AREA BASED CLASSIFICATION OF MARKET:

On the Basis of Geographic Location/area:

 Local Markets: In such a market the buyers and sellers are limited to
the local region or area. They usually sell perishable goods of daily
use since the transport of such goods can be expensive.
 Regional Markets: These markets cover a wider are than local
markets like a district, or a cluster of few smaller states
 National Market: This is when the demand for the goods is limited to
one specific country. Or the government may not allow the trade of
such goods outside national boundaries.
 International Market: When the demand for the product is
international and the goods are also traded internationally in bulk
quantities, we call it an international market.

OTHER CLASSIFICATION OF MARKET:

On the Basis of Time

 Very Short Period Market: This is when the supply of the goods is

fixed, and so it cannot be changed instantaneously. Say for example
the market for flowers, vegetables. Fruits etc. The price of goods will
depend on demand.
 Short Period Market: The market is slightly longer than the previous
one. Here the supply can be slightly adjusted.
 Long Period Market: Here the supply can be changed easily by
scaling production. So it can change according to the demand of the
market. So the market will determine its equilibrium price in time.

On the Basis of Nature of Transaction

 Spot Market: This is where spot transactions occur, that is the money

is paid immediately. There is no system of credit
 Future Market: This is where the transactions are credit transactions.
There is a promise to pay the consideration sometime in the future.

On the Basis of Regulation

  Regulated Market: In such a market there is some oversight by
appropriate government authorities. This is to ensure there are no
unfair trade practices in the market. Such markets may refer to a
product or even a group of products. For example, the stock market is
a highly regulated market.
 Unregulated Market: This is an absolutely free market. There is no
oversight or regulation, the market forces decide everything

CLASSIFICATION OF MARKET BASED ON COMPETITION:

PERFECTLY COMPETITIVE MARKET:
In a purely competitive market, there are a large number of buyers and sellers
dealing in homogenous products. A perfectly competitive market is a wider
term than a purely competitive market. A perfectly competitive market is
characterized by a situation when there is perfect competition in the market.

Some of the definitions of perfect competition given by different economists

are as follows:
According to Robinson perfect competition can be defined as, “When the
number of firms being large, so that a change in the output of any of them has a
negligible effect upon the total output of the commodity, the commodity is
perfectly homogeneous in the sense that the buyers are alike in respect of their
preferences (or indifference) between one firm and its rivals, then competition is
perfect, and its rivals, then competition is perfect, and the elasticity of demand
for the individual firm is infinite.”

According to Spencer, “Perfect competition is the name given to an industry or

to a market characterized by a large number of buyers and sellers all engaged in
the purchase and sale of a homogeneous commodity, with perfect knowledge, of
market price and quantities, no discrimination and perfect mobility of
resources.”
In the words of Prof. Leftwitch, “Perfect competition is a market in which there
are many firms selling identical products with no firm large enough relative to
the entire market to be able to influence market price.”

According to Bilas, “The perfect competition is characterized by the presence of

many firms. The all sell identical products. The seller is a price taker, not price
maker.”

In perfect competition, there are a large number of buyers and sellers in the
market. However, these buyers and sellers cannot influence the market price by
increasing or decreasing their purchases or output, respectively.

Perfect competition also involves certain other conditions, which are as

follows:
i. Large Number of Buyers and Sellers:
In perfect competition, the number of buyers and sellers is very large. However,
level of output produced by a seller or purchases made by a buyer are very less
as compared to the total output or total purchase in an economy.

Therefore, under perfect competition, sellers and buyers cannot influence the
market price. As a result, the market price remains unchanged, irrespective of
any activity of buyers or sellers. Consequently, buyers and sellers are bound to
follow the market price.

ii. Homogeneous Products:

In perfect competition, all the organizations produce identical products having
same quality and features. Therefore, a buyer is free to purchase the product
from any seller in the market. Consequently, the sellers are required to keep the
same price for the same product.

iii. Free Entry and Exit:

Constitutes a significant feature of perfect competition. Under perfect
competition, there are no legal, social, or technological barriers on the entry or
exit of organizations. In the condition of perfect competition, all organizations
earn normal profit. If the level of profit increases within a particular industry,
then new organizations would be attracted toward the particular industry.

