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Market Structure

Market
Market refers to the interaction between buyers and

sellers of a good(or service) at a mutually agreed upon price. An institutional relationship between buyers and sellers

Market Morphology
Nature of competition- one seller/many sellers
Nature of product homogeneous / differentiated Number & size of buyers

Freedom to entry/exit the market

Types of Market
Perfect Competition
Monopolistic competition Oligopoly

Monopoly
Monopsony

Perfect Competition
Most basic
Theoretical & hypothetical

Features
1.
2. 3.

4.
5. 6. 7. 8.

Presence of large no. of buyers & sellers Homogeneous product Freedom of entry & exit Perfect knowledge Perfectly elastic demand curve Perfect mobility of factors of production No govt intervention Firm is a price taker

Demand & Revenue


TR= Q . P
MR = d(TR)

Here, AR=MR= P

Market Demand & Firms Demand Curve


Industry
Price

Firm
S E

D P

Cases
Super normal profit

MC & AC below equilibrium

Normal profit

AC is tangential to MR & AR

Loss

AC is above MR & AR

Shut Down Point


If the prevailing price in the market is more than the

AVC of production, the firm would continue the production.


But if the AVC exceeds AR, the firm should shut down.

Long run Equillibrium


Can earn only normal profits.
Reason: unrestricted entry of players Condition for long run equillibrium is

P=LAC=SAC=SMC=MR=AR

Brain Teasers:
Does perfect competition really exist?
If yes/no, tell why, how and give appropriate

justifications with examples.


Date of submission: 8-Oct-2011

Monopoly
Is a market in which a single seller sells a pdt(or

service) which has no substitute. Mono single Polo to sell


Eg: Indian Railways

Features of a monopoly market:


Single seller
Single pdt No difference between firm and industry

Independent decision making


Restricted entry

Reasons for monopoly


Restriction by law ; eg: Indian Railways, EBs Control over key raw materials ; eg: GoI for nuclaer

weapons Specialized know-how ; eg:IBM Small market size


Other reasons: 1. R&D Strong advertising and marketing base Existence of sunk costs

Types of monopoly
1. Legal monopoly: created by Govt to restrict other players and to keep control
2. Economic Monopoly: created whenever competition is eliminated due to economic inefficiency of other players or due to superior efficiency of a particular player.

3. Natural Monopoly: created when the size of the market is so small that it can accommodate only a single player
4. Regional Monopoly: created because of geographical an d territorial aspects

Short Run Equilibrium


Cases of
1. Super normal profit 2.Normal profit

3.Loss

Price Discrimination
Definition:

- Practice of discriminating among buyers on the basis of the price charged for the same good(or service).
Prerequisites for price discrimination:

Market Control 2. Division of market 3. Different elasticities


1.

Bases of price discrimination:


1. 2.

3.
4. 5. 6. 7.

Personal Geography Demography Time Paying capacity Purpose of use Need

Degrees of price discrimination


1. First degree: - The seller is able to charge different prices for

different units of the same product from the same consumer. 2. Second degree: - The seller divides the consumers in groups on the basis of their paying capacity and discriminates on the basis of consumer surplus - Consumer Surplus- is the difference between the price consumers are willing to pay and the price they actually pay.

Third degree:
- The seller takes only a small portion of the consumer

surplus. - The firm segregates the consumers on different bases and each group is a separate market and then charges price accordingly. - Eg: Movie ticket charges

Is frequent flyer option given by airlines a type of price

discrimination? If yes, why and of which degree?

Price & Output decisions of discriminating monopolist


Charge lower price and supply more in the market with

high price elasticity.


Charge higher price and supply less in the market with

low price elasticity.

Caselet
Is Government Monopoly also Harmful?
Is it possible to monopolise in the modern network

age? A case of Microsoft

Monopolistic Competition
A market situation where a relatively large number of

producers offer similar but not identical products. Features: 1. Large no. of buyers & sellers 2. Heterogeneous products 3. Selling costs 4. Independent decision making 5. Imperfect knowledge 6. Unrestricted entry & exit

Cases of super normal, normal and sub-normal profits Short run

Price and output decisions in long run

Advertising is of more importance.

Oligopoly
Definition: - Few dominant sellers sell differentiated or homogeneous products under continuous consciousness of rivals actions.
Types: - If they sell differentiated pdts Differentiated oligopoly - Homogenous pdts Pure oligopoly

Features of oligopoly
Few sellers Product differentiated or homogeneous Entry Barriers

1. Huge investment barriers 2. Strong consumer loyalty for existing brands 3. Economies of scale Interdependent decision making Non price competition Indeterminate demand curve 2 demand curves Kinked demand curve

Examples
Indian automobile industry
Cement industry Airline industry

Collusive Oligopoly
Rival firms enter into an agreement in mutual interest on various

accounts such as price , market share, etc. Types Explicit collusion formal commonly called Cartels Tacit collusion - informal
Cartel: - A formal agreement among firms on output and price. - Eg: OPEC

An arrangement by all the members, where a centralised body decides on the pricing. An arrangement by all the members to divide the market share among them and fix the price independently.

Pricing Policy & Methods


Objectives of Pricing policy: 1. Survival 2. Rate of growth & sales maximisation 3. Market shares 4. Target return on investment 5. Preventing competition 6. Making Money 7. Service motive 8. Regular income 9. Price stabilistaion

Factors of pricing
Costs

Factors

Demand Consumer Psychology Competition Profit Government policy

Pricing Methods
Cost plus or ful cost pricing
Going rate pricing Pricing for a rate of return

Administered prices
Predatory pricing Transfer pricing