that if he lower the price
below the prevailing price, his
competitors will follow him and will
accordingly lower the prices, whereas
if he raises the price above the
prevailing level, his competitors will
not follow his increase in price.

Contd..
These two different type of reaction of
the competitors make the portion of
demand curve above the prevailing
price level relatively elastic and
portion of demand curve below it
relatively inelastic .Hence two
situation are emerged
1)Price reduction
2)Price increase

Contd
Kink is formed at the prevailing price
level because the segment of
demand curve above the prevailing
price level is highly elastic & the
segment of demand curve below the
prevailing price level is less elastic .

Why Price Rigidity

Thus oligopolist confronting a kinked
demand curve will have no incentive to
raise its price or to lower it.
Oligopolist will not gain any larger share of
market by reducing his price below the
prevailing level & there will be substantial
reduction in his sales if he increase the
price above the prevailing level, he will be
extremely reluctant to change the
prevailing prices.

Monopoly Market
Monopoly is a market structure in which
there is a single firm producing the
output.
Being the sole supplier monopolist is thus
in a situation to fix up a price to his own
advantage.
Feature
1)A single seller
2)No close substitute
3)Barriers to entry
4)Perfect knowledge

Sources of Monopoly
There are major sources of monopoly

1)Patent right
2)Control over the essential raw
material
3)Grants of franchise by the
government
4)Advertising and brand loyalties

Types of Monopoly
1) Pure monopoly- when single seller
produces such a product which has
neither a near nor a remote
substitute and the seller takes the
whole of the country income all the
time, it is pure monopolist.
2) Bilateral Monopoly It is a
market consist of single seller and
single buyer.

Contd.
3)Discriminating Monopoly This
is a market structure where
monopolist charges different prices
from different customer for the same
good & services at the same time.
Price discrimination is a technique by
which the monopolist makes the
customer pay according to his ability.

Condition Essential for prices

Discrimination
It is possible under specific
condition which are as follow
i. Existence of two or more than two
markets.
ii.Existences of different elasticities of
demand in different market .
iii.No possibility of resale

Contd.
Price discrimination is made
possible, by three factors:
i. Consumer's preferences
ii.The nature of the good
iii.Distance and frontier barriers

Consumer's Preferences
Price discrimination because of consumer
preferences is possible under the following
conditions:
When consumer A is unaware of the fact that
consumer B gets the same good at a
different price.
When the consumer has an irrational feeling
that he is paying a higher price for better
quality, though, in reality, it may not be true.
When the price differences are so minute
that the consumer is not worried about it.

The nature of the good

Since the resale of certain direct

services is not possible, these
provide enough opportunities for
price discrimination; e.g. the service
of a doctor or lawyer.

Distance and frontier

barriers
Price discrimination is also possible due to
distance and frontier barriers. For example,
when the monopolist is serving two markets: a
home market where there is a tariff and a world
market where there is no tariff, he can take
advantage of the protected market (where there
is tariff) and charge a higher price in the home
market. Price discrimination may also take place
due to differences in the transport costs.

Forms of Price
Discrimination
1) Personal Discrimination - when
the monopolist simultaneously
charges different prices from
different buyers.
2) Place Discrimination- when
monopolist charges different prices
in different market places.

Contd
(2) Trade Discrimination when
monopolist charges different prices
for the different uses or from
different occupation.
For e.g an electricity company may
charges a high price for domestic
consumption and may charge low
price for the industrial consumption.

Dumping
Dumping is international price
discrimination.
Dumping occurs when a producers
sells a commodity in a foreign
country at a price that is lower than
the price which he charges in the
domestic market.

Degree of Price
Discrimination
Price discrimination can be categorized on the
basis of the degree of discrimination.
First degree price discrimination is
considered to be the most extreme form of
discrimination.In this type of discrimination, the
customer is charged the maximum possible price,
and hence at this degree of price discrimination,
firm makes maximum profits. Healthcare industry
is the best example for such a type of price
discrimination. (Take- it or leave- it degree
and Perfect Price Discrimination ).

Second Degree Price

Discrimination

In this type of price discrimination,

buyers are divided into different
group and from each group different
price is charged. For e.g railway
ticket

Third degree price

discrimination
This type of price discrimination is the
most common and practical. Here the
consumers are sub divided into sub
market or groups based on the elasticity of
demand. Consumers can be divided as
residential and business users.

