FORMS OF MARKET

Meaning of Market :- A structure in which the buyers and sellers of the commodity remain in
close contact.
Definition & Features of Perfect Competition
Perfect competition is a form of the market where there is a large number of buyers and sellers of a
commodity. Homogeneous product is sold with no control over price by an individual firm.

(1) Large Number of Buyers and Sellers - The number of firms selling a particular commodity is so
large that any increase or decrease in the supply of one particular firm hardly influences the total
market supply. Accordingly, any individual firm fails to make any influence on the price of the
commodity. It is, therefore said that a firm under perfect competition is a price taker. Not only is
the number of sellers very large, also the number of buyers is very large. Accordingly, an individual
buyer under perfect competition is also a price taker.
(2) Homogeneous Product - All sellers sell identical units of a given product. It is that buyers will have
no reason to prefer the product of one seller to the product of another seller. Thus, the price of
the product throughout the market will be the same. Each firm sales homogeneous product at the
given price, there are no selling costs in perfectly competitive market.
(3) Perfect Knowledge – Buyers and sellers are fully aware of the price prevailing in the market.
Buyers know it fully well at what price sellers are selling a given product. As a consequence, only
one price prevails in the market.
(4) Free Entry and Exit of Firms – A firm can enter and leave any industry. There is no legal restriction
on the entry or exit.
(5) Perfect Mobility – Factors of production are perfectly mobile under perfect competition. Factors
will move to that industry which pays the highest remuneration. It implies that there is uniform
cost structure of all the firms.
(6) No transportation cost: it implies that transport cost do not affect the market.

Definition & Features of Monopoly

Monopoly is a market situation in which there is only one producer of a commodity with no
close substitutes.
(1) One Seller and Large Number of Buyers – Under monopoly, there should be a single
producer of a commodity. There is no difference between firm and industry. Firm is price maker.
(2) Restrictions on the Entry of the New Firms – Under monopoly, there are some restrictions
on the entry of new firms into monopoly industry. These restrictions may be legal artificial,
institutional and economical. Due to restrictions on entry, firm earns super normal profits in the
long run.
(3) No Close Substitutes – A monopoly firm produces a commodity that has no close
substitutes. Buyers have to purchase the commodity from monopolist or go without it.
(4) Full Control Over Price – Since he alone produces the commodity in the market, a
monopolist has full control over its price. A monopolist thus, is a price maker.
(5) Possibility of Price Discrimination – Many a time, a monopolist charges different prices
from different consumers. It is called price discrimination. “Price discrimination refers to the
practice by a seller of charging different prices from different buyers for the same good.”
Definition & Features of Monopolistic Competition
Monopolistic competition is a market situation, in which many firms compete with each other to sell
their closely related differentiated products.

(1) Large Number of Firms and Buyers – As under perfect competition, there are large number of
buyers and firms. Also the size of each firm under monopolistic competition is small. Each firm has
a limited share of the market.
(2) Product Differentiation – Though the number of firms is large but their products differ from one
another, in color, shape, brand, quality, durability, etc. These products are close substitutes.
Example i.e. in case of soaps, we have several brands as Lux, Hamam, Godrej, pears, Palmolive etc.
Because of product differentiation, each firm can decide its price policy independently. So that
each firm has a partial control over price of its product.
(3) Freedom of Entry and Exit of Firms – Firms are free to enter into, or exit from the industry.
(4) Selling Cost – Each firm has to spend a lot on the advertisement of its products. In order to sell
more units of the product, it gives wide publicity of its product in newspapers, cinemas, journals,
radio, TV etc. The expenses on advertisement and publicity are called selling costs.
(5) Non-Price Competition – Firms may compete with one another without changing the price of their
products. Firms compete in attracting potential buyers by offering them gifts and other services.

