Managerial Economics

Contents
• Market Structure
• Determinants of Market Structure
• Basis of Market Classification
• Market Types
• Perfect Competition
• Features of Perfect Competition
• Assumptions of Perfect Competition
• Monopoly
• Features of Monopoly
• Advantages of Monopoly
• Disadvantages of Monopoly
• Oligopoly
• Features of Oligopoly
• Advantages of Oligopoly
• Disadvantages of Oligopoly
• Price Leadership
• Price Output determination under Price Leadership
• Assumption under Price Leadership
• Difference between Monopoly & Oligopoly
• Difference between Monopolistic Competition & Oligopoly
Meaning & Definition of Market Structure

“The term Market refers not necessarily to a place but always to a commodity and the buyers and
sellers who are in direct competition with one another” --- Prof. R. Chapman

“Economists understand by the term ‘Market’, not any particular place in which things are bought and
sold but the whole of any region in which buyers and sellers are in such free intercourse with one
another that the price of the same goods tends to equality, easily and quickly” --- A.A. Cournot
Determinants of Market structure

 Number & Nature of Sellers

 Number & Nature of Buyers

 Nature of Product

 Entry & Exit Conditions

 Economies of Scale
Basis of Market Classifications

 On the Basis of Area

 On the Basis of Nature Of Transactions

 On the Basis of Volume Of Business

 On the Basis of Commodities and Securities

 On the Basis of Time

 On the Basis of Status Of Sellers

 On the Basis of Legality

 On the Basis of Nature Of Competition

Types of Markets
 Perfect Competition

Definitions:

“Perfect competition is a market structure characterised by a complete

absence of rivalry among the individual firms”– A. Koutsoyiannis

“Perfect competition is a market structure in which all firms in an industry

are price-takers and in which there is freedom of entry into and exit from
Industry”– R.G. Lipsey
 Features of perfect competition

 Large numbers of buyers and sellers

 Homogeneous product

 Free Entry & Exit

 Perfect Knowledge

 Absence of Transport Costs

 Perfect Mobility of the Factors of Production

 Absence of Artificial Restriction

 Absence of selling costs

 Assumptions of Perfect Competition
1. Free entry and exit of the firms

2. The efficiency of all the firm is same

3. Due to homogeneity in all the factors of production they can be acquired at constant and
uniform prices

4. Uniformity in the cost curves of the firms

5. The technology being alike, the plants of all the firms are same

6. All the firms have perfect knowledge about price and output
 Monopoly

MEANING:

THE WORD MONOPOLY IS DERIVED FROM THE LATIN WORD I.E. “MONO” MEANS
SINGLE “POLY” MEANS SELLER /CONTROLLER. HENCE THE WORD MONOPOLY MEANS
CONTROL OF SINGLE SELLER IN A MARKET . THUS IN MONOPOLY THERE IS ONE SOLE
SELLER ,WHO CONTROL THE PRICE AND OUTPUT OF THE PRODUCT IN THE MARKET .IT IS
THE TYPE OF MARKET SITUATION WHERE THERE IS ONLY ONE SELLER AND BARRIERS TO
ENTRY ,PRODUCT HAVING NO CLOSE SUBSTITUTE ,CROSS ELASTICITY OF DEMAND BEING
LOW WITH OTHER PRODUCT AND NO OTHER FIRM PRODUCES AN IDENTICAL PRODUCT IS
CALLED MONOPOLY .HAVING CONTROL OVER THE PRICE ,A MONOPOLISTIC CAN SELL HIS
PRODUCT AT THE PRICE OF HIS CHOICE .THE PRICE CAN BE FIXED BY MONOPOLISTIC AT
WHICH HE WILL SELL HIS PRODUCT BUT AT THE SAME TIME HE CANNOT DETERMINE THE
AMOUNT OF THE COMMODITY THAT THE BUYER WILL BUY. HENCE ,THE PRICE IS FULLY
UNDER CONTROL OF THE MONOPOLISTIC BUT NO CONTROL OVER THE DEMAND THAT IS
DETERMINED BY THE PURCHASER .
  Definitions.

