MARKET STRUCTURE

MODULE 4

MUHAMMED THAHIR PT
• What is market?
• The market is a set of conditions in which buyers and sellers come in contact
for the purpose of exchange.
• Different market structures affect the behavior of buyers and sellers (firms).
• A market economy is the framework in which exchange is mediated through
markets where prices play a decisive role through interaction of the forces of
demand and supply.
 Perfect competition
• Perfect competition is an ideal type of market structure where all producers and
consumers have full and symmetric information and no transaction costs.
• There are a large number of producers and consumers competing with one
another in this kind of environment.
• Perfect competition is theoretically the opposite of a monopolistic market.
• Since all real markets exist outside of the plane of the perfect competition model,
each can be classified as imperfect.
• The opposite of perfect competition is imperfect competition, which exists when a
market violates the abstract tenets of neoclassical pure or perfect competition.
 Characteristics of Perfect competition:
• All firms sell an identical product (the product is a commodity or
homogeneous).
• All firms are price takers (they cannot influence the market price of their
products).
• Large number of buyers and sellers.
• Buyers have complete or perfect information (in the past, present, and future)
about the product being sold and the prices charged by each firm.
• Absence of transportation cost.
• Firms can enter or exit the market without cost (No barriers for entry and exit).
Pricing under perfect competition
Three profit conditions under perfect competition
1. When price (or AR) > AC, there is excess profit.
2. When AR = AC, only normal profit is yielded.
3. When AR (or price) < AC, losses occur
• Examples of perfect competition
• Foreign exchange markets: Here currency is all homogeneous. Also, traders
will have access to many different buyers and sellers. There will be good
information about relative prices. When buying currency it is easy to compare
prices
• Agricultural markets: In some cases, there are several farmers selling identical
products to the market, and many buyers. At the market, it is easy to compare
prices. Therefore, agricultural markets often get close to perfect competition.
 Monopoly
• A monopolistic market is a theoretical condition that describes a market where
only one company may offer products and services to the public.
• A monopoly describes a market situation where one company owns all the
market share and can control prices and output.
• A pure monopoly rarely occurs, but there are instances where companies own
a large portion of the market share, and ant-trust laws apply.
 Characteristics of a monopolistic market:
• Single supplier. A monopolistic market is regulated by a single supplier.
• Barriers to entry and exit.
• No close substitutes. No close substitutes exist for the product sold by the
pure monopolist
• Profit maximizer.
• Price setter or price maker
• Unique product.
• Price discrimination.
 Types of monopoly
• Natural monopoly
• Legal monopoly
• Social monopoly
• Monopoly by combination
 Effects of monopoly

• Consumers have no substitutes and are forced to pay the price for the goods
dictated by the monopolist.
• Super profit
• A decline in consumer surplus.
• Possible diseconomies of scale.
Pricing under monopoly (Super Profit)
Pricing under monopoly (Normal Profit)
 Monopolistic competition
• Introduced by E.H Chamberline and J. Robinson.
• A market structure in which there is a large number of firms dealing in the
differentiated products which are closely substitutes.
• A mixed type of monopoly and perfect competition.
 Features of monopolistic competition
• Large number of sellers.
• Free entry and exit.
• Product differentiation .
• Imperfect knowledge.
• Limited mobility of factors.
• Presence of transport cost
• Selling outlays
• Non-price competition
 Oligopoly
• Price-output takes independent.
• High degree of uncertainty in the market.
• Difficult to maximise the profit.
• Two main elements: collusion and cartel
 Features of oligopoly
• Few sellers
• Control over supply
• Inter-dependence on firms
• Conflicting attitudes on firms
• Advertising and selling cost
• Price rigidity
• Non-profit motive
• Group behaviour
 Collusive and Non-collusive oligopoly
• In collusive oligopoly, firms are under an agreements and they will mutually
decide the market policies like OPEC.
• In non-collusive oligopoly, firms are working separately with a competitive
mentality.
• Both system promoting profit maximisation but in different ways.
• In collusive oligopoly- cartel and price leadership.
• In non-collusive oligopoly- Cournot, Bertrand and Kinked model
 Kinked Demand Curve Model
• Introduced by Paul M Sweesy
• The introduction of kinked demand curve in oligopolistic market is because of
price rigidity:
Prevent rivals with specific price
Buyer may accustomed with a particular product
Keeping reasonable price
Established price may taken from bargaining and agreement
• Assumptions:
• Small number of
buyers
• Either product
differentiation or not
• Asymmetrical
information on price
 Will there always be price rigidity?
• Increase in costs
• Decrease costs
• Increase in demand
• Decrease in demand