MARKET STRUCTURES

LEARNING OBJECTIVESTo know about the market

Classification of market

Market Structure

Price and output determination under market structure

What is Market"Market refers to an arrangement, whereby buyers and sellers come in contact with each other directly or indirectly, to buy or sell goods."

Classification or Types of Market

Market Structure

Perfect CompetitionA market having very large number of firms, each of which produces the same standardized products and takes the market price as given

Salient Features Large no. of buyers and sellers.Homogeneous product.Free entry and exist of firms in an industry..Perfect knowledge of market conditions.No transport cost.Firms are price takers.Uniform Price

Firms Equilibrium under Perfect Competition

An individual firm is equilibrium when two conditions are met Firm is earning maximum profit .MC=MR and MC cuts the MR from belowThere are 2 methods of knowing equilibrium TR and TC method MR and MC method

TR-TC Method TCMaximum profit LossProfitLoss

MR-MC Method :-MR=MCMC

Perfect Competition Short RunFirm can have 3 situations when in equilibrium-Profit SituationLoss SituationNormal Profit Situation

a) Profit SituationPrice, Revenue and CostOutputMCACAVCQQ2*P= MR= AR0profitP1Q2*EMR=MCSES= Avg. Profit

b) Loss SituationPrice, Revenue and CostOutputMCACAVCQP4Q4*0lossP4= MR4= AR4EBCDEEB= Avg. Loss

Shutdown Point Price, Revenue and CostOutputMCACAVCQP5Q5*0lossP5= MR5= AR5SThe point where price is below AVC & as soon as firm attains this point it should stop production so that loss can be FC only.

c) Normal Profit situationPrice, Revenue and CostOutputMCACQP3Q3*0P3= MR3= AR3EP=AR=AC=MR=MCAR=AC

Perfect Competition

LMR=LARLMCLACPCOSTQE Long Run

Monopolistic CompetitionThere are many firms, each selling a differentiated product. Because products sold by different firms are not perfect substitutes, each firm has some control over price. There are no barriers to entering the market.

Features of Monopolistic MarketMany FirmsFew Artificial Barriers to EntrySlight Control over PriceDifferentiated ProductsNon Price Competition

Non Price competitionNonprice competition is a way to attract customers through style, service, or location, but not a lower price.

Conditions of non-price competitionCharacteristics of GoodsThe simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture, or taste.Location of SaleA convenience store in the middle of the desert differentiates its product simply by selling it hundreds of miles away from the nearest competitor.

Service LevelSome sellers can charge higher prices because they offer customers a higher level of service.Advertising ImageFirms also use advertising to create apparent differences between their own offerings and other products in the marketplace.

Conditions of non-price competition

Price and Output Determination in Monopolistic Competition

Monopolistic Competition Eshort run

Monopolistic Competition ENormal profit

Monopolistic Competition Eloss

Long run E

OligopolyOligopoly describes a market dominated by a few large, profitable firms, a result of two sorts of barrier to entry ;Economies of scaleGovernment may limit the number of firms in the market.

Types of OligopolyCollusion A Collusion is an agreement among members of an oligopoly to set prices and production levels. Price- fixing is an agreement among firms to sell at the same or similar prices. CartelsA cartel is an association by producers established to coordinate prices and production.

Monopoly A single firm serves the entire market. A monopoly occurs when the barriers to entry are very strong, which could result from a large economies of scale or the government limit on the number of firms.

Barrier to EntryFactors that make it difficult for new firms to enter a market are called barriers to entry.

Start-up Costs The expenses that a new business must pay before the first product reaches the customer are called start-up costs. Technology Some markets require a high degree of technological know-how. As a result, new entrepreneurs cannot easily enter these markets.

Barrier to Entry (contd)

Characteristics of MonopolySingle SellerBarrier to entryNo close substitutesPrice MakerPrice Discrimination

Forming a Monopoly Different market conditions can create different types of monopolies. There are several ways in which monopolies are formed

Economies of ScaleIf a firm's start-up costs are high, and its average costs fall for each additional unit it produces, then it enjoys what economists call economies of scale. An industry that enjoys economies of scale can easily become a natural monopoly.e.g Local Phone Service Electric Power Generation

Forming a Monopoly (contd)

Natural MonopoliesA natural monopoly is a market that runs most efficiently when one large firm provides all of the output. Sometimes the development of a new technology can destroy a natural monopoly.Government Monopoly Government monopoly is a monopoly created by the government. These take several forms

Forming a Monopoly (contd)

Government MonopoliesTechnological Monopolies: The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time e.g Drugs covered by patentsFranchises and Licenses: A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market. A license is a government-issued right to operate a business.

Price DiscriminationPrice discrimination is the division of customers into groups based on how much they will pay for a good.Although price discrimination is a feature of monopoly, it can be practiced by any company with market power. Market power is the ability to control prices and total market output.

Targeted discounts, like student discounts and manufacturers rebate offers, are one form of price discrimination.Price discrimination requires some market power, distinct customer groups, and difficult resale.

Price Discrimination

Comparison of market structures

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