Market structures

Meaning of market:
Generally the term “Market” refers to a
place in which commodities are bought
and sold.
For ex, cotton market, gold market ,etc
John .f. Due defines market as “A
group of buyers and sellers who are in
sufficiently close contact with one
another so the exchange takes place
among them”.
Continued….
Thus a market is one which consists of limited
or unlimited no. of buyers and sellers who have
close contact either directly or indirectly so that
buying and selling of goods take place between
them.
Classification Of Markets:
Markets can be classified on the basis of
place, time or competition.
The following chart gives a clear picture
about the classification of markets.
 CLASSIFICATION OF MARKETS

MARKETS

PLACE TIME COMPETITION

• LOCAL MARKET IMPERFECT

2.NATIONAL 1. VERY SHORT MARKET
PERFECT
MARKET 2. SHORT 1. MONPOLY
MARKET 2. DUOPOLY
3.INTERNATIONAL 3. LONG 1. PURE 3. OLIGOPOLY
MARKET 4. VERY LONG COMPETITION 4.MONOPOLISTIC
2. PERFECT COMPETITION
Pure Competition

• Characteristics:
This term is generally used by the American
Economists:
1. Existence of Large number of Buyers and
Sellers
2. Homogenous Products
3. Free Entry and Exit of Firms
 Perfect Competition
• Features:
This term is traditionally used by the British
Economist:-
1. Existence of Large number of Buyers and Sellers
2. Homogeneous product
3. Free entry and exit of firms
4. Uniform price
5. Perfect mobility of factors of production
6. Perfect knowledge of market
7. Full and Perfect Competition
8. No Transport Costs
9. No Government Intervention
 Distinction Between Pure and
Perfect Competition
The pure competition is a part of perfect
competition .
the term “pure competition” is generally used
by the American economists.
The term “perfect competition” is used by the
British economist.
For a market to be highly competitive, 3
fundamental conditions are:
1. Existence of large no. of buyers and sellers
2. Homogenous product
3. Free entry and exit of firms
continued….
For the market to be perfectly competitive
6 more conditions must be added to the
above. They are:
1. Uniform price
2. Perfect knowledge of factors of production
3. Perfect mobility of factors of production
4. Full and perfect competition
5. No transport costs
6. No government intervention
Price–Output determination under
Perfect Competition in an Industry
(General model)
Under a perfectly competitive market, in case
of the industry market price of the product is
determined by the interaction of supply and
demand.
The market price is not fixed by either the
buyers or sellers, the firm or the industry.
It is only demand and supply that determines
the equilibrium price of the product.
Continued…

Under perfect competition a firm will

not have any freedom to fix the price of its
product.
The industry is the price maker or giver
and a firm is a price taker or receiver. As a
part of the industry, it has to simply
charge the price that is determined by the
industry.
Price under Perfect competition is
determined with the help of Market
Demand and Supply Schedule
Price per Quantity Quantity
unit in Rs demanded in supplied in
units units

5 1000 5000
4 2000 4000
3 3000 3000
2 4000 2000
1 5000 1000
Price-output determination under
Perfect Competition

OX axis=quantity demanded & supplied

OY axis=price
E=Equilibrium Point
Price-output determination under
perfect competition
Equilibrium of the Industry and
Firm in the Short run period under
Perfect Competition
Under conditions of Perfect Competition the
industry is the “Price maker”, the firm is a “Price
taker”.
In the short period the firm can adjust its
output to the change in demand to a certain
extent with the help of existing plant and
machinery.
The fixed factors cannot be altered but the
variable factors can be altered to produce more
quantity.
(1)Equilibrium of an Industry in
short period under perfect
competition
(2) Equilibrium of a firm making
profits

TR=OM x OP=OPEM
TC=OM x OC=OCAM
Total Profit=TR-TC
=OPEM-OCAM
=PEAC
(3) Equilibrium of a firm incurring
losses
TR=OM x OC=OCBM
TC=OM x OP=OPEM
Total Loss = TC-TR
= OCBM-OPEM
= PEBC
Normal Profit
Normal profit is the minimum reasonable
level of profit which the entrepreneur must
get in the long run so that he is induced to
continue the employment of his resources in
its present form.
Normal profit is regarded as a part of factor
cost.
When AR=AC it is implied that normal profit
is included in the TC.
Super Normal Profit

