Lecture-25

Markets
Learning objective: Market Classification as per degree of competition, basis of
classification and Characteristics of different types of markets
Classification of markets as per degree of competition
Market
Structure

No. of firms
or producers
or sellers

Degree of
product
differentiation

Perfect
competition
Imperfect
competition
Monopoly

Many sellers

Homogenous
product

One seller

Product with no
close substitutes

Pure
Oligopoly
Differentiated
Oligopoly
Monopolistic
competition

Few sellers

Homogenous
product
Differentiated
product
Differentiated
product

Few sellers
Many sellers

Firms degree
of control over
price

Part of
economy
where
prevalent
No control over Farm
price
commodities
Considerable
control over
price
Some control
over price
Some control
over price
Some control
over price

Railways,
posts,
electricity etc.
Steel,
chemicals, etc.
Automobiles,
computers, etc.
Retail trade

Basis of Market Classification

The principal basis of market classification as per degree of competition is:
1)
2)
3)
4)
5)

Number of buyers and sellers

Nature of the commodity
Degree of price control
Knowledge of the market
Mobility of factors

Market Classification
On the basis of degree of competition the market is classified into Perfect
Competition and Imperfect Competition.
Perfect competition
Perfect competition is a form of market where there is large number of buyers and sellers
of a commodity. Homogenous product is sold with no control over price by an individual
firm.

Characteristics of perfect competition:

Following are the characteristics of the perfect competition:
1. Large Number of Buyers and Sellers: Perfectly competitive market is comprised by
the presence of large number of buyers and sellers. Though a firm (seller) is large, but
its supply is only a small part of the total quantity offered for the sale in the market.
Similarly, each buyers demands is relatively small to the market demand. Since no
seller or buyer is large influence the market price, they take the market price as a
given parameter beyond their control. The economic agents (sellers and buyers) are
the price takers and quantity adjusters. There is no rivalry among buyers and sellers.
The demand curve of a firm in the perfectly competitive market is infinitely elastic
implying that the firm can sell any amount of output at the prevailing market price.
2. Homogenous Product: The commodity transacted in perfectly competitive market is
identical. There is no way to differentiate the goods produced by the different firms.
The buyers have no preference of the commodity supplied by sellers and the sellers
have no preference among the buyers.
3. Free Entry and Exit of Firms: There is no barrier on the entry and exit of the firms
form the industry. A firm can leave the industry if it cannot withstand losses.
4. No Government Regulations: Government does not place any restriction, on price,
output, entry of the firms, etc. There is no government intervention in the market.
5. Perfect Mobility of Resources: the factors of production can move from one firm to
another. Workers can move from one job to another and from one place to another.
The owners of manmade and natural resources are free to use them in those economic
activities where they get higher returns. There exists perfect competition in the
markets of factors of production.
6. Perfect Knowledge: It is assumed that all economic agents (sellers and buyers) have
complete knowledge of the conditions prevailing in the market. Both buyers and
sellers are aware of the nature of product and prevailing market price. Therefore, no
buyer will offer a price higher than the prevailing one and no seller is willing to sell
the product at the price, lower that the prevailing one. As a result, single price for the
product prevails in the market.
The concept of pure competition is distinguished from that of perfect competition.
The pure competition relaxes the assumptions of perfect mobility of resources and perfect
knowledge. The first four characteristics are common to both perfect competition and
pure competition. Markets for the various farm commodities can be cited as an example
for perfect competition.
Imperfect competition
Imperfect competition is a market in which firms can appreciably affect the market
price of the product. It implies that imperfect competition; the individual sellers have

some degree of control over prices of the products. In imperfect competition intense
rivalry exists among the firms. Under imperfect competition, market is classified into:
Monopoly
Oligopoly
Monopolistic competition
Monopoly
It is that market situation in which there is a single seller of a product with no
close substitutes in the market. There are legal, natural and technical barriers to the entry
of new firm in the monopoly market.
Characteristics of monopoly
Following are the characteristics of monopoly:
1. One Seller and Large Number of Buyers: Under monopoly, there should be a single
producer of the commodity. He may be alone, or there may be a group of partners or a
joint stock company. Thus, there is only one firm under monopoly. But the buyers of
the product are in large number. Consequently, no buyers can influence the price of
the product.
2. Restrictions on the Entry of the New Forms: Under monopoly, there are some
restrictions on the entry of new firms into monopoly industry. As for instance, there
are patent rights or exclusive control over technique or raw material.
3. No Close Substitutes: A monopoly firm produces a commodity that has no close
substitutes.
4. Full Control over Prices: Since firm alone produces the commodity in the market, a
monopolist has full control over its price. A monopolist thus, is price maker. He can
fix whatever price he wishes to fix for his product.
5. Possibility of Price Discrimination: Many a time, a monopolist charges different
prices form different consumers. It is called price discrimination. Price
discrimination refers to the practice by a seller of charging different prices from
different buyers for the same good. In monopoly, there is a possibility of price
discrimination.
Oligopoly:
It represents the presence of a few firms in the market, producing either a homogenous
product or products which are close but not perfect substitutes to each other. Oligopoly
can be divided into two forms, viz., perfect oligopoly wherein a few firms produce a
homogenous product and imperfect oligopoly wherein there are a few firms producing
heterogeneous products. The examples are TV, two wheelers, four wheelers, cigarettes,
textiles, etc.
Characteristics of oligopoly
Following are the characteristics of oligopoly:

