Market Structure

meaning
• A market is a set of buyers and sellers, commonly referred to as
agents, who through their interaction, both real and potential,
determine the price of a good, or a set of goods.

• The concept of a market structure is understood as those

characteristics of a market that influence the behaviour and results of
the firms working in that market.
Market structure- determinants
• 1. The number of Firms:
• 2. Number and Nature of Buyers:
• 3. The market share of the largest firm:
• 4. Nature of Product:
• 5. Entry and Exit Conditions:
• 6. Economies of Scale:
• 7. Degree of Vertical Integration of the Industry:
• Perfect competition--------------------------imperfect competition
• monopoly
• Oligopoly
• Monopolistic
• Duopoly
• Bilateral monopoly
• Duopsony
• oligipsony
Perfect competition- characteristics
• Large number of sellers:
• Large number of buyers:
• Homogeneous Products:
• Free entry and free exit:
• Perfect knowledge about the market:
• Perfect mobility:
• Absence of transport cost:
Demand curve
Price (Rs.) Demand (Units)
5 1
5 2
5 3
5 4
5 5
Quantity(units) Average Revenue Total Revenue (PxQ) Marginal Revenue
(Price) (ΔTR/ΔQ)

1 10 10 10

2 10 20 10

3 10 30 10

4 10 40 10
Shut down point
example
Suppose there is a perfectly competitive industry where all the firms
are identical with identical cost curves. Furthermore, suppose that a
representative firm’s total cost is given by the equation TC = 100 + q2 +
q where q is the quantity of output produced by the firm. The market
demand for this product is given by the equation P = 1000 – 2Q where
Q is the market quantity and the market supply curve is given by the
equation P = 100 + Q.
example
• a. What is the equilibrium quantity and price in this market given this
information?
• b. The firm’s MC equation based upon its TC equation is MC = 2q + 1.
Given this information and your answer in part (a), what is the firm’s
profit maximizing level of production, total revenue, total cost and
profit at this market equilibrium?
example
• 2. A firm its output in a perfectly competitive market. The firm's total
cost function is given in the following schedule:
Output (units) Total Cost (Rs.)

0 50

10 120

20 170

30 210

40 260

50 330

60 430
• The prevailing market price is $7 per unit.
• a) What is the firm's profit maximizing output level?
Monopoly: characteristics
• 1. One seller and large number of buyers:
• 2. No close substitute:
• 3. Strong barriers to the entry into the industry:
• 4. Price Discrimination:
• 5. Nature of demand curve:
Demand curve
Reasons for monopolies
• Ownership of a Key Resource:
• Government Franchise:
• Intellectual Property Protection:
• Natural Monopoly:
example
• 1. A monopolist has a cost function TC= 200y + 15Y2 and faces a
demand function given by P = 1200 – 10y.
• a) What output maximizes its profit?
• b) What is the profit-maximizing price?
• c) What is its maximal profit?
Monopolistic market- characteristics
• 1. Large Number of Buyers and Sellers:
• 2. Free Entry and Exit of Firms:
• 3. Product Differentiation:
• 4. Selling Cost:
• 5. Lack of Perfect Knowledge:
• 6. Less Mobility:
• 7. More Elastic Demand:
PC- Monopolistic-monopoly
Oligopoly market- Characteristics
• 1. Few firms:
• 2. Interdependence:
• 3. Non-Price Competition:
• 4. Existence of Price Rigidity:
• 5. Group Behaviour:
• 6. Barriers to Entry of Firms:
• 1. Role of Selling Costs:
• 2. Indeterminate Demand Curve: