Market

Department of Management Studies

• In economics, we do not refer to a market as a physical place

• Economists will describe a market as the coming together of the buyers and sellers, i.e.

• an arrangement where buyers and sellers come in direct or indirect contact to sell/buy goods
and services

• For example, the market for mobile will constitute all the sellers and buyers of mobile
phones in an economy
 Market
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•Local Markets

•Regional Markets

•National Market

•International Market
Market
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 Perfect Competition
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• It is an ideal but imaginary market. 100% perfect

completion cannot be seen

• A perfect Competition market is a type of market

in which the number of buyers and sellers is very
large

• All are engaged in buying and selling a

homogenous product at a uniform price without
any artificial restrictions

• And possessing perfect knowledge of the market at

a time
 Department of Management Studies

According to Joan Robinson, “Perfect competition prevails when the demand

for the output of each producer is perfectly elastic”
 Features of the Perfect Combination
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I. Large Number of Buyers and Sellers

• ‘A large number of buyers’ implies that each

individual buyer buys a very, very small
quantum of a product as compared to that found
in the market

• This means that the buyer has no power to fix

the price of the product

• He is only a price-taker and not a price-maker

 Department of Management Studies

• The term, a large number of sellers’ implies that the share of each individual seller is a very,
very small quantum of a product

• This means that he has no power to fix the price of the product

• Like the buyer, the seller also is only a price-taker and not a price-maker
 II. Homogeneous Product and Uniform
Price
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• The product sold and bought is homogeneous in nature, in the sense that
the units of the product are perfectly substitutable

• All the units of the product are identical (i.e.) of the same size, shape,
color, quality, etc.

• Therefore, a uniform price prevails in the market

 III. Free Entry and Exit
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• In the short run, it is possible for the very efficient producer,
producing the product at a very low cost, to earn super normal profits.
Attracted by such profit, new firms enter the industry

• When a large number of firms enter, the supply (in comparison to

demand) would increase, resulting in lower prices

• An inefficient producer, who is unable to bring down the cost incurs a

loss

• Disturbed by the loss, the existing loss-incurring firms quit the market

• If it happens, supply will then decrease, and prices will go up.

Existing firms could earn more profit
 IV. Absence Of Transport Cost
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The prevalence of the uniform price is also due to the absence of the transport cost
 V. Perfect Mobility of Factors of Production
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• The prevalence of the uniform price is also due to the perfect mobility of the factors of
production

• As they enjoy perfect freedom to move from one place to another and from one occupation to
another, the price gets adjusted
 VI. Perfect Knowledge of the Market
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All buyers and sellers have a thorough knowledge of the quality of the product, prevailing price,
etc.
 VII. No Government Intervention
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There is no government regulation on the supply of raw materials, and in the

determination of price, etc.
 Department of Management Studies

Features of perfect competition

• Many firms
• Freedom of entry and exit; will require low sunk costs
• All firms produce identical or homogeneous products
• All firms are price takers, therefore the firm’s demand curve is perfectly elastic
• There is perfect information and knowledge
• The industry price is determined by the interaction of Supply and Demand
• In the long run firms will make normal profits
 Monopoly
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• The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and
‘Poly’

• Mono refers to a single and “poly” to seller

• In this way, monopoly refers to a market situation in which there is only one seller of a
commodity. Hence, there is no scope for competition

• (Still some economists observe that there will always be potential threat to the monopolists)
 Definition
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• Monopoly is a market structure characterized by a single seller, selling the unique product
with the restriction for a new form to enter the market

• Monopoly is a form of market where there is a single seller selling a particular commodity
for which there are no close substitutes
 Features of Monopoly
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• There is a single producer / seller of a product

• The product of a monopolist is unique and has no close substitute

• There is strict barrier for entry of any new firm

• The monopolist is a price-maker

• The monopolist earns maximum profit/ abnormal profit

 Why Monopolies Arise
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1. Monopoly resources: A key resource is owned by a single firm

2. Government regulation: The government gives a single firm the exclusive right to produce
some good or service

3. The production process: A single firm can produce output at a lower cost than can a large
number of producers
 Sources of Monopoly Power
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• Natural Monopoly: Ownership of the natural raw materials [E.g. Gold mines (Africa), Coal
mines, Nickel (Canada) etc.]

• State Monopoly: Single supplier of some special services (E.g. Railways in India)

• Legal Monopoly: A monopoly firm can get its monopoly power by getting patent rights, trade
mark from the government
 Price & Output Determination Under Monopoly
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Total profit = (Average Revenue – Average

Cost) X Total output
 Types of Price Discrimination
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There are three types of price discrimination

Personal – Different prices are charged for different individuals (for example, the railways give tickets
at concessional rate to the ‘senior citizens’ for the same journey)

Geographical - Different prices are charged at different places for the same product (for example, a
book sold within India at a price is sold in their basis, China drops its goods in Indian market. As a
result, watch and toys industries closed down their business

On the basis of Use - Different prices are charged according to the use of a product (for example,
lower rates are charged by Electricity Board for domestic uses of electricity and higher rates are
charged for commercial and industrial uses)
 Dumping
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• Dumping refers to practice of the monopolist charging higher price for his product in the local
market and lower price in the foreign market

• Through dumping, a country expands its command over other countries for its product

• This is also called as ‘International Price Discrimination”

• For example, India’s electronic market is flooded with the China’s products.
 Monopolistic Competition
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• This describes a market structure in which there are many firms selling products that are
similar but not identical

• In a monopolistically competitive market, each firm has a monopoly over the product it
makes, but many other firms make similar products that compete for the same customers
 Department of Management Studies

To be more precise, monopolistic competition describes a market with the following attributes:

• Many sellers: There are many firms competing for the same group of customers

• Product differentiation: Each firm produces a product that is at least slightly different from those of
other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve

• Free entry and exit: Firms can enter or exit the market without restriction

• Thus, the number of firms in the market adjusts until economic profits are driven to zero
 Features of monopolistic competition
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The important features of monopolistic competition are :

1. There are large number of buyers and many sellers

2. Firms under monopolistic competition are price makers.

They set their own prices

3. Firms produce differentiated products. It is the key element of monopolistic competition

 Department of Management Studies

4. There is a free entry and exit of firms

5. Firms compete with each other by incurring selling cost or expenditure on sales promotion of
their products

6. Non – price competition is an essential part of monopolistic competition

7. A firm can follow an independent price policy

 Department of Management Studies

Under monopolistic competition, different firms produce different varieties of the product
and sell them at different prices

Each firm under monopolistic competition seeks to achieve equilibrium as regards

1. Price and output, 2. Product adjustment and 3. selling cost adjustment

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 Wastes of Monopolistic Competition
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Generally there are five kinds of wastages under monopolistic competition

1. Idle Capacity: Unutilized capacity is the difference between the optimum output that can be
produced and the actual output produced by the firm

In the long run, a monopolistic firm produces deliberately output which is less than the optimum
output that is the output corresponding to the minimum average cost

This is done so mainly to create artificial and raise price. This leads to excess capacity which is
actually a waste in monopolistic competition
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2. Unemployment: Under monopolistic competition, the firms produce less than

optimum output

As a result, the productive capacity is not used to the fullest extent

This will lead to unemployment of human resources also

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3. Advertisement: There is a lot of waste in competitive advertisements under monopolistic

competition

The wasteful and competitive advertisements lead to high cost to consumers

It is also claimed that advertisements cheat the consumers by giving false

Information about the product

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4. Too Many Varieties of Goods:

• Introducing too many varieties of a good is another waste of monopolistic competition

• The goods differ in size, shape, style and colour

• A reasonable number of varieties would be sufficient

• Cost per unit can also be reduced, if only a few varieties are produced in larger quantity Instead
of larger varieties with small quantity
 Department of Management Studies

