Concepts of Economics for Managers

ECON115

Market Structure

Submitted To – Dr Rupinder Kaur

Submitted By – UTKARSH SHARMA (A3221520139)
ADITYA GUPTA (A3221520152)
KUSHAL PODDAR (A3221520167)
BIJAY AGARWAL (A3221520172)
CHETAN GOYAT (A3221520187)

BBA LLB (H)

Market Structure with special focus on Monopolistic & Monopoly Market

Section - C

 ACKNOWLEDGEMENT

We would like to express our gratitude towards our teacher Dr Rupinder Kaur who gave
us this opportunity to work on this knowledgeable project which helped us to gain a lot
of information about the subject. This project helped us improve our research skills and
also learn about new concepts. We would also like to thank her for helping us and
guiding us through the project and helping us in the successful completion of this
project.
Market Structure with special focus on Monopolistic & Monopoly Market

 INTRODUCTION
In market economies, there are a variety of different market systems that exist,
depending on the industry and the companies within that industry. It is important for
small business owners to understand what type of market system they are operating in
when making pricing and production decisions, or when determining whether to enter or
leave a particular industry.
A variety of market structures will characterize an economy. Such market structures
essentially refer to the degree of competition in a market.
There are other determinants of market structures such as the nature of the goods and
products, the number of sellers, number of consumers, the nature of the product or
service, economies of scale etc. We will discuss the four basic types of market structures
in any economy. One thing to remember is that not all these types of market structures
actually exist. Some of them are just theoretical concepts. But they help us understand
the principles behind the classification of market structures.
Market Structure with special focus on Monopolistic & Monopoly Market

 TYPES OF MARKET STRUCTURE

 Perfect Competition- In a perfect competition market structure, there are a large number of
buyers and sellers. All the sellers of the market are small sellers in competition with each other.
There is no one big seller with any significant influence on the market. So all the firms in such a
market are price takers.

 Monopolistic Competition- This is a more realistic scenario that actually occurs in the real
world. In monopolistic competition, there are still a large number of buyers as well as sellers.
But they all do not sell homogeneous products. The products are similar but all sellers sell
slightly differentiated products.

 Oligopoly- In an oligopoly, there are only a few firms in the market. While there is no clarity
about the number of firms, 3-5 dominant firms are considered the norm. So in the case of an
oligopoly, the buyers are far greater than the sellers.

 Monopoly- In a monopoly type of market structure, there is only one seller, so a single firm will
control the entire market. It can set any price it wishes since it has all the market power.
Consumers do not have any alternative and must pay the price set by the seller.
Market Structure with special focus on Monopolistic & Monopoly Market

 MONOPOLISTIC COMPETITION
Monopolistic competition refers to a market situation where there are many firms selling a differ-
entiated product. “There is competition which is keen, though not perfect, among many firms making
very similar products.” No firm can have any perceptible influence on the price-output policies of the
other sellers nor can it be influenced much by their actions. Thus monopolistic competition refers to
competition among a large number of sellers producing close but not perfect substitutes for each other.

 CHARACTERISTICS OF MONOPOLISTIC COMPETITION:

 Large Number of Sellers:

In monopolistic competition the number of sellers is large. They are “many and small enough” but
none controls a major portion of the total output. No seller by changing its price-output policy can
have any perceptible effect on the sales of others and in turn be influenced by them. Thus there is no
recognised interdependence of the price-output policies of the sellers and each seller pursues an
independent course of action.

 Product Differentiation:
One of the most important features of the monopolistic competition is differentiation. Product
differentiation implies that products are different in some ways from each other. They are
heterogeneous rather than homogeneous so that each firm has an absolute monopoly in the production
and sale of a differentiated product. There is, however, slight difference between one product and
other in the same category.
Products are close substitutes with a high cross-elasticity and not perfect substitutes. Product
“differentiation may be based upon certain characteristics of the products itself, such as exclusive
patented features; trade-marks; trade names; peculiarities of package or container, if any; or singularity
in quality, design, colour, or style. It may also exist with respect to the conditions surrounding its
sales.”

 Freedom of Entry and Exit of Firms:

Market Structure with special focus on Monopolistic & Monopoly Market

Another feature of monopolistic competition is the freedom of entry and exit of firms. As firms are of
small size and are capable of producing close substitutes, they can leave or enter the industry or group
in the long run.

