MARKET FORMS

MARKET FORMS

Market in economic term means a meeting place where buyers and

sellers deal directly or indirectly.
Clark and Clark defines market as that “any body of persons who are in
intimate business relations and carry on extensive transactions in any
commodity” .

Market structures are different market forms based on the degree of

competition prevailing in the market.

Economists have classified markets on the basis of:

(a) the number of buyers and sellers of the commodity;
(b) the nature of the commodity produced by the sellers;
(c) degree of freedom in the movement of goods and factors; and
(d) whether knowledge on the part of the buyers and sellers regarding
prices in the market is perfect or imperfect.
PERFECT AND IMPERFECT MARKETS
The type of market depends on the degree of competition prevailing in the
market. Broadly speaking, there are two types of competition prevailing in
the markets; (l) perfect competition and (ii) Imperfect competition.

A market is said to be perfect when all the potential sellers and buyers are
promptly aware of the prices at which transactions take place and all the
offers made by other sellers and buyers, and when any buyer can purchase
from any seller and conversely.

Under such a condition, the price of a commodity will tend to be the same
(after allowing for cost of transport including import duties) allover the
market."

The prevalence of the same price for the same commodity at the same time
is the essential characteristics of a perfect market.
A market is said to be imperfect when some buyers or sellers or both are not
aware of the offers being made by others.

Naturally, therefore, different prices come to prevail for the same

commodity at the same time in an imperfect market.

In a perfect market, on the other hand, the same price rules throughout the
market.
Forms of Market

Broadly the market forms are classified into four

types:-

1. Perfect Competition.
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
Perfect Competition
The Perfect competition means all the buyers and sellers in the market
are aware of price of products.

The following are the characteristics of perfectly competitive market

1. Large number of buyers and sellers in the market.

2. Homogeneous product.
3. Free entry or exit .
4. All the buyers and sellers in the market have perfect knowledge
about the market conditions.
5. Perfect mobility of factor of production.
6. Absence of transportation costs.
7. Uniform price.
 PRICE AND OUTOUT DETERMINATION UNDER
PERFECT COMPETITION
Under perfect competition, there are no legal, social, or technological barriers on
the entry or exit of organizations. Sellers and buyers are fully aware about the
current market price of a product. Therefore, none of them sell or buy at a higher
rate. As a result, the same price prevails in the market under perfect competition.
The buyers and sellers cannot influence the market price by increasing or
decreasing their purchases or output, respectively. The market price of products
in perfect competition is determined by the industry. This implies that in perfect
competition, the market price of products is determined by taking into account
two market forces, namely market demand and market supply.

In the words of Marshall, “Both the elements of demand and supply are required
for the determination of price of a commodity in the same manner as both the
blades of scissors are required to cut a cloth.” In perfect competition, the price of
a product is determined at a point at which the demand and supply curve
intersect each other. This point is known as equilibrium point as well as the price
is known as equilibrium price. In addition, at this point, the quantity demanded
and supplied is called equilibrium quantity.
Demand under Perfect Competition
Demand refers to the quantity of a product that consumers are willing to
purchase at a particular price, while other factors remain constant. Market
demand is defined as a sum of the quantity demanded by each individual
organization in the industry. A consumer demands more quantity at lower price
and less quantity at higher price. Therefore, the demand varies at different
prices. A demand curve normally slopes downwards which means that, other
things remaining the same, more quantity of a commodity will be demanded at
a lower price.
Supply under Perfect Competition
Supply refers to quantity of a product that producers are willing to supply at a
particular price. Market supply refers to the sum of the quantity supplied by
individual organizations in the industry. Generally, the supply of a product
increases at high price and decreases at low price. A supply curve normally
slopes upwards. It means that the producers will offer to sell larger quantity of
the product at a higher price. Supply depends on the number and size of the
firms, production techniques and the prices of the productive resources.
 Equilibrium under Perfect Competition
As discussed earlier, in perfect competition, the price of a product is
determined at a point at which the demand and supply curve intersect each
other. This point is known as equilibrium point. At this point, the quantity
demanded and supplied is called equilibrium quantity.

