MARKET STRUCTURE
Dr. Ramesh S. Desai
Asso. Professor and Head
Dept. of Economics
Shri Shahu Mandir Mahavidyalaya, Pune
Market
Structure
Perfect
Competition
Oligopoly
Duopoly
Monopoly
Monopolistic
Competition
Contents:
1. Market: Meaning and Types
2. Perfect Competition : Meaning and Features
3. Monopoly: Meaning and Features
4. Monopolistic Competition : Meaning and Features
5. Oligopoly : Meaning and Features
6. Duopoly : Meaning and Features
Market-Meaning and Type:
The market exists where the interaction between the buyers and the sellers is done at a price that is acceptable to both. A market is a place where the buyers and the seller can gather to facilitate the exchange of goods and services.
The market may be physical like a retail outlet, where people meet face-to-face, or virtual like an online market, where there is no direct physical contact between buyers and sellers. There are different types of markets.
1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
5. Duopoly
Perfect Competition:
Meaning :
Perfect competition is a form of market structure. Perfect competition is a purely theoretical market type and does not appear in reality. It is an idealistic structure that provides scales for comparing, valuing and evaluating other realistic markets. If the following conditions or features appear, the market is considered perfect competition.
Perfect Competition: Cont…
Features:
1. Large numbers of buyers and sellers : In perfect competition, the number of buyers and sellers in the market is very large. Therefore, the share of a single buyer in the total market demand and the share of a firm in the total supply are very low.
2. Homogenous product: Products produced by all firms are completely homogeneous. Therefore, no firm can influence the price.
3. Free entry and exit: In the perfect competition, firms have the freedom to enter and exit the market or industry.
Perfect Competition: Cont…
4. Perfect knowledge of market to buyers and sellers: In perfect competition, buyers and sellers have complete knowledge of the market situation. Buyers and sellers know about market prices, quality of goods for sale in the market, etc.
5. Perfect mobility of factors of production: There are no obstacles to the mobility of factors of production. Factors of production can move from one firm to another and from one industry to another.
6. No transport cost: In perfect competition large number of producers operates production in neighboring areas. There is no need to consider transportation and transport costs.
Monopoly :
Meaning:
Monopoly exists when there is only one firm that produces or sells a particular product with no alternative.
According to Watson, ‘a monopolist is the only producer of a product that has no close substitutes.’
Features:
1. Single producer or seller: A monopolist is the sole producer or seller of a particular product.
2. Lack of competition: Since the monopolist is the sole producer or seller of a particular product, it does not have to compete with other producer.
3. No close substitutes: The product the monopolist produces has no close substitutes.
4. Cross elasticity of demand is zero: In pure monopoly, the cross elasticity of demand is zero. However, in the case of a simple monopoly, cross elasticity of demand is very low.
Monopoly : Cont…
5. Control of supply of product: The monopolist is the sole producer of a particular product and has control over the supply. He can increase or reduce the supply of product as needed.
6. No difference between firm and industry: In monopoly there is a single firm that produces or sells a particular product. In monopoly there is no difference between firm and industry. 7. Restrictions on entry of firms: The monopolist restricts the entry of new firms into the production activities of the product.
8. Price maker: The monopolist determines the price of his or her own product. It has control over pricing.
9. Less elastic demand: The monopoly product has no close substitutes. Therefore, the demand for the product it produces is less elastic.
10. Average and marginal curves fall steadily: In monopoly the average revenue curve and the marginal revenue curve will go downward.
11. Control only price or supply at the same time: Monopoly control over price and supply of goods. However, a monopolist can control only price or supply at the same time.
Monopoly : Cont…
5. Control of supply of product: The monopolist is the sole producer of a particular product and has control over the supply. He can increase or reduce the supply of product as needed.
6. No difference between firm and industry: In monopoly there is a single firm that produces or sells a particular product. In monopoly there is no difference between firm and industry. 7. Restrictions on entry of firms: The monopolist restricts the entry of new firms into the production activities of the product.
8. Price maker: The monopolist determines the price of his or her own product. It has control over pricing.
9. Less elastic demand: The monopoly product has no close substitutes. Therefore, the demand for the product it produces is less elastic.
