Unit V : Market Behaviour

 Markets
 Concept
 Price Determination in Short Run and Long Run
 Types of Market
 Perfect Competition
 Monopoly

 Monopolistic Competition
 Oligopoly

 Market Morphology
 In the economic sense 'Market' refers to an arrangement whereby buyers and sellers come in
contact with each other directly or indirectly to sell and purchase goods .
 The basis of classifying markets rests on three crucial elements
 the number of firms producing a product
 nature of the product produced ( homogeneous or differentiated)
 the ease with which new firms can enter an industry
 Classification of market forms
 Markets are generally classified into
 Perfect Competition
 Monopoly
 Monopolistic Competition
 Oligopoly

 Market Morphology
Type of No. of Nature of product No. of Freedom of Examples
Market Firms Buyers Entry and
Exit

Perfect Very Homogeneos ( Very Unrestricted Agricultural

Competition Large undifferentiated ) Large Commodities,
shares,unskilled labour

Monopolistic Many Differentiated Many Unrestricted Retail stores, detergents

Competition

Oligopoly Few Undifferentiated or Few Restricted Cars, computers,

Differentiated universities

Monopoly Single Unique Many Restricted Indian Railways , Indian

Defence Industries
 Perfect Competition
 Perfect Competition refers to the market structure where competition among buyers and
sellers prevails in its most perfect form. In perfectly competitive market a single market
price prevails for a commodity.
 Features of Perfect Competition
 Large Numbers of Buyers and sellers
 Homogeneity of Product
 Perfect Mobility Factors of Production
 Perfect Knowledge
 Absence of Government Regulations
 Absence of Transportation Costs
 Profit Maximisation
 Under Perfect Competition due to large number of sellers and homogeneity of product the
seller is the price taker.
 Under Perfect Competition AR = MR = P
 Monopoly
 Monopoly is a market structure with a single seller and a unique
product. There exist barriers to entry of new firms in this market.
The features that lead to perpetuation and evolution of monopoly
can studied as control over strategic raw materials, patent rights for
product or production process, Government Liscensing , size of the
market and entry limiting pricing policy.
 Features of Monopoly
 Single seller and unique product facing a large number of buyers
 A monopolist tends to restrict entry
 A monopolist resorts to price discrimination
 Monopoly power reduces social welfare
 State monopolies often usher in scale economies.
 Existence of super-normal profits.
Monopoly ( Cont )
 Demerits of Monopoly
 High Price and restricted output
 Biased Allocation of the economic resources
 Discouraging the technonological progress
 Unfair trade practices
 Exploitationof corrupt system
 Merits of Monopoly
 Potential to stand Depression
 Potential for Research and Development
 Potential to face Foreign Competition
 As a remedy to unhealthy competition
 As a source of essential public utilities
 In Monopoly , The AR curve of the monopolist coincides with the Market
Demand curve
Price Discimination in Monopoly
 A monopoly resots to discriminatory pricing policies whenever possible. It charges different
prices fm different individuals at different times or in different markets.
 Definitions:
 “Price discrimination exists when the same product is sold at different prices to different
buyers.” -Koutsoyiannis
 “Price discrimination refers to the sale of technically similar products at prices which are not
proportional to their marginal cost.” -Stigler
 “Price discrimination is the act of selling the same article produced under single control at a
different price to the different buyers.” -Mrs. Joan Robinson
 “Price discrimination refers strictly to the practice by a seller of charging different prices
from different buyers for the same good.” -J.S. Bain
 “Discriminating monopoly means charging different rates from different customers for the
same good or service.” -Dooley
 Price discrimination is possible when two fundamental conditions are fulfilled
 It is not possible to transfer any unit of the product from one market to another
 It is not possible for the buyers in the dearer market to transfer themselves into the cheaper
market to buy the product or service at a cheaper price
 Price Discrimination
 As distinguished by A.C. Pigou price discrimination can be of three types
 Price discrimination of first degree (Perfect price discrimination )
This occurs when the monopolist is able to sell each and every seperate unit
of the output at a different price .
 Price Discrimination of Second degree
Price Discrimination of second degree occurs when the monopolist is able to
charge seperate prices for different blocks or quantities of a commodity
 Price Discrimination of Third Degree
Price discrimination of the third degree is said to occur when a monopolist
divides his buyers into two or more than two sub markets or groups
depending upon the price elasticity of demand and charges a different price
in each sub-market.
 Price Discrimination
 Price discrimination can also be segregated into following three types:
 1. Personal Price Discrimination:
 Personal price discrimination refers to the charging of different prices from
different customers for the same product. For example, a doctor charges
different fees for the same operation from rich and poor patients.
 2. Geographical Price Discrimination:
 Under geographical price discrimination, the monopolist charges different
prices in different markets for the same product. It also includes dumping
where a producer may sell the same commodity at one price at home and at
the other price abroad.
 3. Price Discrimination according to Use:
 When the monopolist charges different prices for the different uses of the
same commodity is called the price discrimination according to use.
Monopolistic Competition

 Monopolistic Competition is a form of imperfect market with many

sellers and product differentiation.
 Features of Monopolistic Competition
 Large number of buyers and sellers
 Products are intrinsically close substitutes hough differentiated
externally through packaging, appearance or brand positioning
 Each seller enjoys a monopoly with his brand loyalist customers.
 Entry and exist are free
 Selling and Adverstising costs are high
 Oligopoly
 Oligopoly is a form of market in which there are few sellers.
 Features
 There a few big sellers and a large number of buyers
 Products can be either homogeneous or close substitutes with
external differentiation
 All the firms are price makers with down ward sloping AR curves
 Entry is restricted and unattractive due to price rigidity
 Price and non-price wars as well as cut throat competition.
 There exists ‘price rigidity’ which can be explained using the 'kinked
Demand Curve' approach
 Oligopoly often ends up in price leadership cartels.
 There is a high degree of interdependence among firms in oligopoly.