Market Analysis: Structures

BY: SARABJEET SINGH ROHIT SAXENA SANYOG VIMALESH

What is a market ???

The term market refers to a

structure in which buyers and sellers comes into a contact to perform a transaction

Market Structures: Determinants

Number and size distribution of Sellers: Large number

each firm will have less influence on price. Number and size distribution of buyers: will decide the influence of buyers on price and demand Product Differentiation: with this, seller can charge different price for his product Conditions of entry and exit: ease of entry increases threat of competition; ease of exit depends whether resources can be used for alternative products, or are specialized

Perfect Competition (PC): Characteristics

Large number of small sized buyers and sellers: so none can exert

significant influence over price, each is a price taker and not a price maker Homogenous Product: identical products or perfect substitutes, so buyer can switch in case of price increase by one seller wheat, potato, rice etc. Ease of entry and exit: profits attract entry and losses call for exit; resources can be easily transferred among industries Perfect knowledge of prices: so no seller can charge higher price than market price No cost of transportation Perfect mobility of factors of production: to ease entry and exit conditions

Equilibrium
determined by market forces it is a price taker, thus its demand curve is horizontal and is = AR= MR

curve

Monopoly
Single seller/ producer in the market: thus can

greatly influence price and the demand curve of firm = dd curve of industry and is downward sloping; firm is price maker and not price taker Unspecified number of buyers No close substitutes available, product is well differentiated Free entry/exit prohibited/made difficult: either natural or artificial restriction

Monopoly: Equilibrium Price and Output

Demand curve of monopolist is market demand curve since he is the

only seller

Thus profit maximising rule for him same as of others, i.e. at the

point where MC= MR, i.e. where MC curve intersects MR curve

He makes supernormal profits at this point, by difference between

AC and AR/ P curve multiplied by quantity sold

Price Discrimination
Means: charging different prices from different buyers for the same

product First degree price discrimination: when each unit is sold to the consumer at a different price, maximum price for each unit, so entire consumer surplus is taken by the producer; rarely in practice; eg. Sale of T- bills by govt. Second degree price discrimination: buyers groups based on price elasticity of demand, charge higher price in less elastic group; or on slabs of quantities purchased by consumer; first range/ block at higher price, then second and so on; eg. In case of electricity Third degree price discrimination: markets are segmented based on their demand characteristics, on various factors like geographical coverage (books); nature of use (telephones: residential/ business) etc.

Monopolistic Market
Large number of small buyers & small sellers Products are slightly differentiated, product of one firm is a

close substitute for that of other sellers, hence each firm has some control/monopoly over the price Downward sloping Demand curve; Example : Different brands of shampoos, detergents, soaps etc. This product differentiation can be real or imaginary; thus advertising and selling strategies acquire importance in this model Easy entry and exit in the industry

Equilibrium condition
Downward sloping Demand curve Profit maximising output

& price is where MC= MR There could be supernormal profits in Short Run In Long Run, since free entry/ exit permissible, More firms enter, thus reducing price, till the AR curve is tangent to LAC curve, when all supernormal profits are wiped out Incase of losses, firms exit thus reducing supply and increasing price till again AR is tangent to LAC curve, so firm makes normal profits

Oligopoly
Small number of sellers Unspecified number of buyers Interdependence amongst sellers, each firm considers reactions of other

firms to its own moves and also reacts to other firms moves Importance of selling and advertising cost: since products are close substitutes Group behaviour: tendency to act in a group for benefit of all and avoid price wars Due to interdependence and reactions of firms, demand curve of oligopolist is not fixed and will keep changing
Collusive Oligopoly : through an agreement: formal or tacit. Can be :

- Cartel: Equilibrium attained by MC=MR (combined) and then price given to the firms; each can produce output based on its cost conditions or sometimes even output quotas of each firm are decided by the cartel - Price leadership : of low cost firm, dominant firm, barometric leadership (old and experienced, quick to sense changes and initiate moves), aggressive price leadership

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