5.

Forms of Market
Prepared by : Reena D Isaac
Mulund College of Commerce
5. Forms of Market
• Introduction, Definition
• Classification
• Perfect competition- features, Price Determination
• Imperfect competition – Monopoly-features, Types
• Oligopoly- features
• Monopolistic Competition- Meaning, Features
Introduction
• Common language – market means a specific place where buyers
and sellers of a commodity meet and exchange their goods.
• Economics- does not necessarily mean a place but it is a
medium through which buyers and sellers exchange their
commodities.
• Market – an arrangement through which buyers and sellers
come in contact with each other directly or indirectly and
exchange of goods and services take place among them.
• Does not have a fixed location, but covers the entire area of
operation of demand and supply
 Definition
• Augustin Cournot – “Economists understand the term market, not any
particular market place in which things are bought and sold, but the
whole of any region in which buyers and sellers are in such a close
contact with one another that the prices of the same goods tends to
equality easily and quickly”.
• Network of dealings between potential buyers and potential sellers.
• Market exist - buyers and sellers - A product/service to be bought or
sold – price of the product – close contact between buyers and sellers –
knowledge about market
Classification
 Classification on the basis of Place
• Local Market: Sellers sell and customers buy a product in the
region/area in which it is produced.
• When demand and supply of a commodity is restricted to a particular locality,
it is called a local market. For example, vegetables, milk, flowers, fish etc.

• National Market: Domestic market in a given country. Each national

market is governed by the regulation of its own country.
• When demand and supply of a commodity are spread over the entire nation,
we have a national market. For example, wheat, sugar, medicines etc. Goods
available in the local markets may also have national market.
Classification on the basis of place
• International Market : World wide market in which buyers and
sellers trade in goods and services across the national borders.
• When a commodity enjoys demand and supply from the entire world,
it is said to have International market or world market. Gold, silver,
electronic goods are the examples for goods having international
market.
 On the basis of time
• Very short period – Period in which supply is fixed and price is
determined by the demand. The time period is for a few
days/weeks in which the supply of commodity cannot be increased.
Eg Vegetables, flowers, Milk.
• Short Period – Period of less than one year. Firms can only make
adjustment in inputs like labour to increase the supply of goods and
services.
• Long Period – It is a period of time in which all factors of
production and costs are variable. Firms are able to adjust all costs.
Generally upto 5 years.
• Very Long Period – Production time is so long that all inputs are
variables. It is of more than 5 years.
 Perfect Competition
Ideal and Imaginary concept. Pure Theoretical concept

Joan Robinson “Perfect competition prevails when the demand

for the output of each producer is perfectly elastic”.
• Market structure where there are large number of buyers and
sellers selling homogeneous products at a uniform price.
• Freedom of entry and exist, absence of transport cost and no
government intervention, perfect knowledge of market
conditions.
 Example of Perfect Competition
• Examples of perfect competition
• In the real world, it is hard to find examples of industries which fit all the criteria of ‘perfect
knowledge’ and ‘perfect information’. However, some industries are close.
• Foreign exchange markets. Here currency is all homogeneous. Also, traders will have access to many
different buyers and sellers. There will be good information about relative prices. When buying
currency it is easy to compare prices
• Agricultural markets. In some cases, there are several farmers selling identical products to the
market, and many buyers. At the market, it is easy to compare prices. Therefore, agricultural markets
often get close to perfect competition.
• Internet related industries. The internet has made many markets closer to perfect competition
because the internet has made it very easy to compare prices, quickly and efficiently (perfect
information). Also, the internet has made barriers to entry lower. For example, selling a popular good
on the internet through a service like e-bay is close to perfect competition. It is easy to compare the
prices of books and buy from the cheapest. The internet has enabled the price of many books to fall
in price so that firms selling books on the internet are only making normal profits.
 Features of Perfect Competition
1. Large number of Sellers 6. Perfect knowledge of
Market
2. Large number of Buyers 7.Perfect mobility of factors
of Production
3. Homogeneous Product 8. Absence of Transport cost
4. Free entry and Exit 9. No government
Intervention
5. Single price 10. No Selling cost
 Price Determination
• Equilibrium price – price at which quantity demanded is
equal to the quantity supplied.
• Price of the product is determined by both buyers and sellers.
• Equilibrium price is determined by the interaction of demand
and supply forces.
• Alfred Marshall- demand and supply are like two blades of a pair
of scissors. Just as cutting of cloth is not possible with the use of
one blade, the equilibrium price of a commodity, cannot be
determined either by the forces of demand or by supply alone.
Both determine the price
Schedule and diagram
Imperfect Competition-Type of market showing some but
not all the features of a competitive market.
• MONOPOLY
• Term derived from Greek word – ‘Mono’- Single & ‘Poly’ – Seller
• Single seller and large number of buyers.
• Barriers to entry
• Lack of substitute product.
• E.H.Chamberlin “Monopoly refers to a single =
firm which has control over the supply of a
product which has no close substitute”.
 Features of Monopoly
1. Single Seller/Firm 9. Supernormal Profit
2. Large number of buyers 10. Fixes either the price or
output to be sold.
3. No close substitute 11. No Selling cost
4. Entry Barriers 12. Downward sloping
5. Complete control over market demand curve
supply
6. Price maker
7. Price discrimination
8. No Distinction between firm and industry
 Types of Monopoly
1. Private Monopoly – owned and operated by private individuals, profit
maximization, Eg. TATA’s, Reliance.