 According to D. Salvatore .
“ Monopoly is type of market organization in which
there is a single firm selling a commodity for which there
are no close substitute. ”

 According to A. Koutsoyiannis ,
“Monopoly is a market situation in which there is a
single seller, there are no close substitute for the
commodity it produces ,there are barriers to entry .
 Features Of Monopoly

Features of monopoly are as follows :

 Single Seller
 Restricted Entry
 Homogenous Product
 Full Control Over Price
 Price Discrimination
 Lack Of Innovation
 Lack Of Competition
 Advantages Of Monopoly .
Advantages Of Monopoly are as Follows :

 Research and development

 Economies of scale

 Competition for corporate control

 Stability of prices

 Sources for revenue for government

 Massive Profits
 Disadvantages Of Monopoly .

Disadvantages of Monopoly are as Follows

 Exploitations of Costumers
 Dissatisfied Costumers
 Higher Prices
 Price Discrimination
 Inferior Goods and Services
 Price and Costs
OLIGOPOLY
 Market
 A specific place for purchasing & selling of goods is termed as market.

Monopoly

Monopoly competition
Imperfect Market.

Market Oligopoly

Perfect Market.
Duopoly
 Oligopoly
 Oligopoly is defined as a condition where there is huge competition among a few large firms &
there is an element of interdependence in firm’s decision making.
 Any decision made by one firm(be price, product or promotion) shows impact on competitor’s
trade.
 A major change in policy by one firm will show immediate & obvious impacts on its competitors.
 DEFINATION
 P.C.Dooley :-”An oligopoly is a market of only a few sellers, offering either homogenous or
differentiated products. There are so few sellers that they recognize their mutual dependence”.
 Mainfield :-”Oligopoly is a market structure characterized by a small number of firms & a great deal of
independence”.
 Grinols :-An oligopoly is a market in which numbers of firms in an industry is, so small that each must
consider the reaction of rivals in formulating its price policy.
 In other words an oligopoly is a market situation where no of firms are small (more than two)
which sell differentiated or homogenous product that are much close .Oligopoly are of different
types:
 With product differentiation oligopoly &
 Without product differentiation oligopoly which is also called ‘competition among a few’.
 E.g. :-automobile or cold drinks industry there is limited no of manufacturer for automobile
& cold drink manufacturing industry in India .
Feature of Oligopoly
 Interdependence.
 Imp of advertising & selling cost.
 Group Behavior.
 Indeterminate Demand Curve.
 Few Sellers.
 Aggressive & Defensive marketing Methods.
 Competition & Combination.
 Identical & Differentiated Products.
 Small number & large Firms.
 Feature Of Oligopoly:-
1.Interdependence
 The most important feature of oligopoly is the interdependence in decision making of the few
firms which comprise the industry.
 Each firm can effect the market. Decision of each firm dependent on the choice of the other firm.
This is known as interdependence or Strategic dependent.
 E.g. Best on A depends on what B does, and best of B depends on what A does.
2. Importance of advertising & selling cost
 Marketing place a important role to gain greater market share or to maintain their existing share.
 Many firms need to incur good deal on advertising and other sales promotion measures for this
purpose.
 Hence, advertising and selling costs play a vital role in oligopoly market.
3. Group Behavior.
 Oligopoly is a group behavior theory.
 Its is not a theory of individual or mass behavior.
 Each oligopolist closely watches the business behavior of other oligopolists in the industry and
design his movies on the basis of some assumption of their behavior.
 Generally there is no acceptance of group behavior theory.
4. Indeterminate Demand Curve.
 Due to interdependent it becomes difficult for one firm to predict other firms behavior. There is shift in
the oligopoly demand curve due to reaction of rival firms to change made by this firm.
 When one firm change the prices the product demand will depend on the price change by rivals.
 5. Few Sellers.
 There are very few producers in an oligopoly market.
 Large firms take large percent of market share.
 E.g.Tyre manufacturers or the aviation industry. The market is shared among a few producers. The
producers may sell homogeneous products(steel, coal, copper) or differentiated products(as in the
case of automobiles, soft drinks, mobile phone handsets). The producers of these products
compete on the basis of differences in product like- different packaging,colour, flavour.
6. Aggressive & Defensive marketing Methods.

 Various defensive & aggressive methods are used by the

oligopoly firms so to increase or maintain their market
share.
 They uses sales promotion and also extensive
advertising.
 According to W.J.Bannal –”Advertising can become a
death and life matter under oligopoly”.
7. Competition & Combination.
 Competition is not perfect in oligopoly.
 On one hand there may be violent, fierce, cut throat and cruel competition but on the other
hand, disadvantage of rivalry and competition are realized by oligopolists. Hence some policy
of collusion may be worked out by the oligopolist firms in order to avoid harmful completion.
8. Identical & Differentiated Products.
 Identical product oligopoly:- In this type of oligopoly raw materials are processes or
intermediate goods are produced and they are used as inputs by other industries e.g.-steel,
aluminum and petroleum.
 Differentiate product oligopoly:-In this type main focus is on goods sold for personal
consumption.e.g.-household detergents, automobiles and computers.
9. Small number & large Firms.
 A small number of large firm dominate the market
Advantages

 Huge profits by large firms with strong hold.