It can be seen that at price OP1, supply is more than the demand. Therefore, prices
will fall down to OP. Similarly, at price OP2, demand is more than the supply.
Similarly, in such a case, the prices will rise to OP. Thus, E is the equilibrium at
which equilibrium price is OP and equilibrium quantity is OQ.
The price at which demand and supply are equal is known as equilibrium
price and the quantity bought and sold at the equilibrium price is known as
equilibrium output.

In the diagram, equilibrium price is determined at the point E where both

demand and supply are equal. The upper limit of the price of a product is
determined by the demand. The lower limit of the price is determined by
the production cost. The point E can be regarded as the position of stable
equilibrium.

Under perfect competition, a firm will not have any independence to fix the
price of its own product. The industry is the price –maker and the firm is
the price-taker.
Monopoly
Monopoly means `single `selling’. In brief, monopoly is a market
situation in which there is only one seller or producer of a product for
which no close substitution is available. As there is only one firm under
monopoly, that single firm constitutes the whole industry.
The monopolist can fix price of his product and can pursue an
independent price policy. A monopolist can take the decision about the
price of his product. For example- electricity, water supply companies
etc.
The following are the important features of monopoly
1. One seller and a large number of buyers.
2. No close substitutes for the product .
3. Monopolist is not the price taker and the price maker.
4. Monopolist can control the supply.
5. No entry of new firm to the market .
6. Firm and industry are the same
PRICE AND OUTPUT
DETERMINATION
UNDER MONOPOLY
MONOPOLY
History of
monopoly
Sources of
monopoly
 Examples of
monopoly in india
Price and output
determination
under monopoly
Characteristics of
monopoly market
Monopoly equilibrium
 Graph which indicates price and
output detemination under monopoly
KEY TAKEAWAYS

A monopolist will be in equilibrium when two conditions are fulfilled-

1. MC=MR
2. MC must cut MR from below

Monopolist produces that quantity of the good at which total profit is

maximum.

Monopolist earn up normal profit at the point of equilibrium where AR

exceeds AC.
Conclusion
THANK YOU FOR YOUR
ATTENTION

QUESTIONS!
Monopolistic Competition
In the present World market, it can be seen that there is no monopoly and
there is no perfect competition. There is a mix up of the two. This situation
is generally known as Monopolistic competition. According to Prof .E. H
Chemberlin, Monopolistic Competition means a market situation in which
competition is imperfect. The products of the firms under monopolist
competition, are mainly close substitutes to each other.
The following are the important features of Monopolistic Competition.
1. There are large numbers of buyers and sellers
2. It deals with differentiated products.
3. There are free entry and exit of firms to the markets.
4. The selling cost determines the demand for the products.
5. There is no association of firms
6. There is no price competition.
7. There is lack of knowledge of the market.
 PRICE AND OUTPUT
DETERMINATION UNDER
MONOPOLISTIC COMPETITION
 MONOPOLISTIC COMPETITION

• Monopolistic competition refers to a market situation in which

there are many producers producing goods which are close
substitutes of one another or where output is differentiated.
• Perfect competition + monopoly = monopolistic competition.
• It combines the elements of both monopoly and perfect
competition.
• Here the competition is imperfect in the market – Prof Edward H
Chamberlin’s theory of monopolistic competition in 1933.

• Ex : soap industry – Dettol, lux, dove etc.

• restaurants, saloons, soft drinks industry etc.,
 important characteristics of monopolistic competition

• There are large number of sellers and buyers

• Free entry into and exit of firms from the market
• Product differentiation - Goods made by them are close
substitutes i.e., the products are similar but not identical
• There is no price competition ( i.e., competition is on the
factors other than price like quality, smell, packaging etc.)
• Selling cost determines the demand for the products
(expenses incurred for selling the product eg: advertising)
• Holds some control on the price
 Price and output determination under monopolistic
competition

• In a market of monopolistic competition, price and

output are determined in two stages. They are -

• 1. short run 2. long run.

