Market structures perfect & imperfect competitions

A simple and useful presentation for professors to teach market structure in economics class. Contains relevant illustrations

1. MARKET STRUCTURES Prepared by: Sajan N Thomas

2. What are markets? In common parlance, by market is meant a place where commodities are bought and sold at retail or wholesale prices . In Economics however, the term “Market” does not refer to a particular place as such but it refers to a market for a commodity or commodities. It refers to an arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods.

3. Markets

4. What is ‘market structure’ Market structure  is the characteristics of a  market . We focus on those characteristics which affect the nature of competition and pricing

5. Type of Market Structures

6. Alternative Market Structures The four market structures perfect competition monopoly monopolistic competition oligopoly

7. Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted   Differentiated Builders, restaurants Downward sloping, but relatively elastic   Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals)   Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

8. Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted   Differentiated Builders, restaurants Downward sloping, but relatively elastic   Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals)   Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

9. Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted   Differentiated Builders, restaurants Downward sloping, but relatively elastic   Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals)   Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

10. Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted   Differentiated Builders, restaurants Downward sloping, but relatively elastic   Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals)   Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

11. Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect Competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic Competition Many / several Unrestricted   Differentiated Builders, restaurants Downward sloping, but relatively elastic   Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals)   Pure Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

12. Perfectly competitive market

13. REVENUE AND COST CURVES UNDER PERFECT COMPETITION

14. SHORT PERIOD EQUILIBRIUM under Perfect Competition

15. LONG PERIOD EQUILIBRIUM under Perfect Competition

16. IMPERFECT COMPETITION

17. MONOPOLY Literally monopoly means one seller. ‘ Mono’ means one and ‘poly’ means seller. One firm is the sole producer or seller of a product which has no close substitutes. Thus monopoly is negation of competition.

18. Features of monopoly S ingle producer or seller There is no close substitute for the product There is no freedom of entry The monopolist is a price maker The monopolist aims at maximisation of his profit

19. Indian railway – a monopoly

20. Source and Types of Monopoly Control of inputs Economies of scale Patents Legal Restrictions Entry Lags

21. Short run & Long run Equilibrium of the Monopolist

22. PRICE DISCRIMINATION Sometimes, a monopoly firm might charge different prices to different groups of buyers. This pricing technique is called price discrimination.

23. Degrees of Price Discrimination Prof . A C Pigou has distinguished between three forms of price discrimination, namely; First degree price discrimination ( different price to each of its customers ) Second degree price discrimination ( discriminate according to quantities consumed ) Third degree price discrimination ( different prices to each sub market )

24. Price discrimination of the first degree The monopolist discriminates price not only between different consumers but also between the different units of purchase by a given consumer. He extracts the maximum possible price for each unit of his output. The monopolist has complete knowledge about the market demand curve. He can charge the maximum price which a consumer is ready to pay for purchasing a given quantity. Price discrimination of the second degree Price does not differ for each unit of purchase. The consumer is made to pay one price upto a certain amount of purchase and another price for purchases exceeding this amount. This is known as the principle of block pricing. Price discrimination of the third degree A particular consumer pays a particular price, irrespective of the amount of his purchase. But the price differs between different consumers (or different groups of consumers).

25. Monopolistic Competition It is that form of market in which there are large numbers of sellers selling differentiated products which are similar in nature but not homogenous. E g ., the different brands of soap - these are closely related goods with a little difference in odour , size and shape . It is a combination of perfect competition and monopoly

26. Features of monopolistic competition

27. Equilibrium of the Firm – Monopolistic market Short run Long run

28. OLIGOPOLY

29. Meaning Oligopoly is a market situation in which there are few firms producing either differential goods or closely differential goods. The number of firms is so small that every seller is affected by the activities of the others .

30. Features of oligopoly

31. COLLUSIVE OLIGOPOLY There exists usually some form of understanding among the oligopolists in a particular industry. This understanding or agreement among the oligopolists may be either tacit or formal.

32. Collusions are of two main types: ( i ) Cartels and (ii) Price leadership .

33. THE KINKED DEMAND THEORY OF OLIGOPOLY It has been observed that many oligopolistic industries exhibit an appreciable degree of price rigidity or stability . That is, in many oligopolistic industries prices remain sticky or inflexible, and there is no tendency on the part of the oligopolists to change price of the commodity by them even if the economic conditions undergo a change. The most popular explanation is the so-called kinked demand curve hypothesis.

34. KINKED DEMAND CURVE

35. DUOPOLY

36. Meaning pf duopoly It is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market.

37. Monopsony Monopsony denotes a market condition when there is solitary consumer of a product or service. Eg : a supermarket which is a sole buyer of fruits from a regions

38. Bilateral Monopoly Bilateral monopoly denotes a market condition in which a solitary manufacturer of merchandise faces a solitary purchaser of that commodity

39. Duopsony An economic condition, similar to a duopoly, in which there are only two large buyers for a specific product or service. Members of a duopsony have great influence over sellers and can effectively lower market prices for their supplies Eg : In a local market where there are only two leading milk companies collecting milk from farmers

40. Oligopsony An  oligopsony  is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers. It contrasts with an oligopoly, where there are many buyers but few sellers.

41. Example of oligopsony