CHAPTER FIVE
MARKET STRUCTURE
5.1. The concept of market in physical
and digital space
Market describes place or digital space by which
goods, services and ideas are exchanged to satisfy
consumer need.
Digital marketing is the marketing of products or services
using digital technologies, mainly on the internet but also
including mobile phones, display advertising, and any
other digital media.
Digital marketing channels are systems on the internet
that can create, accelerate and transmit product value
from producer to the terminal consumer by digital
networks.
Market….
Physical market is a set up where buyers can physically
meet their sellers and purchase the desired
merchandise from them in exchange of money.
In physical marketing, marketers will effortlessly
reach their target local customers and thus they have
more personal approach to show about their brands.
5.2. Perfectly competitive market
Perfect competition is a market structure
characterized by a complete absence of rivalry among
the individual firms.
5.2.1 Assumptions of perfectly
competitive market
A market is said to be pure competition (perfectly
competitive market) if the following assumptions are
satisfied.
1. Large number of sellers and buyers: sellers and buyers
are not price makers rather they are price takers.
2. Homogeneous product
3. Perfect mobility of factors of production
4. Free entry and exit
5. Perfect knowledge about market conditions
6. No government interference
Once the price of the product is determined in the
market, the producer takes the price (Pm in the figure
below) as given.
Hence, the demand curve (Df) that the firm faces in this
market situation is a horizontal line drawn at the
equilibrium price, Pm.
5.2.2 Short run equilibrium of the firm
The main objective of a firm is profit maximization.
If the firm has to incur a loss, it aims to minimize the loss.
Profit is the difference between total revenue and total cost.
Total Revenue (TR): it is the total amount of money a
firm receives from a given quantity of its product sold.
TR=P X Q, where P = price of the product
Q = quantity of the product sold.
Average revenue (AR)
Average revenue (AR):- it is the revenue per unit
of item sold.
Therefore, the firm‘s demand curve is also the
average revenue curve.
Marginal Revenue (MR)
Marginal Revenue: it is the additional amount of money/ revenue
the firm receives by selling one more unit of the product.
It is the change in total revenue resulting from the sale of an extra unit
of the product.
Thus, in a perfectly competitive market,
AR = MR = P =Df
Since the purely competitive firm is a price taker, it will
maximize its economic profit only by adjusting its output.
Maximum profit or minimum loss
There are two ways to determine the level of output at which a
competitive firm will realize maximum profit or minimum
loss.
a) Total Approach (TR-TC approach)
In this approach, a firm maximizes total profits in the short run
when the (positive) difference between total revenue (TR) and
total costs (TC) is greatest.
Note: The profit maximizing output level is Qe because at this
output level that the vertical distance between the TR and TC
curves (or profit) is maximized.
b) Marginal Approach (MR-MC)
The firm will maximize profit or minimize loss by producing
the output at which marginal revenue equals marginal cost.
The perfectly competitive firm maximizes its short-run total
profits at the output when the following two conditions are
fulfilled.
I. MR = MC
II. The slope of MC is greater than slope of MR; or MC is
rising). (that is, slope of MC is greater than zero).
Firms in the short- run gets positive or zero or negative profit
depends on the level of ATC at equilibrium. Thus, depending on the
relationship between price and ATC.
i) Economic/positive profit
If the AC is below the market price at equilibrium, the firm
earns a positive profit equal to the area between the ATC curve
and the price line up to the profit maximizing output.
ii) Loss
- Ifthe AC is above the market price at equilibrium, the firm earns a
negative profit (incurs a loss) equal to the area between the AC
curve and the price line.
iii) Normal Profit
Normal Profit (zero profit) or break- even point - If the AC is equal
to the market price at equilibrium, the firm gets zero profit or
normal profit.
Example: Suppose that the firm operates in a perfectly
competitive market. The market price of its product is $10. The
firm estimates its cost of production with the following cost
function:
TC=2+10q-4q2+q3
A) What level of output should the firm produce to maximize its
profit?
B) Determine the level of profit at equilibrium.
C) What minimum price is required by the firm to stay in the
market?
To determine which level of output maximizes profit we have to use the
second order test at the two output levels. That is, we have to see which
output level satisfies the second order condition of increasing MC.
B) Above, we have said that the firm maximizes its profit by producing 8/3
units. To determine the firm‘s equilibrium profit we have to calculate the
total revenue that the firm obtains at this level of output and the total cost
of producing the equilibrium level of output.
5.2.3 Short run equilibrium of the industry
The perfectly competitive firm always produces where P
=MR=MC (as long as P exceeds AVC), the firm‘s short-run
supply curve is given by the rising portion of its MC curve above
its AVC, or shutdown point.
The industry/market supply curve is a horizontal summation
of the supply curves of the individual firms.
Industry supply curve can be obtained by multiplying the
individual supply at various prices by the number of firms, if
firms have identical supply curve.
An industry is in equilibrium in the short-run when market is
cleared at a given price.
5.3. Monopoly market
Pure monopoly exists when a single firm is the only
producer of a product for which there are no close
substitutes.
The main characteristics of this market structure
include:
I. Single seller
II. No close substitutes
III. Price maker
IV. Blocked entry
5.3.1. Sources of monopoly
The emergence and survival of monopoly is attributed to the
factors which prevent the entry of other firms in to the
industry.
The major sources of barriers to entry are:
I. Legal restriction
II. Control over key raw materials
III. Efficiency
IV. Patent rights:
5.4. Monopolistically competitive market
It defined as the market organization in which there are
relatively many firms selling differentiated products.
It is the blend of competition and monopoly
The competitive element arises from the existence of
large number of firms and no barrier to entry or exit.
The monopoly element results from differentiated
products, i.e. similar but not identical products.
This market is characterized by:
I. Differentiated product. real (eg. quality) or fancied
(e.g. difference in packing).
II. Many sellers and buyers
III. Easy entry and exit
IV. Existence of non-price competition
5.5. Oligopoly market
I. Few dominant firms: the number of firms is small enough
that each firm recognizes the actions of other firms, implying
that firms are mutually interdependent.
II. Entry barrier: The barriers may include economies of scale,
legal, control of strategic inputs, etc.
III. Products may be homogenous or differentiated.
If the product is homogeneous, we have a pure oligopoly.
If the product is differentiated, it will be a differentiated oligopoly.
Only two firms in the market is known as duopoly.