2. Public/Essential/Social Monopoly – owned and managed by the

government. Welfare oriented. Eg. Water supply, Electricity, Railways.

3. Legal/Statutory Monopoly – granted by law. Patent, copyright, trade

marks. Forbid the potential competitors to imitate the design of product
registered under brand name. Eg. Amul products, postal services.

4. Natural Monopoly – Endowment of resources by natural advantages –

good location, climatic condition. Eg Gulf countries- oil, India-Jute, South
Africa- Diamonds
5. Simple Monopoly- monopolist charges uniform/single price
for his commodity to all consumers in a market.
6. Discriminating Monopoly- Firm charges different prices for the same
product to different consumers in different regions on basis of socio-
economic conditions Eg. Doctor

7.Voluntary/Joint Monopoly – Aquired jointly by some firms through

mutual agreements and business combinations like trusts, cartels,
syndicates eg. OPEC

8. Technological Monopoly – Particular firm has exclusive knowledge of a

superior technology. Firm can produce and sell better quality of products
at low price which no other firm can do.
 Oligopoly
• Derived from Greek word ‘Oligo’ – few and ‘Poly’ – sellers

Few firms producing either homogeneous product (pure oligopoly)

eg cement companies copper, steel, aluminum, iron or
heterogeneous products (imperfect/differentiated oligopoly) eg-
automobiles soaps, television, refrigerators etc.
 Features of Oligopoly
1. Few firms/sellers – Few sellers and many customers.
2. Interdependence – Seller has to be cautions with respect to any action
taken by the competing firm.
3. Advertising – Firm advertise their products on a frequent basis.
4. Entry barriers – Firms can easily exit the industry, but face certain
barriers to enter. Barriers- govt license, patent, complex technology
etc.
5. Lack of uniformity – in terms of size. Some may be small other big.
6. Uncertainty – about output and price
7. Competition – With few players in market there is intense competition
among sellers.
 Monopolistic Competition
• Mixture of perfect competition and monopoly.
• Realistic in nature.
• Many sellers produce similar product which are close substitutes
for each other.
• Producer has a monopoly for one’s own product but face
competition from rivals producing close substitute.
• Coined by Prof E.H.Chamberlin – book ‘Theory of Monopolistic
Competition’ Published in 1933.
• “Monopolistic Competition refers to competition among a large
number of sellers producing close but not perfect substitutes”.
 Features of Monopolistic Competition
• Fairly large number of Sellers - Although the number is large, but
still smaller than perfect competition.
• Fairly large number of buyers - Each buyer has a preference for a
specific brand of product. Buy the product on the basis of Choice.
• Product differentiation – colour, shape, wrapper cover, design etc.
• Free entry and exit – Firms are free if there are profict and leave the
market if there is a losss.
• Selling cost – advertisement – T.V. Radio, newspaper etc
• Close Substitutes - Eg hamam soap close substitute is Lux soap
• Concept of Group - Firms producing differtiated products.
 Comparison between different forms of Market
Perfect competition
Large number of sellers
Large number of buyers
Homogeneous product
Free entry and exit
No Market power
Perfect knowledge
Price taker
Selling cost does not exist
Normal profit
Monopoly
One seller
Large number of buyers
Homogeneous product
Closed entry
Large Market power
Some knowledge
Price maker
Selling cost does not exist
Super normal profit
 Comparison between different forms of Market

Oligopoly Monopolistic Competition

Few sellers Fairly large number of sellers
Large number of buyers Fairly large number of buyers
Homogeneous/Differentiated Differentiated product
Some Knowledge Some knowledge
Closed entry Free entry and exit
Significant market power Slight power
Price maker Price maker
Selling cost exists Selling cost exists
Super normal profit Normal profits