MARKET

"Market refers to an arrangement, whereby buyers and sellers come in contact with each other directly
or indirectly, to buy or sell goods."
Thus, above statement indicates that face to face contact of buyer and seller is not necessary for market.
E.g. In stock or share market, the buyer and seller can carry on their transactions through internet. So
internet, here forms an arrangement and such arrangement also is included in the market.

Characteristics of Market
1. Existence of commodity which is to be bought and sold.
2. The existence of buyers and sellers.
3. A place, be it a certain region, a country or the entire world.
4. Communication between buyers and sellers that only one price should prevail for the same
commodity at the same time.

Classification or Types of Market

The classification or types of market are depicted in the following chart.

Generally, the market is classified on the basis of:

1. Place,
2. Time and
3. Competition.
On the basis of Place, the market is classified into:
1. Local Market or Regional Market.
2. National Market or Countrywide Market.
3. International Market or Global Market.
On the basis of Time, the market is classified into:
1. Very Short Period Market.
2. Short Period Market.
3. Long Period Market.
4. Very Long Period Market.
On the basis of Competition/Market Structure, the market is classified into:

1. Perfectly Competitive Market Structure.

2. Imperfectly Competitive Market Structure.
(Market structure refers to number and types of firms operating in the industry.)

Both these market structures widely differ from each other in respect of their features, price, etc. Under
imperfect competition, there are different forms of markets like monopoly, duopoly, oligopoly
and monopolistic competition.

1. A monopoly has only one or a single (mono) seller.

2. Duopoly has two (duo) sellers.
3. Oligopoly has little or fewer (oligo) number of sellers.
4. Monopolistic competition has many or several numbers of sellers.
The suffix poly has its origin from Greek word Polus which means many or more than one.

What is Perfect Competition?

1) Perfect Competition refers to a market situation where there are very large number of buyers
and sellers dealing in a homogenous product at a price fixed by the market.
2) Perfect Competition is a market structure where there is a perfect degree of competition and
single price prevails.
3) The concept of Perfect Competition was introduced by Dr. Alfred Marshall.
4) Nothing is 100% perfect in this world. So, this states that perfect competition is only a
theoretical possibility and it does not exist in reality.

Main Features of Perfect Competition ↓

The following are the characteristics or main features of perfect competition :-

1. Many Sellers
In this market, there are many sellers who form total of market supply. Individually, seller is a firm and
collectively, it is an industry. In perfect competition, price of commodity is decided by market forces of
demand and supply. i.e. by buyers and sellers collectively. Here, no individual seller is in a position to
change the price by controlling supply. Because individual seller's individual supply is a very small part
of total supply. So, if that seller alone raises the price, his product will become costlier than other and
automatically, he will be out of market. Hence, that seller has to accept the price which is decided by
market forces of demand and supply. This ensures single price in the market and in this way, seller
becomes price taker and not price maker.

2. Many Buyers
Individual buyer cannot control the price by changing or controlling the demand. Because individual
buyer's individual demand is a very small part of total demand or market demand. Every buyer has to
accept the price decided by market forces of demand and supply. In this way, all buyers are price takers
and not price makers. This also ensures existence of single price in market.

3. Homogenous Product
In this case, all sellers produce homogeneous i.e. perfectly identical products. All products are perfectly
same in terms of size, shape, taste, colour, ingredients, quality, trade marks etc. This ensures the
existence of single price in the market.

4. Zero Advertisement Cost

Since all products are identical in features like quality, taste, design etc., there is no scope for product
 differentiation. So advertisement cost is nil.

5. Free Entry and Exit

There are no restrictions on entry and exit of firms. This feature ensures existence of normal profit in
perfect competition. When profit is more, new firms enter the market and this leads to competition.
Entry of new firms competing with each other results into increase in supply and fall in price. So, this
reduces profit from abnormal to normal level.
When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So
remaining firms raise their prices and their profits go up. So again this ensures normal level of profit.
6. Perfect Knowledge
On the front of both, buyers and sellers, perfect knowledge regarding market and pricing conditions is
expected. So, no buyer will pay price higher than market price and no seller will charge lower price
than market price.

7. Perfect Mobility of Factors

This feature is essential to keep supply at par with demand. If all factors are easily mobile (moveable)
from one line of production to another, then it becomes easy to adjust supply as per demand.
Whenever demand is more additional factors should be moved into industry to increase supply and
vice versa. In this way, with the help of stable demand and supply, we can maintain single price in the
Market.

8. No Government Intervention
Since market has been controlled by the forces of demand and supply, there is no government
intervention in the form of taxes, subsidies, licensing policy, control over the supply of raw materials,
etc.