1. Presence of Few Sellers: an important feature of oligopoly is the presence of few

sellers. The product here is homogenous or heterogeneous in nature. Since the
number of sellers is few, each firm commands a sizeable market share of a product.
2. Interdependence: Due to few numbers of firms in the industry, no single firm can
afford to ignore the reaction of other firms to its actions. Suppose a given firm is
contemplating to bring some changes in its price and output policies, it duly considers
the counter actions of the other firms. Thus, the fortune of one firm are decided upon
by the policies of the other firms.
3. Indeterminate Demand: The interdependence of firms under oligopoly creates
uncertain atmosphere. The price and output policies resorted to by a give firm and its
consequent sales of other firms can not be estimated with any amount of certainty.
Suppose a firm would like to lower the price for increasing sales, the anticipated
increase may not take place, for other firms too would have lowered the price by still
a higher margin. This reaction of the other firms is a difficult proposition to be
assessed. Hence the demand or revenue curve is indeterminate.
4. Conflicting Attitude of Firms: the firms in oligopoly behave as arch rivals and like to
be independent to get maximum profit. By their actions and counteractions, they
create an atmosphere of uncertainty. Against this action, at times they behave
differently by cooperating each other to eliminate uncertainty arising out of mutual
competition. By this way they join together for maximizing their profit. Certainly it is
a conflicting attitude of the firms reflected by the competition and co-operation.
5. Competition: There is always a battle among the firms in oligopoly. This rivalry
continues as long as firm exists in the business.
6. Features of monopoly: Oligopoly is characterized by presence of few firms, product
differentiation and a large market share. It enjoys the superiority of a monopoly in the
business as a differentiated product produced by oligopolist attracts the consumers
rather consumers are more attract to it. The possibilities are plenty for the firms to
unite and done the role of monopoly to enjoy the liberties.
7. Price Rigidity: Alongside competition, and monopoly element in oligopoly, price
rigidity is another feature. The rivals are more passive for bringing the changes in
prices, for such changes may affect the sales and consequently the revenue. The firms
are well aware of the fact that any reduction or rise in price leads price war or loss of
sales. This impending danger forces them to keep quiet rather than an exception in
oligopoly.
8. Lack of Uniformity in the Size of the Firm: Size of the firms in oligopoly differs
considerably. Some may be very large, while others very small.
Monopolistic Competition
In real life, it is monopolistic competitive market that generally exists. It is that
situation of the market wherein there are many sellers of the product, but the product of
each seller is a bit different from the products of other sellers. This product differentiation
manifests itself in trade mark, name of the brand, quality differentiation or in different
facilities and services offered to the consumers. There are many examples relating to this
kind of market. Firms producing different brands of toothpaste, as Pepsodent, Colgate,
Close-up, etc. are operating under monopolistic competition.
As a matter of fact, monopolistic competition is a mid-way situation between
perfect competition and monopoly.

Characteristics of monopolistic competition:

Following are the characteristics of monopolistic competition:
1. Large Number of Sellers and Buyers: as under perfect competition, there are large
number of buyers and firms. Also the size of each firm under monopolistic
competition is small. Each firm has a limited share of the market.
2. Product Differentiation: The distinct feature of monopolistic competition is a
product differentiation. Though the number of firms is large, but their products
different from one another, in colour, shape, brand, quality, durability, etc. These
products are close substitutes. Because of product differentiation, each firm can
decide its price policy independently. So that each firm has a partial control over price
of its product.
3. Freedom of Entry and Exit of Firms: Firms are free to enter into, or exit from the
industry. But new firms have no absolute freedom of entry into industry. They may
have to face several difficulties. Products of some firms may be legally patented. New
firms can not produce those products. No rival firm can produce or sell a patented
item.
4. Selling Cost: Each firm has to spend a lot on the advertisement of its products. In
order to sell more units of the product, it gives a wide publicity of its product in
newspapers, journals, radio, TV, etc. The expenses on advertisement and publicity are
called selling costs.
5. Less Mobility: there is no perfect mobility of factors, goods and services.
6. Lack of Perfect Knowledge: Sellers and buyers of products and owners of factors of
production do not have perfect knowledge about the prices of the products and factor
services. It is so because due to product differentiation, it is not possible to compare
the price of different products. Likewise, factors of production are also not fully
aware of the price being paid by different firms for the services of the factors.
7. Non-Price Competition: Another feature of monopolistic competition is that firms
may compete with one another without changing the price of their products. Firms
compete in attracting potential buyers by offering them, gifts and other services. In
short, they compete on other than price front. The consumer develop liking for a
particular product. They would buy that very product even if its price is higher than
products of other firms.
Questions
1 Which of the following is/ are the features of monopolistic market competition
a) Large number of buyers and sellers
b) Heterogeneous nature of the product
c) Product differentiation
d) All of the above
2In perfect competition there is,
a) Large number of buyers and few number of sellers
b) Large number of sellers and few number of buyers
c) Large number of buyers and sellers
d) One buyer and one seller

3 A market structure with large number of firms selling a homogenous product is known
as
a) Monopolistic competition
b) Monopoly
c) Perfect competition
d) Oligopoly
4 In perfect competition every seller has____________ control over the market
a) Little
b) No
c) Significant
d) None of the above
5Which of the following product market represent perfect competirion
a) Cigarette
b) Automobiles
c) Wheat
d) All
6 ___________ is the market situation in which there are few sellers for the commodity
a) Monopoly
b) Duopoly
c) Oligopoly
d) monopsony
7 In perfect competition, individual firm is
a) Price maker
b) Price taker
c) Both
d) None
8__________ is the market situation in which there are few sellers for the commodity
a) Monopoly
b) Duopoly
c) Oligopoly
d) monopsony
9Which of the following is/ are the features of perfect competition
a) Infinite buyers and sellers
b) Homogenous nature of product
c) Absence of transportation cost
d) All of the above
10 For which of the following there exists perfect competition?
a) Tractor
b) Pesticide
c) Paddy
d) Television
Answers
1 d)
2c)

3 c)
4b)
5 c)
6 c)
7 b)
8 b)
9d)
10 c)