In such a case, the extra profit would be transferred to new organizations. On

the contrary, if the total profit in an industry is normal, then some organizations
may prefer to exit from the industry. However, if there are restrictions on the
entry of new organizations, then the existing organizations may earn
supernormal profit. Therefore, organizations would earn normal profits, if there
are no restrictions on entry and exit.

iv. Perfect Knowledge:

Implies that under perfect competition, buyers and sellers have perfect
knowledge about the prices of products prevailing in the market. In such a case,
when the sellers and buyers are fully aware about the current market price of a
product, then none of them would sell or buy at a higher rate. As a result, the
same price would prevail in the market.

v. Absence of Transport Cost:

Refers to one of the necessary condition for perfect competition. In perfect
competition, the transportation cost is zero, so that the rule of same price can be
applied. If transportation cost is present, then the prices of products would vary
in different sectors of the market.

vi. Perfect Mobility of Factors of Production:

Helps organizations in regulating their supply with respect to demand, so that
equilibrium can be maintained. This implies that the factors of production are
free to move from one industry to another.
IMPERFECTLY COMPETITIVE MARKET:
In economic terms, imperfect competition is a market situation under which the
conditions necessary for perfect competition are not satisfied. In other words,
imperfect competition can be defined as a type of market that is free from the
stringent rules of perfect competition.

Unlike perfect competition, imperfect competition is characterized by

differentiated products. The concept of imperfect competition was firstly
explained by an English economist, Joan Robinson.

In addition, under imperfect competition, buyers and sellers do not have any
information related to the market as well as prices of goods and services. In
imperfect competition, organizations dealing in products or services can
influence the market prices of their output.

There are different forms of imperfect competition, which are shown in

Figure:

The different forms of imperfect competition (as shown in Figure-3).

MONOPOLY:
The term monopoly has been derived from a Greek word Monopolian, which
signifies a single seller. Monopoly refers to a market structure in which there is
a single producer or seller that has a control on the entire market. This single
seller deals in the products that have no close substitutes.

Some of the definitions of monopoly given by different economists are as

follows:
According to Prof. Thomas, “Broadly, the term monopoly is used to cover any
effective price control, whether of supply or demand of services or goods;
narrowly it is used to mean a combination of manufacturers or merchants to
control the supply price of commodities or services.”

According to Prof. Chamberlain, “Monopoly refers to the control over supply.”

According to Robert Triffin, “Monopoly is a market situation in which the firm

is independent of price changes in the product of each and every other firm.”

From aforementioned definitions, it can be concluded under monopoly the

demand, supply, and prices of a product are under the direct control of the
seller. In monopoly, the slope of the demand curve is downward to the right.

Following are the main features of the monopoly market structure:

i. Single Seller:
Refers to the main feature of monopoly. Under monopoly market conditions,
there is a single seller or producer of products. In such a case, buyers are not left
with any other option; therefore, they are required to purchase from the only
seller.

This leads to a full control of the seller on the supply of products in the market.
In addition, under monopoly, the seller enjoys the power to decide the price of
products. Therefore, in monopoly, there is no distinction between an
organization and industry as one organization constitutes the whole industry.

ii. No Substitutes of the Product:

Implies that under monopoly, the seller deals in the product that is unique in
nature and does not have close substitutes. The differentiation of products is
absent in case of monopoly market.

iii. Barriers to Entry:

Refers to the main cause of the existence of monopoly market. Under
monopoly, there are a number of entry barriers that restrict the entry of new
organizations. These barriers include exclusive resource ownership, copyrights,
high initial investment, and other restrictions by government.

iv. Restriction on Information:

Implies that under monopoly, information is restricted to the organization and
people working within the organization. This information is not available to
others and can be transferred only in the form of copyrights and patents.

Monopoly is a condition that prevents the entry of new organizations in the

existing market due to various prevailing barriers.

Some of the barriers to entry of new organizations are as follows:

i. Legal Restrictions:
Refer to barriers that are imposed by a government for public welfare. In India,
postal, railways, electricity, and state roadways are the best examples of old
monopolies. Earlier, in these industries, the entry of new organizations was
restricted. However, after economic reforms of 1990s, the Government of India
has allowed the entry of private sectors in these industries.

Besides this, the government also forms monopolies in private sectors by

providing patents, trademarks, and copyrights to those private organizations that
have capability of reducing prices to minimum. Such monopolies are termed as
franchise monopolies.
ii. Resource Ownership:
Helps in sustaining the monopoly of an organization. Some of the organizations
traditionally have control over the raw materials that are necessary for the
production of specific goods, such as aluminum, bauxite, and diamond.
Generally, such resources are limited in nature. Therefore, organizations that
have acquired these resources attain monopoly in the industry.