10. Average and marginal curves fall steadily: In monopoly the average revenue curve and the marginal revenue curve will go downward.
11. Control only price or supply at the same time: Monopoly control over price and supply of goods. However, a monopolist can control only price or supply at the same time.
Monopolistic Competition:
Meaning:
Monopolistic competition is the combination of monopoly and competition. In this market there are many firms producing products that are close substitute.
According to Samuelson and Nordhaus, ‘Monopolistic competition is a market structure in which there are many sellers who are supplying goods that are close substitutes but not perfect substitutes’
Features:
1. Large number of firms: In monopolistic competition the number of firms is large. However, it is less than perfect competition. Firm have some degree of monopoly power and have to compete with other firms.
2. Product differentiation: In monopolistic competition, every producer tries to differentiate the product that they are producing from the other. Product differentiation takes place in the form of variations in the quality and size of the goods, advertising, discounts of some services while selling etc.
Monopolistic Competition: Cont…
3. Easy entry and exit: Firms in monopolistic competition have the freedom to participate in and exit from production activities. Since the share of one firm in the total supply is low, the total supply is not significantly affected by one or two firms entering or leaving the production activities.
4. Price differentiation: In a monopolistic competition, firms have the freedom to determine the price of their products. As the product of each firm is different from the others, the prices charged by various firms are also different.
5. More elastic demand: In a monopolistic competition, firms produce products that are close substitute. Naturally the demand remains flexible at such times. Demand for the product of the firms under monopolistic competition is more elastic. However, it is not as elastic as perfect competition.
Monopolistic Competition: Cont…
3. Easy entry and exit: Firms in monopolistic competition have the freedom to participate in and exit from production activities. Since the share of one firm in the total supply is low, the total supply is not significantly affected by one or two firms entering or leaving the production activities.
4. Price differentiation: In a monopolistic competition, firms have the freedom to determine the price of their products. As the product of each firm is different from the others, the prices charged by various firms are also different.
5. More elastic demand: In a monopolistic competition, firms produce products that are close substitute. Naturally the demand remains flexible at such times. Demand for the product of the firms under monopolistic competition is more elastic. However, it is not as elastic as perfect competition.
Oligopoly:
Meaning:
Oligopoly is the type of market in which a small, it means between two and ten firms, sell identical or discriminated goods. Oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market.
According to Samuelson and Nordhaus, ‘Oligopoly is a situation of imperfect competition in which an industry is dominated by small number of suppliers’
Features:
1. Few firms or sellers: In oligopoly market there is small number of firms or sellers. In general, when a number of sellers are between two and ten, oligopoly comes into existence.
2. Interdependence: In oligopoly the share of each firm in total supply is large. Each firm has to take other competitor firm into consideration when making price and product decisions.
Oligopoly: Cont…
3. Uncertain demand curve: Firms in oligopoly cannot assume that if they change their price, other competing firm cannot change their prices. Therefore, the shape of the demand curve of firm in oligopoly is not fixed.
4. Importance of advertising and selling cost: It is necessary for firms in oligopoly to make efforts to increase or to avoid decrease in their market share. For this, they have to spend large on advertising and sales promotion.
5. Some extent monopoly: Every firm receives some degree of monopoly power when a firm produces discriminatory goods. However, monopoly is not obtained if the product is not discriminatory.
6. Inconsistent behavior of firms: Firms in oligopoly tend to make more profit by avoiding competition when considering the loss of competition. However, when firms want their share of the market to increase, they struggle against each other to increase it.
Duopoly:
Meaning:
Duopoly is a special form of oligopoly. Duopoly is a type of market in which two firms sell the identical or differentiated product. Duopoly means competition between two firms or seller.
According to Samuelson and Nordhaus, ‘Duopoly is a market structure in which there are only two sellers’
Features:
1. Two firms or sellers: In duopoly there are two firms producing specific product. Therefore, their total market share is large or nearly half-half.
2. Presence of monopoly element: If the firms under duopoly are producing differentiated product; the firms enjoy some monopoly power, as each product will have some loyal customers.
3. Interdependence: Since there are only two firms in the case in duopoly, there is large extent interdependence between them.
4. Massive uncertainty: The two firms can coexist and determine price and each other's market share. However, these two firms are also likely to compete.
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