• super normal loss normal

profits
• profit
 Price and output determination under monopolistic
competition

1. In monopolistic competition the firms

determine the price of the product
(because they show product
differentiation as like in monopoly)
2. Therefore it faces a downward sloping
demand curve
3. Therefore elasticity of demand
increases but not perfectly elastic
4. Brand loyalty or strong preference of
the consumer gives seller the
opportunity to raise price
5. And the firm can also attract the
consumer of other products by
lowering the price.
 SHORT RUN EQUILIBRIUM

• Under monopolistic competition, the firm will be in

equilibrium position when –
• i. marginal revenue = marginal cost i.e., MR = MC
• ii. and the MC curve cuts the MR curve from below
• So, as long as the MR > MC the seller will gets profits to
expand his output
• If MR < MC the output gets reduced

• The firms earn super normal profit when AR > AC

• and losses when AR< AC
 Super normal profits in short run

• Firm is in equilibrium at point E,

because at this point MC = MR

• At equilibrium the output is OQ

• The price of the equilibrium
output is OP for the cost incurred
OC

• OP – OC = PC is the super normal

profit per unit
• ABPC is the total super normal
profits
 LOSS IN SHORT RUN

• At equilibrium point E,
where MC = MR the
average cost is greater
than the average revenue.
• So the cost incurred for
output is more than the
price for what it is sold.
• OC > OP
• OC – OP = loss per unit
• Total loss for the output
OQ is ACPB
 Long run equilibrium

• Under monopolistic competition, the supernormal profit in

the long run is disappeared as new firms are entered into
the industry ( because the entry is free). So the total
demand gets shared between large number of firms.
• As the new firms enter and start production, the supply will
be increased and the price will be fallen
• If the firms are incurring losses they will leave the industry
so the total output gets reduced and the price will increase,
hence the loss making situation is converted in to normal
profits for the remaining firms.
• So the demand curve will shift to the left and so the firms
can only earn normal profits in long run.
 NORMAL PROFIT IN LONG RUN

• At equilibrium point MC = MR
• Here the average cost is equal to
average revenue i.e., AC = AR
• At equilibrium point the total
revenue is OP and the cost is also
OP
• So OP – OP = 0 super normal
profit i.e., no profit no loss

• So at this equilibrium point there

is no super normal profit and the
firms can only earn normal
profits
CONCLUSION
Oligopoly
Oligopoly is a situation in which there are so few sellers and a large
number of buyers. According to J .Stigler `Oligopoly is that situation in
which a firm bases its market policy in part on the expected behavior of a
few close revels. Further, they may produce homogeneous or
differentiated products.
Oligopoly has the following features
1. The firms are inter dependent in decision making .
2. Advertising should be effective.
3. Firms should have group behavior.
4. Indeterminateness of demand curve .
5. The number of firms or producers or sellers are very small .
6. Product are identical or close substitutes to each other
7. There is an element of Monopoly
Price and Output
Determination
Under Oligopoly
CH. A. N. MANOGNA

160550042
Introduction
⮚ Oligopoly Definition

⮚ Mutual Interdependence

⮚Price and Output Determination Under Oligopoly

Characteristics of Oligopoly

⮚ The small number of firms

⮚ Interdependence

⮚Realization of profit
⮚Strategic game
OLIGOPOLY

Oligopoly is an industry structure characterized by a

small number of firms producing all or most of the
output of some goods that may or may not be
differentiated.
CHARACTERISTICS

The main characteristics of oligopoly are:

(i) The small number of firms: Oligopoly is a market where a small

number of firms exist. These firms dominate the industry to set prices.

(ii) Interdependence: In an oligopolistic market structure all firms in an

industry are mostly interdependent. The leading firm takes actions with
respect to output, quality product differentiation can cause a reaction on
the part of other firms.
(iii) Realization of profit: In an oligopolistic market structure firms are
often thought to realize economic profits. In the case of profits, there is
an incentive for the entry of new firms. The existing firms then try to
block the entry of new firms into the industry.