 Independent Behavior:
In monopolistic competition, every firm has independent policy. Since the number of sellers is large,
none controls a major portion of the total output. No seller by changing its price-output policy can
have any perceptible effect on the sales of others and in turn be influenced by them.

 Selling Costs:
Under monopolistic competition where the product is differentiated, selling costs are essential to push
up the sales. Besides, advertisement, it includes expenses on salesman, allowances to sellers for
window displays, free service, free sampling, premium coupons and gifts, etc.

 Non-price Competition:
Under monopolistic competition, a firm increases sales and profits of his product without a cut in the
price. The monopolistic competitor can change his product either by varying its quality, packing, etc.
or by changing promotional programs.

 Examples of monopolistic

 Example 1 - Taxi’s
Local taxi firms seek to differentiate themselves through factors such as pre-bookings,
limousine service, or through a fleet of different cars. There are many firms in the market, yet
cannot be considered perfectly competition due to: levels of differentiation, imperfect
information on drivers, and the ability to make supernormal profits during peak periods.

 Example 2 - Clothing markets

There are many clothing manufacturers that distinguish themselves based on style, yet also have
a certain level of market power. At the same time, it is relatively straight forward to
manufacture clothes, with low barriers to entry.

 Example 3 - Hotels and pubs

There are thousands of hotels dotted over the country – each with a certain level of local market
power. This classifies as monopolistic competition as there are many firms, each that offer a
slightly different experience. At the same time, the cost to start a small hotel is relatively low.
For instance, a business owner may be able to take out a loan to purchase a property, but they
could leave the market relatively easily.

 Example 4 - Restaurants
There are many separate restaurants all competing on the basis on slight differences. However,
they are all competing for the same customer.

 Example 5 - Hairdressing
Market Structure with special focus on Monopolistic & Monopoly Market

Often a large number of firms that use quality of service as a differentiator. Many customers
will come back to the same hairdresser as they obtain trust and offer a quality of service. At the
same time, there are low barriers to entry, with new stores opening frequently.

 Example 6 - Soap
There are many soap brands, each with a slightly different style and scent. It’s difficult to really
tell the difference which is why some offer to ‘kill 99.9% of bacteria’ and other slogans.

 Example 7 - Toilet Paper

A necessity product, but one that has many competitors offering slightly different qualities and
styles.

 Monopolistic Case Study : Mobile phones

Recall that monopolistic competition refers to an industry that has more than a few firms that each offer
a distinguished product. The Canadian cellular industry is one such market. With a history dating back
as far as Alexander Graham Bell’s invention of the telephone in 1876, the Canadian cellular industry
now has a number of large firms including Rogers, Telus, and Bell. What about Fido, Koodo, and
Virgin Mobile? They are owned by Rogers, Telus, and Bell, respectively. While this market has some
similarities to an Oligopoly (which we will not explore in this course), it is often classified as a
monopolistic competition.

Consider what you would do if your monthly cell phone bill increased by $2. Would you switch to
another company? Likely not. This means that the cellular market is certainly not perfectly competitive
as cell phone companies have some ability to change prices. Therefore, the demand faced by each of
the cellular companies will be more elastic than market demand, but not perfectly elastic. Let’s explore
how these monopolistic competitive firms set prices.
Monopolistic competition refers to a market where many firms sell differentiated products.
Differentiated products can arise from characteristics of the good or service, location from which the
product is sold, intangible aspects of the product, and perceptions of the product.
If the firms in a monopolistically competitive industry are earning economic profits, the industry will
attract entry until profits are driven down to zero in the long run. If the firms in a monopolistically
competitive industry are suffering economic losses, then the industry will see an exit of firms until
economic profits are driven up to zero in the long run.
A monopolistically competitive firm is not efficient because it does not produce at the minimum of its
average cost curve or produce where P = MC. Thus, a monopolistically competitive firm will tend to
produce a lower quantity at a higher cost and charge a higher price than a perfectly competitive firm.
Monopolistically competitive industries do offer benefits to consumers in the form of greater variety
and incentives for improved products and services. There is some controversy over whether a market-
oriented economy generates too much variety.
Market Structure with special focus on Monopolistic & Monopoly Market