9. No Transport Cost
It is assumed that buyers and sellers are close to market, so there is no transport cost. This ensures
existence of single price in market.

IMPERFECT COMPETITION
It is an important market category wherein individual firms exercise control over the price to a smaller
or larger degree depending upon the degree of imperfection present in a case.

Monopoly
1. The term monopoly is derived from Greek words 'mono' which means single and 'poly' which
means seller. So, monopoly is a market structure, where there only a single seller producing a
product having no close substitutes.
2. This single seller may be in the form of an individual owner or a single partnership or a Joint
Stock Company. Such a single firm in market is called monopolist. Monopolist is price maker
and has a control over the market supply of goods. But it does not mean that he can set both
price and output level. A monopolist can do either of the two things i.e. price or output. It means
he can fix either price or output but not both at a time.

Characteristics / Features of Monopoly

Following are the features or characteristics of Monopoly :-
1. A single seller has complete control over the supply of the commodity.
2. There are no close substitutes for the product.
3. There is no free entry and exit because of some restrictions.
4. There is a complete negation of competition.
5. Monopolist is a price maker.

6. Since there is a single firm, the firm and industry are one and same i.e. firm coincides the industry.
 7. Monopoly firm faces downward sloping demand curve. It means he can sell more at lower price
and vice versa. Therefore, elasticity of demand factor is very important for him.

Classification / Kinds / 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 Monopoly
It 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 Monopoly
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. Discriminating 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 trademarks, patents, copy rights, statutory regulation of
government etc., it is called legal monopoly. Music industry 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.

9. Technological Monopoly
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.

Monopolistic Competition
1. Pure monopoly and perfect competition are two extreme cases of market structure. In reality,
 there are markets having large number of producers competing with each other in order to sell
their product in the market. Thus, there is monopoly on one hand and perfect competition on
other hand. Such a mixture of monopoly and perfect competition is called as monopolistic
competition. It is a case of imperfect competition.
2. Monopolistic competition has been introduced by American economist Prof. Edward
Chamberlin, in his book 'Theory of Monopolistic Competition' published in 1933.

Features of Monopolistic Competition :

1. Large Number of Sellers
There are large number of sellers producing differentiated products. So, competition among them is
very keen. Since number of sellers is large, each seller produces a very small part of market supply. So
no seller is in a position to control price of product. Every firm is limited in its size.

2. Product Differentiation
It is one of the most important features of monopolistic competition. In perfect competition, products
are homogeneous in nature. On the contrary, here, every producer tries to keep his product dissimilar
than his rival's product in order to maintain his separate identity. This boosts up the competition in
market. So, every firm acquires some monopoly power.

3. Freedom of Entry and Exit

This feature leads to stiff competition in market. Free entry into the market enables new firms to come
with close substitutes. Free entry or exit maintains normal profit in the market for a longer span of
time.

4. Selling Cost
It is a unique feature of monopolistic competition. In such type of market, due to product
differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost
includes sales promotion expenses, advertisement expenses, salaries of marketing staff, etc.
But on account of homogeneous product in perfect competition and zero competition in monopoly,
selling cost does not exist there.

5. Absence of Interdependence
Large numbers of firms are different in their size. Each firm has its own production and marketing
policy. So no firm is influenced by other firm. All are independent.

6. Two Dimensional Competition

Monopolistic competition has two types of competition aspects viz.
a. Price competition i.e. firms compete with each other on the basis of price.
b. Non price competition i.e. firms compete on the basis of brand, product quality advertisement.

7. Concept of Group
In place of Marshallian concept of industry, Chamberlin introduced the concept of Group under
monopolistic competition. An industry means a number of firms producing identical product. A group
means a number of firms producing differentiated products which are closely related.

8. Falling Demand Curve

In monopolistic competition, a firm is facing downward sloping demand curve i.e. elastic demand curve
It means one can sell more at lower price and vice versa.
Oligopoly
The term oligopoly is derived from two Greek words: ‘oligi’ means few and ‘polein’
means to sell. Oligopoly is a market structure in which there are only a few sellers (but
more than two) of the homogeneous or differentiated products. So, oligopoly lies in
between monopolistic competition and monopoly.
Oligopoly refers to a market situation in which there are a few firms selling
homogeneous or differentiated products. Oligopoly is, sometimes, also known as
‘competition among the few’ as there are few sellers in the market and every seller
influences and is influenced by the behaviour of other firms.