(iv) Strategic game: The entrepreneurs of the firms are like generals in
a war In an oligopolistic market structure. They try to predict the
reactions of rival firms. It is a strategy game which they play in
capturing the market.
Explanation of Price and Output
Determination Under Oligopoly

⮚ Number of Firms

⮚ Goods produced
⮚ The Firms under Oligopoly cooperation
⮚ Barriers
⮚ Models which explain the behavior of the oligopolistic firms.
 Models
⮚Price and Output Determination Under Oligopoly.
i. Cournot’s Model
ii. Stackelberg Model
iii. Bertrand Model
iv. Edgeworth Model
v. Collusive Oligopoly
vi. Cournot’s Model
Price and Output Determination under
Oligopoly
⮚Price and Output Determination Under Oligopoly.
a) If an industry is composed of few firms each selling identical or homogenous
products
b) In case there is product differentiation
 i) The number of firms may vary which is dominating the market. Sometimes there may
be only two or three firms that dominate the entire market (Tight oligopoly). At another
time there are 7 to 10 firms that capture 80% of the market (loose oligopoly).

(ii) The goods produced may or may not be standardized under oligopoly.

(iii) Sometimes the firms under oligopoly cooperate with each other in the fixing of price
and output of goods. At another time, they choose to act independently.

(iv) Sometimes barriers to entry are very strong in oligopoly and at another time, they are
quite loose.

(v) Sometimes A firm under oligopoly cannot certainly predict with the reaction of the
rival firms if any …
 KINKED DEMAND CURVE MODEL OF OLIGOPOLY

In many oligopolistic industries, prices remain sticky or inflexible for a

long time even though the economic conditions change. Many
explanations have been given for this price rigidity under Oligopoly
and the most popular explanation is the Kinked Demand Curve
Hypothesis.

The “Kinked Demand Curve Model” developed by Paul M. Sweezy in

his article “Demand under condition of Oligopoly” in the Journal of
Political Economy, Vol.47(1939);pp-568-73.

This model based on the assumption of “Price Rigidity” i.e. no firm

would like to indulge in price war by changing its price again & again.
Price rigidity means price is fixed at a certain level even though
demand & supply changed considerably.
Assumptions of the Model
1. The number of sellers is few it means a change in price, output
or other variable by one firm will mean retaliation from its rival
firm.
2. The products are “differentiated”. So it is a case of
Differentiated Oligopoly.
3. Products are qualitatively same, it means the absence of
advertisement cost.
4. “Price-cut” by one firm must be followed by competitors. It
means if one firm lowers its price then his rivals will also lower the
prices of their products.
5. “Price-hike” by one firm will not followed by competitors. It
means if one firm increase its price then his rivals will strict at
ongoing price level.
There are three ways in which rival firms may react to
change in price made by one firm

i) The rival firms follow the price changes, both cut and
hike

ii)The rival firms do not follow the price changes.

iii)Rival firms follow the price cuts but not the price hikes.
According to the kinked demand curve hypothesis, the demand curve facing
the Oligopolist has a ‘Kink’ at the level of the prevailing price. The kink is
formed at the prevailing price level because the segment of the demand curve
above the prevailing price level is highly elastic and the segment of the
demand curve below the price level is inelastic.
The figure shows a kinked demand curve with a kink . the
prevailing price is OP and the firm produces and sells OQ
output. The upper segment of the demand curve is relatively
elastic and the lower segment is relatively inelastic.

The differences in elasticity's is due to the particular

competitive reaction pattern assumed by kinked demand curve
hypothesis. The assumed pattern is “Each Oligopolist believes
that if he lowers the price below the prevailing level, his
competitors will follow him and accordingly lower their
prices, whereas if he raises the price above the prevailing
level, his competitors will not follow his increase in price”
Price Reduction : If an oligopolist reduces the price below
the prevailing price to increase sales, the competitors will
fear that their customers would go away from them and buy
from the firm which has made a price cut. Therefore, in
order to retain it’s customers, they will also lower the
prices. Besides the competitors quickly follow the price
reduction by an oligopolist, he will gain only very little
sales.