 MONOPOLY COMPITETION
Monopoly is a market situation in which there is only one seller of a product with barriers to entry of
others. The product has no close substitutes. The cross elasticity of demand with every other product is
very low. This means that no other firms produce a similar product. According to D. Salvatore,
“Monopoly is the form of market organisation in which there is a single firm selling a commodity for
which there are no close substitutes.” Thus the monopoly firm is itself an industry and the monopolist
faces the industry demand curve.
The demand curve for his product is, therefore, relatively stable and slopes downward to the right,
given the tastes, and incomes of his customers. It means that more of the product can be sold at a lower
price than at a higher price. He is a price-maker who can set the price to his maximum advantage.
However, it does not mean that he can set both price and output. He can do either of the two things. His
price is determined by his demand curve, once he selects his output level. Or, once he sets the price for
his product, his output is determined by what consumers will take at that price. In any situation, the
ultimate aim of the monopolist is to have maximum profits.

 CHARACTERISTICS OF MONOPOLY MARKET:

 Under monopoly, there is one producer or seller of a particular product and there is no
difference between a firm and an industry. Under monopoly a firm itself is an industry.

 A monopoly may be individual proprietorship or partnership or joint stock company or a

cooperative society or a government company.

 A monopolist has full control on the supply of a product. Hence, the elasticity of demand for a
monopolist’s product is zero.
Market Structure with special focus on Monopolistic & Monopoly Market

 There is no close substitute of a monopolist’s product in the market. Hence, under monopoly,
the cross elasticity of demand for a monopoly product with some other good is very low.

 There are restrictions on the entry of other firms in the area of monopoly product.

 A monopolist can influence the price of a product. He is a price-maker, not a price-taker.

 Pure monopoly is not found in the real world.

 Monopolist cannot determine both the price and quantity of a product simultaneously.

 Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist can
increase his sales only by decreasing the price of his product and thereby maximise his profit.

 The marginal revenue curve of a monopolist is below the average revenue curve and it falls
faster than the average revenue curve. This is because a monopolist has to cut down the price of
his product to sell an additional unit.

 EXAMPLES OF MONOPOLY
 Example 1 – Steel Company
Carnegie Steel Company created by Andrew Carnegie (now U.S. Steel). From the late 19th century to
the early time of the 20th century, Carnegie Steel Company maintained singular control over the supply
of steel over the market. Carnegie Steel Company during the period of monopoly was effectively
setting the price for the steel nationally without the free market competition. The regulation of the
Government was not present initially. Andrew Carnegie was successful in creating the monopoly for a
long time in the steel industry after which J.P. Morgan took possession of the company by buying it and
melded the same into the U.S. Steel.
Another famous example of a monopoly of historical significance is the American Tobacco Company.
This company maintained singular control over the supply of Tobacco over the market. Government
regulation was also not present initially. However, this company got dismantled after the creation of the
antitrust regulation in the form of the Sherman Antitrust Act. The Supreme court in the year 1911
ordered the American Tobacco Company to dissolve.

 Example 2 – Luxottica
Most of us have never heard of the company ‘Luxottica’ despite the fact they are the biggest
manufacturer of glasses in the world. It is founded in the year 1961 in one of the small villages in Italy.
It started a business at the International level in the early ‘80s and it started taking over the other
eyewear company whichever it can afford. Many sunglasses companies of international levels are
selling their sunglasses in their own brands like Ray-Ban, Vogue, Killer Loop, T3, Armani, etc. It has
also controlled the prime vision care provider in the United States such as Eye Med and Vision Care. It
is one of the examples of a monopoly.

 Example 3 – Google
One can’t even think of the internet layout without Google. Its competitors are Microsoft and Yahoo
but they own a very small share in the market that too in the downward trend. Google makes the
Market Structure with special focus on Monopolistic & Monopoly Market

majority of money from advertising and the same can be clearly seen that it controls 60% of the global
advertising revenue. It has a good revenue generation through the process of harvesting user data with
the track over our online activity and popping up with the advertisement as per our searching history
and locations. Smaller advertisers lag as they are not having the level of user data as Google is having.
Thus Google undoubtedly is one of the largest monopolies in present in the world. The company, in
fact, monopolizes several other different markets in the world.

 Example 4 – Natural Monopoly

The rare availability of natural resources like oil makes it create a monopoly called a natural monopoly.
John D Rockefeller who was the founder of Standard Oil along with his partners took advantage of
both the rarity of resource and price maker.