Pricing Under Monopoly

The monopoly firm like a competitive
firm reaches its equilibrium when it
maximizes its total profits .
Its profits are maximum when
two condition are fulfilled :
i. The MC curve is equal to MR curve
ii.The slope of MC is greater than slope
of MR at the point of intersection.

Contd.
In long run monopoly firm uses his
existing plant at any level which will
maximize his profit since entry of new
firm is totally blocked.
Monopolist will not stay in business if
he make loss in long run. He will most
probably continue to earn super
normal profit in the long run also
because entry was barred.

Perfect Competition
Perfect competition is a market
structure characterized by complete
absence of rivalry among individual
firm.
Feature
1)Large numbers of buyers & sellers
2)Homogeneous product
3)Free entry and exit
4)Perfect knowledge
5)Perfect mobility of resources

Price Determination
A firm is in equilibrium when it maximize its
profits.
Under perfect competition individual firm is a
price taker.
Price is determined by industry and passed
on to firm.
Since an individual firm is unable to
influences the ruling price & since it can sell
an infinite amount at the prevailing prices ,
the demand or AR curve facing an individual
firm under perfect competition is perfectly
elastic at the ruling price.

Contd.
The demand curve of a firm in perfect competition
is horizontal as the price is determined by supply
and demand forces in the industry.
Therefore the equilibrium price will be P= MR=MC.
Thus the first order condition for profit
maximization will be MC=MR=AR=P where MC is
the marginal cost, MR is the marginal revenue, AR
is the average cost and P represents the price.
Second order condition is MC cut MR from below .
Price discrimination is not possible under perfect
competition, because everyone knows the price at
which the good is being bought and sold.

Contd
Under perfect competition firm is
facing four type of situation
i. Super Normal Profit
ii.Normal Profit
iii.Breakeven point
iv.Shut down point

Monopolistic
Competition
An imperfect market can be defined as a
market with many producers offering goods
which are close substitutes, but not identical,
as is the case in perfect competition. Since the
products vary in their features, the pricing also
varies.
All the producers here are monopolists in their
own product markets. However, as most of
these products have close substitutes, the
demand curves are considerably elastic.

Feature of Monopolistic
Competition
i. A large number of firm
ii. Product differentiation
(Heterogeneous)
iii. Some influences over price
iv. Non price competition (selling cost)
v. Freedom of entry and exit

 Under imperfect competition

sellers try to differentiate their
products mainly on the basis of
four aspects:
Physical Features Size, weight, color,
taste, texture, scent, thickness, bottle
design, particular attributes, etc.
Location The number and variety of
locations where a product is available.
Some are available everywhere; while
others are available only at selected
outlets.

Contd..
Services Products can be differentiated on
the basis of the services that accompany
them. For instance, some pizza joints
undertake home delivery while some dont;
some retail outlets have sales staff who help
you choose things, while others don't.
Product Image The image that the producer
tries to build up in the consumers mind
through packaging, etc. For instance, some
shampoos are sold only in salons, while some
clothes are associated with celebrity names.

Product differentiation
Product differentiation can be done on the basis of
two factors.
First, products can be differentiated on the basis
of certain characteristics of the product such as
exclusive original features, trademarks and some
special types of packages or wrappers.
Second, differentiation may be based on the
conditions surrounding the sale of the product and
after sales service. The product is differentiated if
the after sales services rendered by the firm are
different from those of other firms in the market.

Contd
Firms in the service industry also try to differentiate
themselves through their logos. Service companies
such as banks, financial service companies,
insurance companies, consultancies, courier
companies, and airlines try to create an association
in the customers mind with the help of the logo. The
logo gives a distinct personality to the organization.
Through product differentiation the producer or the
seller tries to make its product unique in the mind of
the consumer.

Types of Product
Differentiation
Product differentiation can be in two forms:
Real Product differentiation - when the inherent
characteristics of the product are different . Real
product differentiation takes place when there are
differences in product specifications or differences in
location of the firm which determines whether the
product is available conveniently to the customers
Fancied Product differentiation - when the
products are basically the same. When the product is
differentiated through advertisement, difference in
packaging, design, or brand name, then it can be
called fancied product differentiation.

Differences between perfect &

imperfect competition
In the real world, perfect competition,
where all goods are homogenous and all
firms are price takers, is rarely seen.
Imperfect competition is very common.
In imperfect competition of a market,
there are few sellers and product
differentiation and price wars are common.

Contd.
While firms in a monopolistic market are price
dictators, in perfect competition they are price
takers.

The demand curve for a market based on perfect

competition is a horizontal straight line, while in
imperfect competition the demand curve slopes
downwards from left to right.