MODULE – 3

Market Structure

HINGSTON XAVIER

Assistant Professor Christ College of Engg- IJK

Market Structures

• Market is a term which is commonly used for a particular place or locality where goods are bought and sold.
• According to Prof. Samuelson, “A market is a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service.”

Based on competition, the market structure has been classified into two broad categories:

1. Perfectly competitive. (Perfect Competition)
2. Imperfectly competitive. (Monopoly, Monopolistic competition and Oligopoly)

Perfect Competition

• Perfect competition is defined as a market structure in which an individual firm producing homogenous commodities cannot influence the prevailing market price of the product on its own.
• Perfect competition is a market structure characterized by complete absence of rivalry among individual firms. (Price taker)

Features of Perfect Competition

• Very Large Number of Buyers and Sellers.
• Homogeneous Product.
• Free Entry or Exit of Firms.
• Perfect Knowledge.
• Perfect Mobility of Factors of Production.
• Absence of Transportation Cost.

Demand Curve under Perfect Competition

Equilibrium of a firm under Perfect Competition

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• We know that the necessary and sufficient conditions for the equilibrium of a firm are:

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• MC = MR
• MC curve cuts the MR curve from below

Monopoly

• The word monopoly is derived from two Greek words ‘mono’ means single and ‘polo’ means to sell
• Monopoly is a market in which a single seller sells a product which has no substitutes
• E.g. RBI , Rail transport

Features of Monopoly

• Single seller
• Restriction on entry
• Price maker
• No close substitutes
• Price discrimination
• No difference between firm and industry

Demand Curve Under Monopoly

Equilibrium under Monopoly

• Under monopoly, for the equilibrium and price determination there are two different conditions which are:
• Marginal revenue must be equal to marginal cost.
• MC must cut MR from below.

Equilibrium under Monopoly

Dumping

• It means a monopolist sells his product at a higher price in the home market and lower price in the international market.

Regulation of Monopoly

• Promote competition
• Quality of service
• Prevent excess prices

Monopolistic Competition

• It is a market structure at which large number of sellers dealing with differentiated commodities.
• The term Monopolistic comp was given y Prof. Edward H Chamberlin.
• The main feature of monopolistic competition is

Product Differentiation

• Product Differentiation means commodities marketed by each seller can be distinguished from the products marketed by other seller in the form of size , shape , brand , colour etc..

Features of Monopolistic Competition

• Large number of sellers
• Product Differentiation
• Freedom for entry and exit
• Advertisement and selling cost
• Lack of Perfect Knowledge

Price – Output determination under Monopolistic Competition

Oligopoly

• The word oligopoly is derived from two Greek words ‘Oligo’ means Few and ‘Polo 'means to sell
• It is a market with few sellers dealing with homogenous and differentiated commodities
• in oligopoly one firm’s action will cause its competitors to react. This shows that firms has interdependence under oligopoly

Features of Oligopoly

• Few sellers
• There are barriers for entry
• Homogenous and heterogeneous commodities
• Interdependence between firms
• Independent decision making

Price – Output determination under Oligopoly

Collusive Oligopoly

• According to Samuelson “Collusion denotes a situation where two or more firms jointly set their prices or output, divide the market

among them, or make the business decisions”

• Cartel ----- OPEC

Non – Price Competition

• Non-price competition involves ways that firms seek to increase sales and attract custom through methods other than price.

Forms of Non – Price Competition:

• Loyalty card
• Subsidized delivery
• Advertising/brand loyalty
• After-sales service
• Coupons and free gifts

Product Pricing

• By product pricing presents an opportunity to set the right price for the by products of the main core product so as to earn incremental revenue.

Mark-up Pricing

Target Return Pricing

• It is a pricing method in which a formula is used to calculate the price to be set for a product to return a desired profit or rate of return on investment assuming that a particular quantity of the product is sold.

Penetration Pricing

• Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering.

Predatory pricing

• It is a method of pricing in which a seller sets a price so low that other suppliers cannot compete and are forced to exit the market.

Going rate pricing

• It is when a business sets the price of its product or service based on the market price.

Price skimming

• Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and then lowers it over time.