Thus the segment of the demand curve which his below the
prevailing price OD is inelastic showing that very little
increase in sales is obtained.
Price Increase : If an oligopolist raise the price above the
prevailing price level, there will be a substantial reduction in
sales. as a result of price rise, its customers will withdraw from
it and go to its competitors who welcome new customers will
gain in sales. The oligopolist who raises its price will lose a
great deal and therefore, refrain from increasing price. The
segment of the demand curve which lies above the current
price level OP is elastic following a large fall in sales if a
producer raises his price.

Each oligopolist will find himself in such a situation that on

one hand, he expects rivals to match his price cuts very quickly
and on the other hand, he does not expect his rivals to match
his price increase.
Price Rigidity : An oligopolist facing a kinked demand curve will
have no incentive to raise its price or lower it. The Oligopolist will
not gain any larger share of the market by reducing his price below
the prevailing level. There will be a substantial reduction in sales if
he increasing the price above the prevailing level. Each Oligopolist
will adhere to the prevailing price seeing no gain in changing it.

What price rigidity means is that price under oligopoly tends to be

fixed or constant despite the changes in demand and cost conditions
in the industry. Once established, oligopolistic prices remain constant
for several months, may, even for years.

For example, the price of an automobile remains unchanged for an

entire model year. An oligopolistic price is, as said above, resistant to
changes in demand and in costs. It does not move up and down with
"every little quiver in demand or every little flutter in costs."
To sum-up, we can opine that mutual interdependence
among the firms and price rigidity are two typical features in
oligopoly market. Although the firms are rivals, they are
mutually interdependent. No firms likes to resort to price
change which will harm his business. Hence price
competition is not significant is oligopoly market.
Criticism
1. The oligopoly model provides a theoretical explanation as to why stable
prices exist in oligopolistic industries. But it takes prevailing prices as given
and provides no justification as to why that price level rather than some other
is the prevailing price i.e. the kinked demand model can be viewed as
incomplete.
2. Stigler had tested the kinked demand curve empirically on several
oligopolies. He found that oligopolistic rivals are just as likely to follow price
increase as price decreases indicating little support for the kinked demand
curve.
3. The kinked demand Oligopoly theory does not apply to oligopoly cases of
price leadership and price cartels.
4. In case of pure oligopoly, the kinked demand curve does not provide
adequate explanation for price rigidity.
5. The explanation of price stability by Sweezy’s kinked demand curve theory
applies to depression periods. In periods of boom and inflation, when the
demand for the products increase, price is likely to rise rather than remain
stable.
 DUOPOLY
Duopoly is a market structure in which only two sellers
(producers). This is the basic form of oligopoly competition.
The two players serve multiple buyers and sell competing
goods and services.

In this market, players have a high strategic dependence,

especially in making business decisions such as pricing and
production.
DUOPOLY CHARACTERISTICS

•Market consists of two producers. Both producers serve a

large number of buyers, so their bargaining power is high.
•Producers have a high strategic dependence. Strategic
actions and decisions by one company have a significant impact
on the competitor.
•Chances of collusive behavior are high. Since both of them
are highly interdependent, they are likely to collude to secure
high market profits.
•The level of competition may be fierce. This happens when
the two do not collude. Regulators usually keep a close eye on
this market to avoid anti-competitive practices. Therefore, the
strict supervision of regulators means that the two cannot
collude.
•Monopoly power is significant. Apart from controlling the
market supply, the two companies may also adopt a
differentiation strategy. As long as each adopts a differentiation
strategy, each product will have several loyal customers,
presenting significant monopoly power.

•Entry barriers are high. It can stem from structural barriers

inherent in natural characteristics of markets such as economies
of scale. Or, both companies have deliberately built entry
barriers such as low-price strategies and brand loyalty.

•Economies of scale are high. Each of the companies enjoyed

high sales because the market was split between only two
companies.
 DUOPSONY
A duopsony is an economic condition in which there are only two
large buyers for a specific product or service. Combined, these two
buyers determine market demand, giving them considerably strong
bargaining power, assuming they are outnumbered by firms vying to
sell to them.

Duopsony is also known as a "buyer's duopoly" and is related

to oligopsony, a term describing a market where there are a limited
number of buyers.