For example, Iraq and Iran have monopoly on oil wells and South Africa has
monopoly of diamonds. Such monopolies are termed as raw material
monopolies. These monopolies can also arise due to specific knowledge about a
technique of production. For example, Japan and China have monopoly in
electronic goods industry.

iii. Efficiency in Production:

Arises as a result of a long-term experience, innovation capability, financial
power, less marketing cost, managerial competence, and market finance
accessibility at lower cost. Efficiency in production helps in lowering down the
cost of production. Consequently, an organization achieves an edge over its
competitors and attains monopoly in the industry. Such organizations also
obtain support and protection from the government.

iv. Economies of Scale:

Refers to the technical reason for the existence of monopolies in an imperfect
market. In case an organization finds an appropriate production scale at
minimum cost in the long-run, then it would prefer to cut the prices of products
in the short-run.

This helps an organization to eliminate competitors from the market and attain
monopoly. When the organization attains monopoly, then it would be difficult
for new organizations to enter and sustain in the industry. Such type of
monopolies is termed as natural monopolies. Natural monopolies arise either
due to technical situation of efficiency or are formed by a government for social
welfare.

MONOPOLISTIC COMPETITION:
The term monopolistic competition was given by Prof Edward H. Chamberlin
of Harvard University in 1933 in his book Theory of Monopolistic Competition.
We have discussed the concepts, perfect competition and monopoly. However,
the real market situation is just the middle way between these two extreme
market conditions.

The term monopolistic competition represents the combination of monopoly

and perfect competition. Monopolistic competition refers to a market situation
in which there are a large number of buyers and sellers of products. However,
the product of each seller is different in one aspect or the other.

Some of the definitions of monopolistic competition given by different

economists are as follows:
According to J.S. Bains, “Monopolistic competition is market structure where
there is a large number of small sellers, selling differentiated but close substitute
products.”

According to Baumol, “The term monopolistic competition refers to the market

structure in which the sellers do have a monopoly (they are the only sellers) of
their own product, but they are also subject to substantial competitive pressures
from sellers of substitute products.”

Thus, under monopolistic competition, sellers deal in products having close

substitutes. In monopolistic competition, the number of sellers is very large;
therefore, it resembles perfect competition. On the hand, the products produced
by the sellers in monopolistic competition are close, but not perfect substitutes
of each other.

Thus, the product of every seller is unique, which is a feature of monopoly

market. Therefore, it can be said that monopolistic competition is the integration
of perfect competition and monopoly. Therefore, the characteristics of
monopolistic competition are also the combination of perfect competition and
monopoly.

Some of the characteristics of monopolistic competition are as follows:

i. Large Number of Sellers and Buyers:
Refers to one of the important characteristic of monopolistic competition.
Similar to perfect competition, the size of sellers and buyers is also large in
monopolistic competition.

ii. Differentiated Products:

Constitute the characteristic feature of monopolistic competition. Under
monopolistic competition, the products of sellers are different in many respects,
such as difference in brand, shape, color, style, trademarks, durability, and
quality. Therefore, buyers can easily differentiate among the available products
in more than one way. However, under monopolistic competition, products are
close substitutes of each other.

iii. Free Entry and Exit:

Implies that under monopolistic competition there are no restrictions imposed
on organizations for their entry and exit from the market. This is the same
condition as prevailing under perfect competition.

iv. Restricted Mobility of Factors of Production:

Implies one of the crucial features of monopolistic competition. Under
monopolistic competition, the factors of production as well as goods and
services are not perfectly mobile. This is because if an organization is willing to
move its factors of production or goods and services, it has to pay heavy
transportation cost. This leads to difference in the prices of products of
organizations.

v. Price Policy:
Affects the market prices of a product. Similar to monopoly, average and
marginal revenue curves of an organization also slopes downward in case of
monopolistic competition. This implies that an organization can sell more only
in case it lowers down the prices of its products. On the other hand, under
monopolistic competition, if the prices of products are higher, then the buyers
would switch to other sellers due to close substitutability of products. In such a
scenario, the organization would not be able to sell more. Therefore,
organizations do not enjoy complete control over price in monopolistic
competition.

OLIGOPOLY:
The term oligopoly has been derived from two Greek words, oligoi means few
and poly means control. Therefore, oligopoly refers to a market form in which
there are few sellers dealing either in homogenous or differentiated products. In
India, the aviation and telecommunication industries are the perfect example of
oligopoly market form.

The aviation industry has only few airlines, such as Kingfisher, Air India, Spice
Jet, and Indigo. On the other hand, there are few telecommunication services
providers, including Airtel, Vodafone, MTS, Dolphin, and Idea. These sellers
are closely interdependent to each other. This is because each seller formulates
its own pricing policy by taking into account the pricing policies of other
competitors existing in the market.
Some of the popular definitions of oligopoly are as follows:
In the words of Prof. George J. Stigler, “Oligopoly is a market situation in
which a firm determines its marketing policies on the basis of expected behavior
of close competitors.”