 Companies decide the price.
 Long term profit for dominating companies.
 These profit can be used for research and development.
 Customers can stabilize and plan their expenditure efficiently due to stable
market price that leads to trade cycle stabilization.
Disadvantages

 Price setting is advantage for firms but it might be disadvantage for

customers.
 Small businesses creative plans or ideas fail to realize because they cannot
overcome major player of market.
 Due to various restriction entry of new firms cannot easily enter the
market.
Price determination

 Because of interdependence-there is no definite price-output

determination theory.
 Different assumptions are made by different economists regarding
oligopolist firms based on:
 Co-operation by rivals in their objective pursuits.
 Fight among rivals so as to increase market shares.
 Wide varity agreements.
Two different models

 Non-collusive oligopoly/sweezy/kinked demand curve.

 Collusive oligopoly model.
 Price Leadership

There are few or more than two sellers in an Oligopolist situation who can
capable to exercise monopolistic influence .we generally find existence of ‘Price
Leadership’ in such a market situation .On assumes the price leader's role under price
leadership and fixes the prices for entire industry. Other industrial firm just follow the price
leader and accept the price which is fixed by him and also make adjustment regarding
their output to this price. Generally a price leader is dominant or very large firm or a firm
whose cost of production is lowest .As a result of price war ,it often happens that there is
establishment of price leadership where there is emerging of one firm as winner.
Price –Output Determination under Price
Leadership.
Various models are developed by the economists that are related to
determination of price –output under price leadership (fig 8.27) on the
basis of specific assumptions in context of price leaders behaviour and his
followers.

Fig 8.27:Price-Output Equilibrium under Price Leadership

Assumptions under Price Leadership.

 Only two firm exist termed as A and B where A has lower production cost as compared
to B .
 The firms product is identical or homogenous which means consumers are indifferent
between the firms .
 There is equal market share of both A and B firm ,i.e., they have the same demand
curve that will be half of total demand curve .

The output and price decision and illustrated in (fig 8.28).It is assumed that there are
identical revenue curves which are faced by all the firms are shown by MR and AR curve .
But the cost curve are different : the low-cost or large firm has its cost curves as shown by MC1
and AC1 where as all the other firms are smaller in size shown by MC2 and AC2
The reason behind this is that the economies of scale are shown by the largest firm and its
Production cost is lower as compared to other firms .

Fig 8.28
Under given revenue and cost condition, the firm with low cost would find it more profitable to fix its
prices at OP2(=LQ2) and sell quantity OQ2. Profit is maximum this level, since at this output level.
MC =MR. On other side, profit maximisation by higher cost firms would be at price OP3 and quantity
quantity OQ1. But, if higher price OP3 is charged, they would loose their customer to the low cost
firm.
Therefore high cost firms are force to accept the OP2 price and also recognition of price leadership of
the low cost firm is done. Also note that elimination of other firms can be seen by the low cost firm to
become monopolist by cutting the price to OP1(=JQ2). The low cost firm can sell is all output OQ2 at
price OP but it tends to make nominal profit only. However, it may not do so far the fear of anti-
monopoly laws.
Difference between Monopoly and
Oligopoly
points if Monopoly Oligopoly

Nature of firms Existence of one only Existence of few numbers

of firms
Nature of product Single product Differentiated or
homogeneous product.
Entry of firms Concept of no entry is Concept of restricted entry
there and exit of firm.
Degree of Monopoly Here full monoploy Here limited degree of
Power power exists monopoly power exits.
Control over price A considerable control Only some control exists
over price by the sellers over prices by seller.
can be seen
Difference between Monopolistic
Competition and Oligopoly
Points of difference Monopolistic Oligopoly

Number of sellers Large Only few sellers.

Demand Curve Curve slopes downward Demand curve is kinky

Price Determination Fixed price Other firm influences price

Relation of Firms Independent firms. Largely interdependent firms

Product differentiation Product differentiation is Product differentiation may

certainly found. or may not be found.
Thank You