Market Structure

•DefineMarket?

•Market structure

• •is the interconnected characteristics of a market, such as the number and relative
strength of buyers, and sellers, degree of freedom in determining the price, level and forms of
competition, extent of product differentiation and ease of entry into and exit from the market

•It is the organizational and other characteristics of market

Market structure –identifies how a market is characterized in terms of:

•The number of firms in the industry

•The nature of the product produced

•The degree of monopoly power each firm has

•The degree to which the firm can influence price

•Profit levels

•Firms’ behaviour–pricing strategies, non-price competition, output levels

•The extent of barriers to entry

•The impact on efficiency

Market structure is divided into Perfect and Imperfect

Movement from 0 to 1 is More competitive (fewer imperfections)

Movement from 1 to 0 is Less competitive (greater degree of imperfection)

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 Different Market structures are

Perfect Competition:
• A market situation in which there is large number of buyers and sellers of a homogeneous
products and neither a seller nor a buyer has any control on the price of the product.

• According to Prof. Baumol and Prof. Blinder “Perfect competition occurs in an industry when
that industry is made up of many small firms producing homogeneous products ,when
information is perfect ,and when there is no impediment to the entry or exit of firms.’’

• Example : Agriculture market, Onion, Potatoes, etc

Characteristics

1. Large number of buyers and sellers

2. Homogeneous Product

3. Perfect mobility of factors of production

4. Freedom of entry and exit

5. Perfect Knowledge about the product

6. No Government interference

7. Absence of Collusion and independent decision making by firm

Monopolistic Competition
Large number of firms that produce differentiated products which are close substitutes for each
other.

In other words, large sellers selling the products that are similar, but not identical and compete
with each other on other factors besides price.

Monopolistic competition is a market structure which combines elements of monopoly and

competitive markets. Essentially a monopolistic competitive market is one with freedom of
entry and exit.

Example: Tea, Tooth Paste, Refrigerator, Shoes, Hair oil etc

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Characteristics

1. Large number of buyers and sellers

2. Product Differentiation
3. Freedom of entry and exit
4. Selling Costs
5. Absence of Price competition
6. Downward Sloping Demand Curve

Oligopoly
• A market structure in which a few firms dominate. When a market is shared between a
few firms, it is said to be highly concentrated. The Oligopoly Market characterized by
few sellers, selling the homogeneous or differentiated products.

• In other words, the Oligopoly market structure lies between the pure monopoly and
monopolistic competition, where few sellers dominate the market and have control over
the price of the product.

• Example: Airline Services; Petroleum Industries, Steel, Automobile, Telecommunication

Characteristics

1. Small number of sellers

2. Interdependence of decision making
3. Barriers to entry
4. Intermediate price and output

Duopoly
• A duopoly is a form of oligopoly occurring when two companies control all or most of
the market for a product or service.

• Example: Jet aircraft market -Airbus and Boeing

Monopoly
• A market structure characterized by a single seller, selling a unique product in the
market.

• In a monopoly market, the seller faces no competition, as he is the sole seller of goods
with no close substitute

• Example: Public Utilities-like Water authority, Electricity, Railway, etc

Characteristics

1. One single seller and large no of buyers

2. Monopoly is the industry
3. No Close Substitutes
4. Monopoly is the price maker
5. Restrictions on entry of firms
6. Price discrimination

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 Monopsony

• A market structure in which only one buyer interacts with many would-be sellers of a
particular product. A monopsony is a market with one buyer, many sellers, and no close
substitute for the good in question.

Duopsony

• An economic condition, similar to a duopoly, in which there are only two large buyers
for a specific product or service.

Market structure comparison

Market Characteristics
Structure
Number of Sellers Number of Barriers to Entry and Exit
Buyers Entry Activity
Perfect Many firms Many buyers None Firms have the
Competition freedom to enter and
exit
Monopolistic Many firms with non- Many buyers Very low Firms have the
Competition interdependent pricing and freedom to enter and
quantity decisions exit
Oligopoly Few firms with Unspecified High Difficult entry (often
interdependent pricing and due to economies of
quantity decision scale)
Monopoly Single seller Unspecified Complete entry blocked

Market Characteristics
Structure Homogeneous or Price Taker or Price Draw the demand
Differentiated Product? Searcher/Maker? curve facing the firm
Perfect Homogeneous product, Price Taker - the firm Perfectly elastic
Competition all goods are perfect chooses quantity but takes
substitutes for price from the market
consumers
Monopolistic Differentiated products, Price Searcher Very elastic, but not
Competition but close substitutes for perfectly elastic because
consumers so their close substitutes exist
demand curves are
elastic
Oligopoly Products can be either Price Searcher Inelastic, to be an
differentiated or non- effective oligopoly
differentiated
Monopoly A single, homogeneous Price Maker Inelastic, to be an
product with no close effective monopoly
substitutes

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Firm and Market structure
Constrains and Conditions of the firm based on the following

• Resources

• Given input price

• Technology

• Production function

• Demand and supply function

• Revenue and cost function

• Degree of competitiveness

Profit maximization of a Firm

• Basic Criteria of profit maximization

MC = MR, and MC cuts MR from below and output is Q and price P.