According to Prof. Stoneur and Hague, “Oligopoly is different from monopoly

on one hand in which there is a single seller. On the other hand, it differs from
perfect competition and monopolistic competition also in which there is a large
number of sellers. In other words, while describing the concept of oligopoly, we
include the concept of a small group of firms.”

According to Prof. Leftwitch, “Oligopoly is a market situation in which there is

a small number of sellers and activities of every seller are important for others.”

In oligopoly market structure, the price and output decided by a seller affects
the sales and profit of its competitors. This may either lead to a situation of
conflict or cooperation among sellers.

The main characteristics of oligopoly are as follows:

i. Few Sellers and Many Buyers:
Refers to the primary feature of oligopoly. Under oligopoly, few sellers
dominate the entire industry. These sellers influence the prices of each other.
Moreover, in oligopoly, there are a large number of buyers.

ii. Homogeneous or Differentiated Products:

Implies another important characteristic of oligopoly. In oligopoly,
organizations either produce homogenous products (similar to perfect
competition) or differentiated products (as in case of monopoly). If
organizations produce homogeneous products, such as cement, asphalt,
concrete, and bricks, the industry is said to be pure or perfect oligopoly. On the
other hand, in case of differentiated products, such as automobile, the industry
is known as differentiated or imperfect oligopoly.

iii. Barriers in Entry and Exit:

Prevents the entry of new organizations. The barriers of entry and exit
distinguish the oligopoly market from monopolistic competition. In
oligopolistic market, new organizations cannot easily enter the market due to
various legal, social, and technological barriers. In such a case, existing
organizations have a complete control over the market.

iv. Mutual Interdependence:

Refers to one of the important characteristic of the oligopoly market structure.
Mutual interdependence implies that organizations are influenced by each
other’s decisions. These decisions include pricing and output decisions of
organizations.

In monopoly and perfect competition, organizations do not take into

consideration the decisions and reactions of other organizations, therefore, the
decision of organizations in such types of market structures are independent.
However, in oligopoly, an organization is not able to take an independent
decision.

For example, in oligopoly, a few numbers of sellers compete with each other. In
such a case, the sale of one organization depends on its own price of products as
well as the price of competitor’s products. This mutual interdependence
differentiates oligopoly from rest of the market structures

v. Lack of Uniformity:
Refers to another important characteristic of oligopoly. In oligopoly,
organizations are not uniform in their sizes. Some organizations are very large
in size while some of them are very small. For example, in small car segment,
Maruti Udyog has the share of 86%, while Tata and Cielo have very low market
share.

vi. Existence of Price Rigidity:

Implies that organizations do not prefer to change the prices of their products in
oligopoly. This is because the change in price would not be profitable for an
organization in oligopoly. In case, an organization reduces its price, its rivals
also reduce prices, which adversely affect the profits of the organization. In
case, the organization increases prices, it would lose buyers.

OTHER TYPES OF MARKET STRUCTURE BASED ON

COMPETITION:

 Monopsony:

 a market situation in which there is only one buyer and many

sellers.

 The classic example of a monopsony is a company coal mine.

 Oligopsony:

 a state of the market in which only a small number of buyers exists

for a product.

Example: The fast-food industry is a good example of an oligopsony-Mc.

Donald’s.

 Duoploy:

 A duopoly is a form of oligopoly, where only two companies dominate

the market. The companies in a duopoly tend to compete against one
another.

 Coca-Cola and Pepsi (soft drinks), Unilever and Proctor & Gamble

(detergents).
  Duopsony:

 A duopsony is an economic condition in which there are only two large

buyers for a specific product or service.

 A simple example of a duopsony would be a town having only two

operating restaurants.

CARTEL:

 Definition: A group of separate companies that agree to increase profits by

fixing prices and not competing with each other.

 Oligopolistic firms join a cartel to increase their market power, and

members work together to determine jointly the level of output that each
member will produce and/or the price that each member will charge.

Characteristics:

 Meaning:An explicit, formal agreement between firms in an industry to

fix price and production quantity.

 Price: Unusually high. Prices are fixed by cartel members.

 Characteristics: A small number of firms dominate the industry. Prices

and production quantities are fixed. Product is undifferentiated.

 Barriers to entry: Barriers to entry are very high as it is difficult to enter

the industry because of economies of scale.

 Example: OPEC, Federal Reserve.