Market Structures-Revised

Prof. Tarun Das,

IILM, New Delhi

Market Structures by Prof. Tarun Das 1

Contents of this presentation
1. Different Market Structures
2. Perfect competition
3. Monopoly and Monopolistic competition
4. Structure-conduct-performance (SCP)
approach
5. Review Questions

Market Structures by Prof. Tarun Das 2

 1.1 Different market
•
structures
A market is an arrangement through which
buyers and sellers exchange their goods and
services, anything of value.
• Market structure is a set of characteristics that
determine business environment under which
firms operate.
• Market structure is determined by:
a) Number of sellers and buyers,
b) Degree of product differentiation,
c) Procedures for entry and exit of firms,
d) Degree of contestability and rivalry of firms.

Market Structures by Prof. Tarun Das 3

 1.2 Different market
Markets
structures
Number of Number of
sellers buyers
Perfect Many Many
competition

Monopoly Mono (single) Poly (many)

Duopoly Duo (two) Poly (many)
Oligopoly Oligo (a few) Poly (many)
Monopolistic Large Large
competition

Market Structures by Prof. Tarun Das 4

 1.3 Different Market Structures
Markets Product Entry and Contestabi-
Exit lity & rivalry

Perfect Standar- Free Non-

competition dized existent
Monopoly Differen Blocked Nil
tiated
Duopoly Both Restricted Exists

Oligopoly Both Impeded High

Monopolistic Differen Easy High

competition
tiated

Market Structures by Prof. Tarun Das 5

 2.1 Perfect Competition-
Basic characteristics
• Many sellers and many buyers.
• Perfectly competitive firms are price-takers.
• They sell homogeneous/standardized product
• Perfect knowledge of buyers and sellers
about the market.
• No restrictions on entry and exit of firms
• Price is determined by free market forces of
supply and demand.
• Despite the term “competitive”, firms do not
contest others and donot act as rivals.
• Perfect competition is an utopia- real market
is neither perfect nor competitive.

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 2.2 Perfect Competition-
Equilibrium Conditions
1. Objective Function- Maximize Profits
Π = Total Revenue – Total Cost
= TR – TC= PQ – TC(Q)
2. First order condition,
d Π /dQ= 0 ⇒ P-MC=0 ⇒ P=AR=MR=MC
3.The second order and sufficient condition:
2nd derivative should be negative i.e.
d2 Π /dQ2 < 0, -d(MC)/dQ <0 implying
d(MC)/dQ >0, i.e. MC must be rising,
MC>ATC
4. Break even point: P=MC=Min (ATC)
5. Shut down point: P=MC= Min (AVC)
Market Structures by Prof. Tarun Das 7
2.3 Perfect Competition
equilibrium
COST (Rupe e s)
200

150

100

50

11

13

15

17
1

9
OUTPUT (Q)

AVC ATC MC

Market Structures by Prof. Tarun Das 8

 2.4 Review Question on PC
1. (a) What are the basic characteristics of a
perfectly competitive market? What are the
conditions for profit maximization under
perfect competition? Explain graphically
equilibrium conditions and shut down and
break-even points?
(b) Does perfect competition exist in reality?
Discuss Peteraf’s model for existence of
monopolistic competition.

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 3.1 Monopoly and
Monopolistic Competition
1. Monopoly- Single Firm but many buyers.
Unlike in the perfect competition, price
is variable and is determined by the
monopolist. Entry is restricted.
Equilibrium condition MR = MC
2. Monopolistic Competition- existence of
large number of small firms supplying
differentiated products to many
consumers. Entry and exit of firms, as in
the case of perfect competition, is free-
only difference is the product
differentiation.
Equilibrium condition MR=MC for all

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 3.2 Monopolistic Competition
1. Monopolistic competition lies in between two
extreme market structures- perfect competition
and monopoly.
2. In fact, monopolistic competition combines
features of both monopoly and competitive
markets with varying degrees.
3. Like perfect competition, there are large
numbers of buyers and sellers, and there is free
entry for new firms.
4. However, products are not homogeneous and
firms are not independent decision makers
regarding prices, products, sale services.