• Firm Profit/loss of the firm is at

• AC=AR-Normal Profit

• AC>AR-Loss

• AC<AR-Super Normal Profit/ abnormal profit/economic profit

Relationship between TR, AR and MR

Perfect competition

• Where firm is price taker i.e the market price , for eg. Rs.10

Q Price TR AR MR
1 10 10 10 10

2 10 20 10 10

3 10 30 10 10

4 10 40 10 10
5 10 50 10 10

6 10 60 10 10
7 10 70 10 10

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Imperfect competition

• Where price varies

Q Price TR AR MR
1 10 10 10 10

2 9 18 9 8

3 8 24 8 6

4 7 28 7 4

5 6 30 6 2

6 5 30 5 0

7 4 28 4 -2

Price and Output Determination under Perfect Competition

Perfect competition in short run

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Shut down point
• Perfect competition
• Short run phenomenon

Perfect competition in Long run

• AR=MR=LMC=LAC=SMC
• Firm enjoy Normal profit
• Where AC=AR

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Price and Output Determination under Monopoly
• AC=AR-Normal Profit
• AC>AR-Loss
• AC<AR-Super Normal Profit
• Since no competition, continue making positive economic profits in the short run
and long‐run.

Price Discrimination under monopoly

• Refers to charging of different price for different quantities of a product at
different times, to different customers, group in different market.
• First degree price discrimination
o Charging High Price
o Extract consumer surplus-
• Second Degree Price discrimination
• Charging a Uniform price per unit for a specific quantity or block of product
• Third Degree Price discrimination
• Charging different price for same product in different markets

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Price and Output Determination under Monopolistic Competition
Short run

In Longrun
• At profit maximisation,
• MC = MR, and output is Q and price P.

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 Price and Output Determination under Oligopoly
• Sweezy Kinked Demand curve

• The reaction of rivals to a price change depends on whether price is raised or

lowered. The elasticity of demand, and hence the gradient of the demand curve,
will be also be different. The demand curve will be kinked, at the current price.

• Price rigidity is an important feature of oligopoly market structure. Oligopolists

do not change their prices frequently. Price rigidity can be explained with the
help of kinked demand curve.

• In the long run firm retains supernormal profits

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Price Leadership Model:
• Price leadership is when a firm that is the leader in its sector determines the price
of goods or services
• Price leadership is an informal position of a firm in an oligopolistic selling to lead
other firm in pricing. This leadership may emerge spontaneous due to technical
reason or agreement between the firm to assign leadership
Assumptions
• Small no of firms
• Entry restricted
• Homogeneous product
• Demand is inelastic
• Firm have similar cost curves

Price Leadership Low cost firm

• All firm face identical revenue curves and demand i.e, AR=D &MR
• The low cost firm find more profitable to fix the price and sell quantity
• The low cost firm sells output at lo cost and make more profitable than the other
firms

Price leadership -Dominant firm

• It is assumed that there is always a large sized firm in the industry which
supplies a large proportion of the total market.
• It is also assumed that by the characteristics of the large size the firm is capable of
eliminating the rival firms by price cutting.
• The dominant firm therefore compromise with the existing other firms in the
market.
• And use its dominance to set the price so as to maximize its profit
• The small firms has no alternative but to accept the price set by the dominant
firm.
• Smaller firm-price taker and act as the firms in the perfect competition

Price leadership by Barometric firms

• The price leader is usually the largest or the dominant firm in the industry or it
could also be the lowest cost firm recognized as a true interpreter of the changes
in industry demand and supply conditions warranting a price change
• The barometric firm suppose to have the perfect knowledge about the market
conditions
• Price fixed by the barometric firm is also fixed as the equilibrium price in the
,market with demand =supply
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Economic Surplus
• Producers Surplus is an economic measure of the difference between the amount
a producer of a good receives and the minimum amount the producer is willing
to accept for the good

• Consumer surplus is the difference between the total amount that consumers are
willing and able to pay for a good or service and the total amount that they
actually do pay.

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