Profits in excess of normal profit are

considered as super normal profit.
Also called as pure business profit or excess
profit.
It is obtained when TR exceeds TC.
It is the reward paid for the entrepreneur
for bearing uncertainties or risks of business.
Sub-Normal Profit

When a firm earns only a part of the

normal profit, it is called sub-normal profit.
It is below the normal profit earned,
when TR covers explicit cost fully and a
part of implicit cost of entrepreneurial
services, i.e when revenue is less than the
cost.
 Equilibrium of Industry and Firm in the
Long period under Perfect Competition. (OR)
Price Output determination in the perfect
Competition in the Long run
Equilibrium of Industry:
An industry is said to be in equilibrium when
there is no tendency for the size of the industry
to change i.e either to expand or contract.
The essential condition is that at a given
price the total quantity demanded should be
equal to the total quantity supplied.
All the firms should be in equilibrium i.e
LMC=LMR(MC=MR).
Equilibrium of Industry under
perfect competition in long run
Continued…..
Equilibrium Of a Firm:
In the long period the firm is able to
adjust its output with the changes in
demand, by varying all the factors of
production that it has employed.
Thus it can bring about alterations in
the cost of production and on account of
economies of scale in production.
The essential condition of equilibrium
of a firm is that LAR=LAC.
Equilibrium of a firm under perfect
competition in long run
 Imperfect competition
Imperfect competition is a comprehensive
term to include all other kinds of market
situations except pure and perfect
competition.
Competition becomes imperfect when
the number of sellers is reduced to one, or
a few who offer products for sale.
At the same time restrictions are
imposed on the flow of information, entry
and exit of firms.
 Monopoly
The term “Monopoly” is derived from
two Greek words- Mono –Single and Poly
—means to sell. Thus ‘Monopoly’ refers to
a market situation in which there is a
single seller for the product for which
there is no close substitutes.
According to Prof. Watson “A
Monopolist is the only producer of a
product that has no close substitutes”.
Features of Monopoly:
1. Absence of Competition
2. One Producer or Seller
3. No Close Substitutes
4. Complete Control over Supply
5. Price Maker
6. No New Firms
7. No Difference between a firm and industry
8. Monopoly Firm may be Proprietary or
Partnership / Joint Stock / Government
organization
9. There is a scope for super normal profits.
Ex: Indian Railways , P&T, BMTC;
BWSSB;BESCOM, etc.
Price and Output Determination
under Monopoly OR Equilibrium
under Monopoly
According to MR and MC approach , a monopolist
will be in equilibrium when 2 conditions are
fulfilled. They are
1. MC=MR
2. When MC curve cuts MR curve from below.
The study of price equilibrium can be conducted
in 2 time periods.
1) Short period
2) Long period
Short Period Equilibrium under
Monopoly
Short period refers to that period in which
the monopolist has to work with a given
existing plant.
The monopolist can experience three
possible alternatives. They are:
1. Earning super normal profits
2. Normal profit
3. Incurring losses
(1) Earning Super Normal Profits
If the price determined by the
monopolist is more than AC he will
get super normal profits.
The monopolist will produce upto
the level where MC=MR.
This limit will indicate equilibrium
point.
Diagrammatic Representation

TR=OM x OP=OPQM
TC=OM x OS=OSRM
Total Profit=TR-TC
=OPQM-OSRM
=PQRS
(2) Normal Profits

A monopolist in the short run would

enjoy normal profits when average
revenue is just equal to average cost.
The average cost of production is
inclusive of normal profits i.e.
remuneration paid to the entrepreneur for
his services in the process of production.
Diagrammatic Representation
(3) Minimum Losses
In the short run the monopolist may have to
incur losses certain times.
This situation occurs if price falls due to
depression and fall in demand, the monopolist
will continue to produce as long as price covers
the average variable cost (AVC).
Once the price falls below the AVC,
monopolist will stop production.
Diagrammatic Representation
Long Run Equilibrium Under
Monopoly
Long run is the period in which output
can be changed by changing the factors of
production.
Here equilibrium wo0uld be attained at
that level of output where the long run
marginal cost curve cuts marginal revenue
curve.
Long run equilibrium under
Monopoly