Example of Oligopoly:
In India, markets for automobiles, cement, steel, aluminium, etc, are the examples of
oligopolistic market. In all these markets, there are few firms for each particular
product.
DUOPOLY is a special case of oligopoly, in which there are exactly two sellers. Under
duopoly, it is assumed that the product sold by the two firms is homogeneous and
there is no substitute for it. Examples where two companies control a large proportion
of a market are: (i) Pepsi and Coca-Cola in the soft drink market; (ii) Airbus and
Boeing in the commercial large jet aircraft market; (iii) Intel and AMD in the consumer
desktop computer microprocessor market.

Types of Oligopoly:
1. Pure or Perfect Oligopoly:
If the firms produce homogeneous products, then it is called pure or perfect oligopoly.
Though, it is rare to find pure oligopoly situation, yet, cement, steel, aluminum and
chemicals producing industries approach pure oligopoly.

2. Imperfect or Differentiated Oligopoly:

If the firms produce differentiated products, then it is called differentiated or
imperfect oligopoly. For example, passenger cars, cigarettes or soft drinks. The goods
produced by different firms have their own distinguishing characteristics, yet all of
them are close substitutes of each other.

3. Collusive Oligopoly:
If the firms cooperate with each other in determining price or output or both, it is
called collusive oligopoly or cooperative oligopoly.

4. Non-collusive Oligopoly:
If firms in an oligopoly market compete with each other, it is called a non-collusive or
non-cooperative oligopoly.
Features of Oligopoly:
The main features of oligopoly are elaborated as follows:

1. Few firms:
Under oligopoly, there are few large firms. The exact number of firms is not defined.
Each firm produces a significant portion of the total output. There exists severe
competition among different firms and each firm try to manipulate both prices and
volume of production to outsmart each other. For example, the market for
automobiles in India is an oligopolist structure as there are only few producers of
automobiles.

The number of the firms is so small that an action by any one firm is likely to affect the
rival firms. So, every firm keeps a close watch on the activities of rival firms.

2. Interdependence:
Firms under oligopoly are interdependent. Interdependence means that actions of one
firm affect the actions of other firms. A firm considers the action and reaction of the
rival firms while determining its price and output levels. A change in output or price
by one firm evokes reaction from other firms operating in the market.
For example, market for cars in India is dominated by few firms (Maruti, Tata,
Hyundai, Ford, Honda, etc.). A change by any one firm (say, Tata) in any of its vehicle
(say, Indica) will induce other firms (say, Maruti, Hyundai, etc.) to make changes in
their respective vehicles.

3. Non-Price Competition:
Under oligopoly, firms are in a position to influence the prices. However, they try to
avoid price competition for the fear of price war. They follow the policy of price
rigidity. Price rigidity refers to a situation in which price tends to stay fixed
irrespective of changes in demand and supply conditions. Firms use other methods
like advertising, better services to customers, etc. to compete with each other. If a firm
tries to reduce the price, the rivals will also react by reducing their prices. However, if
it tries to raise the price, other firms might not do so. It will lead to loss of customers
for the firm, which intended to raise the price. So, firms prefer non- price competition
instead of price competition.

4. Barriers to Entry of Firms:

The main reason for few firms under oligopoly is the barriers, which prevent entry of
new firms into the industry. Patents, requirement of large capital, control over crucial
raw materials, etc, are some of the reasons, which prevent new firms from entering
into industry. Only those firms enter into the industry which is able to cross these
barriers. As a result, firms can earn abnormal profits in the long run.

5. Role of Selling Costs:

Due to severe competition ‘and interdependence of the firms, various sales promotion
techniques are used to promote sales of the product. Advertisement is in full swing
under oligopoly, and many a times advertisement can become a matter of life-and-
death. A firm under oligopoly relies more on non-price competition.
Selling costs are more important under oligopoly than under monopolistic competition.
6. Group Behaviour:
Under oligopoly, there is complete interdependence among different firms. So, price
and output decisions of a particular firm directly influence the competing firms.
Instead of independent price and output strategy, oligopoly firms prefer group
decisions that will protect the interest of all the firms. Group Behaviour means that
firms tend to behave as if they were a single firm even though individually they retain
their independence.

7. Nature of the Product:

The firms under oligopoly may produce homogeneous or differentiated product.
i. If the firms produce a homogeneous product, like cement or steel, the industry is
called a pure or perfect oligopoly.
ii. If the firms produce a differentiated product, like automobiles, the industry is called
differentiated or imperfect oligopoly.

8. Indeterminate Demand Curve:

Under oligopoly, the exact behaviour pattern of a producer cannot be determined with
certainty. So, demand curve faced by an oligopolist is indeterminate (uncertain). As
firms are inter-dependent, a firm cannot ignore the reaction of the rival firms. Any
change in price by one firm may lead to change in prices by the competing firms. So,
demand curve keeps on shifting and it is not definite, rather it is indeterminate.

**************************************************************************************