At the earlier time when there were a lot of oil companies who were manufacturing most of their finds,
companies hardly bother of environment and pump waste product directly into the river without
undergoing to the cost of researching proper disposal. They were also using a shoddy pipeline which
was very prone to leakage. Later standard oil started creating a monopoly along with developing
infrastructure aiming to cut down the cost and dependency. Despite the eventual breakup of the
company in 1911, the government understands that this upcoming monopoly will create a reliable
setup, infrastructure and deliver low cost. The profits of the standard oil and a good trend of dividend
helped in gaining investor trust and thereby resulting in more investment from the investors which
helped it to grow larger further.

 Example 5 – AB InBev
The company came into existence after the merger of two huge brewing companies named Anheuser
Busch and InBev. After the merger, they become the distributor of over 200 types of beer across the
world. Many well-known companies like Budweiser, Corona, Beck’s, Stella Artois, Leffe, Skol,
Hoegaarden, etc are selling beers in their name by purchasing the same from AB InBev. The marketing
companies of beers might be different but their manufacturers are the same.

 Example 6 – Social Media Market

The social media market which we can’t think is ripe for monopoly but it is. Facebook is the leader in
the social media market with a maximum percentage of the market share. It is considered to be a
monopoly because it lacks direct competition for any competitor, it has the pricing power and it has the
dominant user base all over the world.
Moreover, in the year 2014, it also acquired What’sApp who was giving good uptrend competition to
Facebook in the social media segment. In this way, almost the majority of share for the social media
market lies with Facebook only. Thus Facebook is a good example of a monopoly in the social media
market.

 Conclusion from Monopoly Examples

Thus monopoly is the industry or the sector which is dominated by one firm or corporation. It is the
market structure that is characterized by the single seller who sells his unique product in the market and
becomes large enough for owning all the market resources for the particular type of goods or service.
For controlling and discouraging the operations of the monopoly, different antitrust laws are put in the
place. These antitrust laws help in prohibiting the practice of restraining the trade and allowing free
trade and competition in the market, thus protecting the consumers. Thus the above-mentioned
Market Structure with special focus on Monopolistic & Monopoly Market

examples are some of the examples of monopoly in the different industries. There are various other
examples as well which shows that a monopoly exists in various different markets or areas.

 Case Study : Indian Railways

PRICE SELLING FOR UNREGULATED MONOPOLIES …..

Economists said that monopoly is power if it faces a downward sloping demand curve (see supply and
demand).In this contrast a price taker can face a horizontal demand curve. A price taker cannot choose
the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they
set it below the equilibrium price, they will have an infinite number of buyers (and be making less
money than they could if they sold at the equilibrium price). In contrast, a business with monopoly
power can choose the price they want to sell at. If they set it higher, they sell less. If they set it lower,
they sell more.
In most real markets with claims, falling demand associated with a price increase is due partly to losing
customers to other sellers and partly to customers who are no longer willing or able to buy the product.
In a pure monopoly market, only the latter effect is at work, and so, particularly for inflexible
commodities such as medical care, the drop in units sold as prices rise may be much less dramatic than
one might expect.

If a monopoly can only set one price it will set it where marginal cost (MC) equals marginal revenue
(MR) as seen on the diagram on the right. This can be seen on a big supply and demand diagram for
many criticism of monopoly. This will be at the quantity Qm; and at the price Pm. This is above the
competitive price of Pc and with a smaller quantity than the competitive quantity of Qc. The offensive
monopoly gains is the shaded in area labeled profit (note that this diagram looks only at the case where
there is no fixed cost. If there were a fixed cost, the average cost curve should be used instead).

As long as the price elasticity of demand (in absolute value) for most customers is less than one, it is
very advantageous to increase the price: the seller gets more money for less goods. With an increase of
the price, the price elasticity tends to rise, and in the optimum mentioned above it will be above one for
most customers. A formula gives the relation between price, marginal cost of production and demand
elasticity which maximizes a monopoly profit: (known as Lerner index). The monopolist’s monopoly
power is given by the vertical distance between the point where the marginal cost curve (MC) intersects
with the marginal revenue curve (MR) and the demand curve. The longer the vertical distance, (the
more inelastic the demand curve) the bigger the monopoly power, and thus larger profits.

The economy as a whole loses out when monopoly power is used in this way, since the extra profit
earned by the firm will be smaller than the loss in consumer surplus. This difference is known as a
deadweight loss.