Total super normal profits = PQRS

Price Discrimination
• Meaning and definition:
Price discrimination means the practice of selling
the same commodity at different prices to different
buyers. If the monopolist charges different prices
for different customers for the same commodity it
is called discriminating monopoly.
Mrs. John Robinson defines price discrimination
as “the act of selling the same article produced
under a single control at different prices to different
customers”.
Types of Price Discrimination:
• There are mainly three types of price
discrimination. They are
1. Personal discrimination
2. Place discrimination
3. Trade discrimination
Personal discrimination:
In this case the monopolist charges
different prices for different customers on
the basis of their ability to pay. This is
possible in specialised personal services of
doctors, lawyers, etc.
Place discrimination:
Monopolist may have different markets in
different places and charge different prices
for the same commodity. Generally
“dumping” is considered as the best
example of place discrimination.
• Trade discrimination:
Here the monopolist charges different
prices for the same commodity for
different types of users for which the
commodity is put to.
For ex, electricity at very low rates for
agricultural purposes and at very high
rates for domestic and industrial purposes.
Conditions For Price Discrimination
1. Existence in imperfect market
2. Existence of different degrees of elasticity of
demand in different markets
3. Existence of different markets for the same
commodity
4. No contacts among the buyers
5. No possibility of resale
6. Legal sanction
7. Buyers illusion
8. Ignorance
9. Product differentiation
Price-Output Determination under
Discriminating Monopoly
Under discriminating monopoly in order to
discriminate the prices, the entire market will be
divided into sub markets on the basis of the
elasticity of demand for the product.
This is explained by the revenue curves of
the 2 sub markets A and B and the aggregate
situation in the entire market under the control
of the monopolist.
Sub market A
Sub market B
Aggregate market

AAR = Aggregate average revenue curve

AMR =Aggregate marginal revenue curve
 Duopoly
Duo means ‘two’ and ‘Poly’ means ‘To sell’.
Thus ‘Duopoly’ refers to a market situation in which there are
only TWO sellers for a product.

The two firms of sellers may either resort to

1) Competition
or
2) Come Together

 Competition:
With the intention of elimination the other from the market and
setting himself as a monopolist. It may be ruinous for both.
 Come to an understanding/ Come Together:
On the other hand they may come to an understanding and
fix a common price & restrict the competition to
advertisement only.
Oligopoly
Oligoi : a few ; Poly : to sell
Oligopoly is that form of imperfect
competition where there are a few firms in the
market producing either homogenous or
differentiated products which are close but not
perfect substitutes of each other.
Identical product : cooking gas, cement, cable
wire, Petroleum, Vegetable oil , etc.
Differentiated products : Cars, T.V Sets ,
Refrigerators, washing machines, scooters,
Fans, etc.
Features of Oligopoly:
1. Very few sellers
2. Interdependent
3. Indeterminant demand
4. Element of Monopoly
5. Price Rigidity
6. Selling Cost
7. Conflicting Attitude of Firms
8. Constant Struggle
Kincked Demand Curve
reference: Dwivedi

• The kincked demand curve model of oligopoly was

developed by Paul M. Sweezy.
• He has tried to show through his kincked demand
curve analysis that price and output once
determined under oligopolistic conditions, tend to
stabilize rather than fluctuating.
• It seeks to establish that once a price-quantity
combination is determined, an oligopoly firm does
not find it profitable to change its price even if there
is a considerable change in cost of production.
Continued…

• There are three possible ways in which rival

firms may react:
1. The rival firms follow the price changes,
both cut and hike;
2. The rival firms do not follow the price
changes;
3. The rival firms follow the price cuts but not
the price hikes;
Graphical Representation
PRICE LEADRESHIP

Under this system, a particular strong

firm which is enjoying the benefits of large
scale production will dominate the small
firms.
The price fixed by the dominating firm
will be followed by all others firms in the
market. Hence the dominating firm
becomes the Price Leader.
 Generally the leadership arises in a
market on account of the following
reason:
1. The leading firm will be enjoying the
benefits of lower cost of production and
possesses huge financial resources at its
disposal.
2. It may have a substantial share in the
market.
3. It will have reputation for sound pricing
policy.
4. It may take the initiative in dominating and
controlling other firms in the industry as a
normal method of functioning.
5. It may follow aggressive price policy and
thereby it can acquire control over other
firms.
6. If a dominant firm is unable ton perform its
role as a price leader it will give the
leadership role to others.
Advantages of Price Leadership