5. Inefficient Firms : Under monopolistic competition, inefficient firms charge prices higher
than their marginal cost

• Such type of inefficient firms should be kept out of the industry

• But, the buyers’ preference for such products mostly due to emotions enables the inefficient
firms to continue to exist

• Efficient firms cannot drive out the inefficient firms because sometimes the Efficient firms
may not be able to Spend money on attractive advertisement to lure the buyers.
 Department of Management Studies

• In reality, the consumers are mostly emotional rather than rational, as stated by
Richard Teiler, the Nobel prize winner for the year 2017

• Rational decision are made by mind; emotional decisions are made by heart
 Oligopoly
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Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products.
Examples are oil and gas. It is difficult to pinpoint the number of firms in ‘competition among the few.’ With
only a few firms in the market, the action of one firm is likely to affect the others.
 Features of Oligopoly
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1. Few large firms

Very few big firms own the major control of the whole market by producing major portion of the market demand

2. Interdependence among firms

The price and quality decisions of a particular firm are dependent on the price and quality decisions of the rival
firms

3. Group behaviour
The firms under oligopoly realize the importance of mutual co-operation
 Department of Management Studies

4. Advertisement cost
The oligopolist could raise sales either by advertising or improving the quality of the product

5. Nature of product
Perfect oligopoly means homogeneous products and imperfect oligopoly deals with heterogeneous products.

6. Price rigidity
It implies that prices are difficult to be changed.
The oligopolistic firms do not change their prices due to the fear of rivals’ reaction.
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Game Theory
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 Department of Management Studies

• It is the study of human conflict and cooperation within a competitive situation

• In some respects, game theory is the science of strategy, or at least the optimal decision-
making of independent and competing actors in a strategic setting

• The key pioneers of game theory were mathematicians John von Neumann and John
Nash, as well as economist Oskar Morgenstern
 Components of Game Theory
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 Players

Pure strategy
 Strategy

 Payoffs
Mixed strategy

Profits
Returns
Zero Sum Game
Losses
 Minimax-Maxmini Principle
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Player B’s strategy

B1 B2 Minimum of A
Player A’s strategy

A1 8 2 2

A2 7 5 5
Maxmini

A3 4 3 3

Maximum of B 8 5 saddle point

Value of the game
Minimax
 Prisoner’s Dilemma
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Albert W. Tucker

The type of strategy, where one

player will be optimal no matter
what his rival player does is called a
dominant strategy
 Nash Equilibrium

Department of Management Studies

• In game theory, the Nash equilibrium, named after the mathematician John F. Nash, is the
most common way to define the solution of a non-cooperative game involving two or more
players

• Nash equilibrium is a strategy where each player will do its best, given the strategy of
other players
 Department of Management Studies

Firm B

Don’t establish a
Establish a branch
barnch

Firm A A=12 A=16

Establish a branch B=04
B=06

Don’t establish a A=07 A=20

barnch B=08 B=05
• When a firm has no dominant strategy
• Tries to follow his opponent’s strategy
 kinked demand curve
Department of Management Studies

• The kinked demand curve was first used by Paul. M. Sweezy to explain price rigidity
 
• The assumption behind this theory of kinked demand is that each oligopolistic will act
and react in a way that keeps conditions tolerable for all members of the industry
 
• Such a situation is most likely to occur where products are quite similar and,
therefore their prices are almost the same.
 
 Department of Management Studies

• If one firm is selling at a price lower than that of its competitors, these competitors will be
compelled to reduce their prices to match this firm’s price

• On the other hand, if one firm decides to sell at a higher price its competitors do not react
by raising their prices.
 
• So, in the first situation (i.e. Price reduction) the firm does not gain, while in the latter the
firm loses its customer to its rival.
 
• The oligopoly firm probably realizes that it is better to rival rather than start a price war,
 
• So in a non-collusive oligopoly, the prices tend to be sticky i.e., there is price rigidity.
Department of Management Studies