MANAGERIAL ECONOMICS

MODULE- II
PART- II

Analysis of Market Structures

 PERFECT COMPETITION
Perfect competition is a market structure where many firms offer a homogeneous
product. Because there is freedom of entry and exit and perfect information, firms
will make normal profits and prices will be kept low by competitive pressures.
Characteristics of Perfect Competition:
1. Large number of buyers and sellers
2. Homogenous products
3. Free entry and exit
4. Perfect knowledge
5. Uniform price
6. Firms are price takers and not price makers. Price is determined by the market
forces of demand and supply.
7. Mobility of factors of production
8. No transport cost
9. No government interference
EXAMPLES OF PERFECT COMPETITION
 An Indian fish market .At the fish market, lots
of sellers gather together to try to sell the same
wares, and lots of customers try to buy them
with a good knowledge of what they are buying.
 There is little to prevent someone from joining
in on the selling or quitting the market
altogether.
 A street food vendor
EQUILIBRIUM PRICE AND OUTPUT
DETERMINATION UNDER PERFECT COMPETITION
Conditions of the
equilibrium of the firm:
1. Marginal Revenue=
Marginal Cost
2. MC curve should cut the
MR curve from below. In
other words, the slope of
MC curve should be
positive.
MONOPOLISTIC COMPETITION
Monopolistic competition as a market structure was first identified in
the 1930s by American economist Edward Chamberlin, and English
economist Joan Robinson.
Characteristics of Monopolistic Competition:
1. Large number of small firms
2. Similar but not identical products sold by the firms
3. Relative freedom of entry into and exit out of the industry
4. Lack of Perfect Knowledge
5. Firms have partial control over the price
6. Product Differentiation: Product differentiation refers to differentiating
the products on the basis of brand, size, colour, shape, etc. The product of a
firm is close, but not perfect substitute of other firm.  differences in shape,
flavour, colour, packing, after sale service, warranty period, etc.
advertising).
7. Selling costs: According to Chamberlin, ‘Selling Cost is the cost which is
incurred to alter the shape and position of the demand curve’.
EXAMPLES OF MONOPOLISTIC COMPETITION
 The restaurant business
 Hotels and pubs

 Some restaurants enjoy monopolistic competition because

of their popularity and reputation.
 Cars

 Newspapers

 Toothpaste: Pepsodent, Colgate, Neem, Babool, etc.

 Cycles: Atlas, Hero, Avon, etc.

 Tea: Brooke Bond, Tata tea, Today tea, etc.

 Soaps: Lux, Hamam, Lifebuoy, Pears, etc.

 MONOPOLY
Characteristics of monopoly:
1. Single seller
2. Monopoly is an industry
3. Restriction to entry
4. No close substitutes
5. Price maker
6. Price Discrimination: According to Mrs. John Robinson,
‘The act of selling the same article produced under a single
control at different prices to different buyers is known as price
discrimination’. It can be on the basis of income, use base
electricity), time basis (call rates), geopgraphical basis and
legal basis.
EXAMPLES OF MONOPOLY
 Indian Railways has monopoly in Railroad transportation
 State Electricity board have monopoly over generation and
distribution of electricity in many of the states.
 Hindustan Aeronautics Limited has monopoly over production
of aircraft.
 There is Government monopoly over production of nuclear
power.
 Operation of bus transportation within many cities.

 Land line telephone service in most of the country is provided

only by the government run BSNL.
TYPES OF MONOPOLY
 Natural Monopoly: Eg: Arab countries have monopoly in
crude oil.
 Social Monopoly: Eg: Defence and Railways in India
 Legal Monopoly: Eg: Trade marks, copyrights and patents
 Discriminating monopoly: Eg: Doctors charging different rates
from different customers
 Technological monopoly: E.g. engineering goods industry,
automobile industry, software industry, etc.
DIFFERENCE BETWEEN REVENUE CURVES OF
MONOPOLY AND MONOPOLISTIC COMPETITION
 OLIGOPOLY
Oligopoly is a market situation in which there are a few sellers and many buyers.
Oligopoly comprises of two terms:
Oligoi which means a few
Pollein which means sellers
Characteristics of Oligopoly:
1. Few sellers
2. Firms are price makers and not price takers
3. Interdependence: Actions of one firm affects the others
4. Conflicting attitude i.e. attitude of cooperation and attitude of conflict.
5. Advertisement: According to Prof Boumol, ‘Advertising can become a life
and death matter’
6. Lack of uniformity
7. Competition
 COLLUSIVE OLIGOPOLY
In case of collusive oligopoly, firms realise their interdependence and
reached some agreement. The agreement may be formal or informal.
Generally the agreement is informal because collusion is illegal in most of
the countries.
Types of collusive oligopoly:
1. Cartels and Margers: A cartel is a form of combination in which independent
business firms in an industry agree to regulate their output, to fix sales quotas
and to control sales contracts and prices. A cartel is a voluntary association
formed with the objective of eliminating competition and to secure monopoly
in the market. In case of mergers, firms willingly join together so as to become
a large firm and have dominating position in the market.
2. Price leadership: In this case, firms formally or informally select one
firm as leader and the actions of the leader firm are followed by others.
If the leader firm raises the price, others also raise the price. Leadership
can be on the basis of low cost firms, dominant firm or barometric price
leadership.
NON-COLLUSIVE OLIGOPOLY

In non-collusive oligopoly, firms do not cooperate, they

only compete. Firms do not reach any agreement and do
not learn from past experience.
The firm is in a highly interdependent situation, where a
change in price will certainly lead to a reaction from
other firms in the oligopoly.
The model suggests the individual firm will arrive at the
following; ‘If I raise my price nobody will follow since
they will expect to steal my customers. If I lower my
price everybody will follow in order to hinder me from
stealing their customers!
EXAMPLES OF OLIGOPOLY
 Airlines industry
 Petroleum refining

 Power generation and supply in most of the parts of the

country
 Automobile industry

 Long distance road transportation by bus. Many of there

routes have buses operated by limited numbers of
operators.
 Mobile telephony.

 Internet service providers