Helps the small firms to formulate price

policy.
Simple and economical.
Ensures stability in the markets.
Puts an end to operations of trade cycles
or fluctuations in the market.
Ensures the spirit of live and let live.
 Monopolistic Competition
Prof. Chamberlin is considered to be the
main builder of the theory of monopolistic
competition.
Features:
1. Existence of sufficiently Large number of Firms.
2. Product Differentiation
3. Selling Cost
4. Free Entry and Exit of Firms
5. No Possibility of Combination
6. Consumers Divided
7. Element of Monopoly and Competition
8. Non price Competition
Price-Output Determination under
Monopolistic Competition
Price output determination under
monopolistic competition is governed by
cost and revenue curves of the firm.
Equilibrium of the Individual Firm In
the Short Period Earning Profits:
Under monopolistic competition a firm
will come to equilibrium on the same
principle of equalising MR to MC. Each firm
will choose that price and output where it
will maximize its profits.
Firm A (Making Profits)
Firm B (Making losses)
Group Equilibrium in the Long Run
under Monopolistic Competition
Prof. Chamberlin made some assumptions of
uniformity to arrive at the long run equilibrium
of the group.
1. The firms produce more or less similar
products.
2. The shape of AR curves will be the same for all
the firms.
3. All firms have equal efficiency in productions
and cost curves are similar.
The abnormal profits earned by the firms will
attract new firms to the group. This will result
in increase in competition and fall in prices.
Graphical Representation
Product Differentiation
 An important feature of the monopolistic
competition is that there is product
variation or differentiation.
 Different varieties of the same commodity
are treated by the consumers as different
products under monopolistic competition.
 Product differentiation is the term used by
Prof. Chamberlin for quality competition.
 Product differentiation is very common in
the case of manufactured goods.
Continued…
1. The producers may bring about product
differentiation through differences in the quality
of the raw materials used, workmanship, size,
colour, etc.
2. The producers may bring about differences in
their products by offering special services to
their customers before and after the sale of
their products. Ex: credit, home delivery, etc.
3. The producers may bring about product
differentiation through sales promotion, such as
advertisement, publicity and propaganda.
4. Differences are also brought about by the
location and distances of the selling depots.
Descriptive Pricing Strategies
Full Cost Pricing or Margin Pricing
This pricing method is widely adopted by the
business firms for its simple and easy procedure.
Under this method, the price is set to cover costs
(materials, labour and overhead) and a pre-
determined percentage for profit. The percentages
added to the costs are called margins.
Firms adopting this method of pricing should consider
following costs:
a. Fixed and Variable Costs of Production
b. Variable and Fixed Selling and Administrative Costs.

It is determined by a variety of considerations:

