Economics Market Structures

Brought to you by …

• Aashna Shah

• Forem Gandhi

• Friya Patel

• Harsh Parikh

• Qais Parker

• Raghu Mundra

• Simran Aggarwal

• Sufiyan

Types of Market Structure

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Perfect Competition

Why study Perfect Competition ?

Even though perfect competition is rarely, if ever, encountered in the real world, we study the perfect competition model because it provides an ideal against which other models like oligopoly, duopoly, monopoly markets are compared.

Assumptions of Perfect Competition :-

1) Homogeneous Goods

2) Perfect Information

3) Price Taking

4) No Transaction Costs

5) Free Entry and Cost

1) Homogenous Goods

All firms sell an identical product. Consumers view the products of various firms as the same, hence, are indifferent between them.

2) Perfect Information

Buyers and sellers have all relevant information about the market including the price and quality of the product.

3) Price Taking

Buyers and sellers cannot individually influence the price at which the product can be purchased or sold. Price is determined by the market, so each buyer takes the price as given.

4) No Transaction Costs

Neither buyers nor sellers incur costs or fees to participate in the market

5) Free Entry and Exit

Firms can enter and exit the industry quickly at any time without having to incur any special expense. That is, firms do not face barriers to entry or exit

Examples of Perfect Competition :-• Buyers and sellers in some auction-type markets, say for

commodities (especially decentralised digital commodities such as Bitcoin) or some financial assets, may approximate the concept

• Street food vendors are also considered to be a part of a perfectly competitive market. Their products are homogeneous in nature, and they are priced accordingly. Consumers are free to make purchases at any vendor they prefer, and entry/exit barriers for sellers are virtually non-existent.

Monopolistic CompetitionMonopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes

Features of

1) Fairly Large Number of Buyers

In this market there are fairly large number of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand.

2) Fairly Large Number of Sellers

The number of sellers in a monopolistic competition is large. It is smaller than that in perfect competition. Since the number of sellers is large, each seller has a limited control over supply. The seller has complete control over his brand. Thus, each seller enjoys an element of monopoly in one hand and on the other they have to face competition from sellers selling close substitute in the market.

3) Product Differentiation

This is the most feature of monopolistic competition. Each product in this market is different from other product in some form or the other. The differences could be in its colour, shape, wrapper, etc.their products, though different, are close substitute to each other eg. Tide is close substitute to surf excel.

4) Free Entry and Exit

Under monopolistic competition, there is freedom of entry and exit i.e new firms are free to enter the market, if there is super normal profit. Similarly, they can leave the market, if they find it difficult to survive.

5) Demand Curve of the Seller

Due to product differentiation and availability of close substitute, demand curve is highly price elastic and downward sloping. It means a slight change in price of the product will bring about a change in quantity demanded.

Examples of Monopolistic Competition

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers.

Features of Oligopoly

With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.Oligopoly is a common market form where a number of firms are in competition.Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly.

Examples of Oligopoly

Monopoly

Mono means single and poly means seller. Thus monopoly means single seller in the market who has complete control over the supply of a commodity. A monopolist is a price maker and not a price taker as there is no close substitute of the commodity.

Features of Monopoly

• Single seller – here there is a single seller or producer. There is no rivalry in this form of market structure as the seller faces no competition

• No close substitute – there are no close substitutes for the commodities sold in the market. No firm can produce the same product in this form of market

• Barriers to entry – in monopoly the entry of other firms is restricted. The seller has complete hold over the supply. This protects the monopoly power

• No distinction between firm and industry- in monopoly as there is only one seller there is no distinction between firm and industry. Thus in monopoly firm is the industry

• Price discrimination- this implies Control over market supply- the monopolist has complete hold over market supply. He is the sole producer of a commodity, and due to barriers in entry it does not allow competitors to enter the market

• Price maker- a monopolist is a price maker not a price taker. He can charge any price for the commodity as he has complete control over the supply of the product

• Super normal profit – a monopolist always wants to earn super normal profit. His decisions regarding price and level of output are guided by profit maximization motive. Thus sometimes he supplies the product at high prices as her the demand and sometimes controls the supply of the product and sells it at a higher price

• charging different prices for the same product to different buyers. The monopolist succeeds in increasing his profit by adopting the technique of price discrimination

Types of Monopoly

1) Perfect Monopoly

It is also called as absolute monopoly. In this case, there is only a single seller of product having no close substitute; not even remote one. There is absolutely zero level of competition. Such monopoly is practically very rare.

2) Imperfect MonopolyIt is also called as relative monopoly or simple or limited monopoly. It refers to a single seller market having no close substitute. It means in this market, a product may have a remote substitute. So, there is fear of competition to some extent e.g. Mobile (Cellphone) telcom industry (e.g. vodaphone) is having competition from fixed landline phone service industry (e.g. BSNL).

3) Private Monopoly

When production is owned, controlled and managed by the individual, or private body or private organization, it is called private monopoly. e.g. Tata, Reliance, Bajaj, etc. groups in India. Such type of monopoly is profit oriented.

4) Public Economy

When production is owned, controlled and managed by government, it is called public monopoly. It is welfare and service oriented. So, it is also called as 'Welfare Monopoly' e.g. Railways, Defence, etc.

5) Simple Monopoly

Simple monopoly firm charges a uniform price or single price to all the customers. He operates in a single market.

6) Discrimination Monopoly

Such a monopoly firm charges different price to different customers for the same product. It prevails in more than one market.

7) Legal Monopoly

When monopoly exists on account of trade marks, patents, copy rights, statutory regulation of government etc., it is called legal monopoly. Parle G is an example of legal monopoly.

8) Natural Monopoly

It emerges as a result of natural advantages like good location, abundant mineral resources, etc. e.g. Gulf countries are having monopoly in crude oil exploration activities because of plenty of natural oil resources, tea from assam

9) Technological Economy

It emerges as a result of economies of large scale production, use of capital goods, new production methods, etc. E.g. engineering goods industry, automobile industry, software industry, etc.

10) Joint Monopoly

A number of business firms acquire monopoly position through amalgamation, cartels, syndicates, etc, it becomes joint monopoly. e.g. Actually, pizza making firm and burger making firm are competitors of each other in fast food industry. But when they combine their business, that leads to reduction in competition. So they can enjoy monopoly power in market.

Credits

• Harsh Parikh ( PPT )

• Aashna Shah & Qais Parker (Perfect Comp)

• Sufi & Forem Gandhi ( Monopolistic Comp)

• Mansi Shah & Simran Aggarwal (Oligopoly)

• Friya Patel & Raghu Mundra (Monopoly)