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 3.3 Monopolistic Competition
5. In monopolistic competition, products are
differentiated by brand names, trade
marks, designs, color and shape,
packaging, prompt after-sale services,
credit terms etc. Despite differentiation,
products are close substitutes.
6. Firms enjoy quasi monopoly powers. Like
monopoly, firms are price makers but do
not have as much market power as the
monopolist. Firms face intense
competition, contestability and rivalry
and produce large number of imperfect
substitutes.

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 3.4 Monopolistic Competition
7. Firms resort to non-price competition like
advertisement, free insurance, free
samples and gifts etc.
Review Question
1. (a) What are the basic characteristics of a
monopolistic competition?
(b) What are the features of a monopoly
and a competitive market coexisting in
monopolistic competition? What is the
basic difference between monopolistic
competition and perfect competition?
(c ) What is the equilibrium competition for
a monopolistic competition?

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3.5 Peteraf’s Model on Cornerstones
of Monopolistic Competition

1. Heterogeneity in factor endowments.

2. Ex-post limits to perfect competition –
non-existence of perfect substitutes
and perfect imitable products and
services
3. Imperfect mobility and tradability of
resources and factors of production
4. Ex ante limits to competition-
Advantage of locations and sites.

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 4.1 Strategy-Conduct-Performance
(SCP) Analysis - Market strategy
of different markets
Market No. of Entry Product
Type firms
Perfect Very Free Standard-
competition large ized

Monopoly One Blocked

Differen-
tiated
Oligopoly A Few Impeded Both

Monopolisti Many Easy Differen-

c Market Structures by Prof. Tarun Das tiated 15

competition
 4.2 Strategy-Conduct-Performance
(SCP) Analysis – Conduct
of different markets
Market Price Product R&D and
Type strategy strategy advertising

Perfect None Indepen None

competition dent

Monopoly Indepen Indepen Light

dent dent
Oligopoly Indepen Indepen Heavy
dent dent
Monopolisti Indepen Indepen
Market Structures by Prof. Tarun Das
Heavy 16
c dent dent
 4.3 Strategy-Conduct-Performance
(SCP) Analysis – Performance
of different markets
Market Profit Technical Progre-
Type efficiency ssiveness

Perfect Normal Good Good

competition

Monopoly Excessive Poor Poor

Oligopoly Excessive Poor Poor

Market Structures by Prof. Tarun Das 17
Monopolisti Fair Good Fair
 4.4 Strategy-Conduct-Performance
(SCP) Analysis – Performance
and Equilibrium Conditions
Market Equity and Equilibrium
Type employmen conditions
t
Perfect Good MC=MR=P=AR
competition

Monopoly Poor MC=MR=P(1-1/Ep)

Oligopoly Poor MC=MR for all

Monopolisti Fair MC=MR=P(1-1/Ep)
c Market Structures by Prof. Tarun Das 18
competition
 4.5 Critique of SCP Approach
1. The structure-conduct-performance (SCP) approach
argues that behavior and therefore the performance of
firms is determined by the industrial structure in which
firms operate. But, SCP approach has been criticized by
many economists:
(a) Complex Relations- The causality from structure to
conduct to performance is not uni-directional and is
much more complex.
(b) Contestable Markets- SCP emphasizes the role of price
setting for making profits. But Baumol argues that profits
actually depend on the degree of contestability i.e. the
ease with which the firms can enter and exit.

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 4.5 Critique of SCP Approach
© Chicago school (Milton Friedman)- There is no
significant degree of monopoly power. In the
long run, markets will bring competition in the
absence of government intervention.
(d) The Austrian school - Like Chicago school, it
criticizes government intervention as it leads
to non-optimal and inefficient allocation of
resources. But it concludes that monopoly
power is a reality and not a bad thing as it
encourages cost-effectiveness and innovations
and promotes growth. It says that SCP analysis
is too static.

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 4.6 Review Question -SCP
Approach
1. (a) Provide a structure-conduct-
performance (SCP) analysis, in a
tabular form, for perfect
competition, monopoly and
monopolistic competition.
(b) What are the criticisms by
Baumol, Chicago school and
Austrian school against the SCP
analysis? Do you agree with their
views?
Market Structures by Prof. Tarun Das 21
 Thank you
Have a Good Day

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