OLIGOPOLY Oligopoly is an important form of imperfect competition. Oligopoly is often

described as competition among the few. Examples of oligopoly are cold drinks industry and
automobile industry. Oligopoly is a situation of market in which there are few sellers (generally 2
to 10), selling homogeneous or differentiated product. Each seller holds a big part of the whole
market. Following are the various features of oligopoly market:

1. A Few Sellers: In this market the are few sellers or producers. Each seller supplies major part of
total supply in the market. Thus each seller is able to influence the market price of the product.

2. Interdependence: Where number of competitors are less, any change in the product, price,
output, advertising technique by a firm will have direct effect on the other firms. Other
competing firms have to change their prices, product etc. Thus firms must keep in mind the
reactions of other firms while taking major decisions.

3. Group Behaviour : In oligopoly market, all the firms may take group decision regarding price,
output etc. to avoid competition and protect the interest of all firms.

4. Importance of Advertising and selling costs: In oligopoly market, firms have to incur large
amount of money on advertisement and sales promotion to increase or to maintain the sale of
product in the market.

5. Indeterminate Demand Curve: An oligopolist cannot predict its sale correctly at a particular
price because change in sale due to change in price also depends upon the reaction of other firms.
Hence demand curves of firms are uncertain.
6. Barriers to entry : There are barriers of entry of new firms in the market. One barrier is that a new
firm may require huge capital to enter the industry. It may be extremely difficult for the new firm to
arrange the funds. Patent rights is another barrier. Availability of crucial raw material only to a limited
number of firms can be still another barrier. These barriers keep the number of firms limited.

7.Non-price competition : In oligopoly, firms are normally afraid of competing with each other by
lowering the price. It may start a price war. Avoiding price war, the firms use other ways of competition
like advertising, customer care, free gifts, etc. Such a competition is called non-price competition.

Distinguish between

(a) Perfect oligopoly and imperfect oligopoly

(b) Non-collusive oligopoly and Collusive oligopoly

(a) Perfect and imperfect oligopoly : In oligopoly firms may produce homogeneous products or
differentiated products. If they produce homogeneous products, it is called perfect oligopoly or
pure oligopoly. Cement industry, steel industry are examples of pure oligopoly. If the firms
produce differentiated products, it is called imperfect oligopoly or differentiated oligopoly. Car
market is one example of imperfect oligopoly. Three or four companies like Maruti, Hundai, Tata
are selling differentiated vehicles.

(b) Non-collusive and collusive oligopoly : When oligopoly firms compete with each other, it is
called non-collusive oligopoly. It is also called non-cooperative, because the firms independently
determine the price and output of their products. And when the firms desire to cooperative with
each other than compete while fixing the price and output, it is called collusive oligopoly. The
cooperation may be exercised through a written agreement (i.e. explicit agreement). There may
be no written agreement but simply an understanding between the firms (i.e. implicit
agreement).

MARKET EQUILIBRIUM

Q. How equilibrium price is determined in a perfect competitive market?

Equilibrium is a state from which there is no net tendency to move. The point at which demand and
supply are equal or where demand curve and supply curve intersect is known as equilibrium point.
Equilibrium price is that price at which quantity demanded equals quantity supplied or where demand
curve and supply curve intersect each other. The quantity demanded and supplied at an equilibrium
price is known as equilibrium quantity.

Demand and supply are equal only at a price of Rs. 3.00. Hence Rs. 3.00 determines the market price. At
a price of Rs. 3.00, there is neither excess demand nor excess supply, hence there is no tendency for the
prices to change. This prices is known as equilibrium price. In the diagram DD demand curve and SS
supply curve intersect at point E, making OP as the equilibrium price.

When market price is more than the equilibrium price, supply becomes greater than the demand. It
creates the situation of excess supply. Consequently, as a result of competition among sellers, price
starts declining and there is competition among seller. Eventually market price becomes equal to
equilibrium price. Similarly, when market price is less than the equilibrium price, demand becomes
greater than the supply. It creates the situation of excess demand among buyers, as a result of
competition among buyers, price starts rising. Eventually market price becomes equal to equilibrium
price. Thus, it is the equilibrium price which prevails in the market. In perfect competition, it is the
industry and not the firm that determines the price.