1. Common practice followed in a particular business.
2. Trade associations by means of advisory price-lists
distributed to the members.
3. Guidelines provided by the government.
Continued….
Advantages :
1. Helps in setting fair and plausible prices.
2. Can be adopted by all types of firms,
single product or multiple product firms.
3. Pricing is factual and precise and can be
defended on the moral grounds.
4. Safeguards the interest of the firm
against the risks and uncertainties of
demand for its products.
Continued….
Limitations:
1. Ignores the influence of demand in the
pricing process.
2. Fails to reflect the forces of competition.
3. Exaggerates the precision of allocated
costs.
4. Regards costs as the main factor
influencing the price.
5. Ignores the marginal or incremental cost
but uses average cost instead.
Product-Line Pricing
Meaning of Product Line:
A product line may be defined as a group of
products which have similar physical features and
perform generally similar functions.
According to Prof. W. J. Staton, “a broad group of
products intended for essentially similar uses and
possessing reasonably similar physical
characteristics, constitute a product line”.
Ex: BPL company – TV, Fridge, Washing machine,
Music system, Micro oven, etc.
Continued….
Meaning of Product-Line Pricing:
Product line Pricing refers to the
determination of prices of individual products
and finding proper relationship among the prices
of members of a product group.
In product line, a few products may be
regarded as less profit-earning products and
others as more profit-earning products.
Important Aspects in Product-Line
Pricing
The three important aspects of
product-line pricing are:
1. Opportunities for multiple products
2. Criteria for adding new products
3. Considerations for dropping of a product.
(A) Opportunity for Multiple
Products
A firm will go for multiple products when there
is “Excess Capacity”. Excess capacity may arise
on account of the various reasons given below:
• Mechanical indivisibilities
• Managerial abilities
• Seasonal variations
• Depression of trade cycles
• Secular shifts
• Research
(B) Criteria for Adding New
Products
At present most of the companies have
become multiple-product firms.In order to
build up competitive strength, to exploit
goodwill of consumers and to earn more
profits –a firm aims at adding one or more new
products to the product line.
Following are the main criteria for adding
new products:
1. Excess Capacity
2. Variation of existing products
3. Pressure from distributors and salesmen
4. Competitive nature of business
Continued…..
While introducing new products, the
management has to consider the
following points:
a. Comparing incremental costs with
incremental revenues.
b. Finding out potential product additions
c. Maximum chance of success.
(C) Considerations for Dropping Old
Products
Product elimination may be undertaken
on account of many reasons:
a) They are produced because of the past
mistakes
b) Because of merger and acquisitions
c) They have become old and obsolete
d) Changes in consumers tastes and
preferences
e) No longer it fits into the organizational
portfolio
f) The demand for product has come down
Continued…..
When a particular product does not
record satisfactory performance, a firm
can think of four alternatives given
below:
1. Improve the present product
2. Selling in bulk
3. Buying in bulk
4. Product life cycle: Total elimination
Pricing Strategies
Reference : P L Mehta
Price Skimming
Pre-conditions for such a strategy are:
• A sufficiently large segment whose demand is relatively
inelastic, not sensitive to a high price.
• Unit costs relatively unaffected by small volume, high
ratio of variable to fixed costs.
• High price unlikely to attract competition.
The policy aims at “skimming the cream” by taking
advantage of the target segment’s willingness to pay a
high price. Policy is, therefore, essentially discriminatory.
Advantages of such a policy are that it enhances the
quality image, thus providing maneuverability
adjustment if the initial price is too high.
Price Penetration
Pre conditions for such a strategy are:
1. A highly price-sensitive market, high price
elasticity.
2. Economies of scale in production or distribution;
ratios of variable to fixed costs are low.
3. Low price likely to discourage competition.
Policy is to charge a low price, so as to
stimulate demand for the product of the firm
and capture a large share of the market.
Loss Leader pricing
According to Haynes and Henry, “A loss leader is
an item which produces a less than customary
contribution or a negative contribution to overhead
but which is expected to create profits on increased
future sales or sales of other items”. This pricing
approach is widely used in retailing business.
This policy may be confused with the pricing which
results in losses. In fact it is a policy which aims at
increasing profits.
Continued….
Sometimes the firms, which manufacture or
sell multiple products, charge relatively low price
on some popular product with the hope that the
customers, who come for this product, will also
buy some other products produced or sold by
the firm. Such a product is known as a loss
leader.
It must be noted that the loss leader does
not mean that this product is necessarily sold at
a loss. It only means that the actual price
charged is lower than what could have been
charged.
Continued…
The basic idea of making a popular product a
loss leader is that the profits thus sacrified will
be made good by profits on the other products.
It has also been seen that the firms
sometimes compel their customers to buy some
product or products along with the purchase of a
popular product. The customer in turn sees the
products forced on him as a loss, hoping to
make up the loss through profit on the popular
product.
 Bob R Holdren did a study of the market behavior of
the grocery stores and found out some features which
are required for a good to serve as a loss leader.
These features are:
1. The buyers should have knowledge of prices of the
same good other selling units.
2. The quantity to be bought by the buyers should be
large enough so as to feel the benefit of price
reduction.
3. Demand for commodity should not be elastic.
4. The price reduction should be significant to be
perceptible.
5. Goods should be more or less of the same quality as
others are selling; neither should price reduction give
an impression of quality reduction.