Different Forms of Market Structure - Class 12 Microeconomics - Commerce PDF Download

FORMS OF MARKET

MARKET :: It REFERS TO ENTIRE AREA where buyers and sellers of a commodity are in contact with each other and sale/ purchase takes place.It doesn’t refer to any particular area or place and face to face contact is not necessary as transaction can be effected through telephone,letter,internet,TV-shoppe

PERFECT COMPETITION :: It is a market situation where there are large number of buyers and sellers selling homogenous good at a single uniform price.The price in this market is set by industry by free play of demand and supply . Examples are
(1) STOCK MARKET

(2) GRAIN MARKET

(3) RAW GOLD MARKET

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Price of a commodity is determined by the market forces of demand & supply and each
 buyer and seller has to accept the same price. Hence uniform price prevails

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(2) HOMOGENOUS PRODUCT :: Those goods which are identical with respect to quality, size, design,colour are called homogenous good.
Such product are perfect substitute or perfect standarize product that buyer donot distinguish the product of one firm from that of another . This makes their cross - elasticity infinite i.e can be readily substituted for each other

IMPLICATION :: A seller cannot afford to charge high price for homogenous good as buyer had the option to purchase the same product from another seller.In other words, no buyer feels attached to any of the sellers (firms). For him, all sellers and the products sold by different firms in the market are equal.
Thus uniform price prevails for the products of all the firms in the industry and those who
charge high prices losses their customers
These goods also rules out the possibility of advertisement and selling cost

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Due to this , purchase of a commodity is a matter of chance and not of choice

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(3) FREE ENTRY AND EXIT :: There is NO LEGAL RESTRICTION OR BARRIERS to entry or exit of firms.Firms are free to start producing the commodity or to stop production . A firm seeking profit can enter the market and any firm suffering losses can exit the market

IMPLICATION :: The freedom of entry and exit of firms has an important implication. This ensures that no firm can earn above normal profits in the long run. Each firm earns just the normal profits, i.e. minimum necessary to carry on business.

(4) PERFECT KNOWLEDGE :: Buyers and sellers are fully aware of price and other market conditions.

IMPLICATION :: The firms have all the knowledge about the product market and the input markets and thus each firm has an equal access to the technology and the inputs used in the technology. No firm has any cost advantage. Thus all the firms earn uniform profits.

Buyers also have perfect knowledge about the product market.The buyers will not pay higher price because they have perfect knowledge. There is no ignorance factor operating in the market. Thus a UNIFORM PRICE PREVAILS IN THE MARKET.

(5) PERFECT MOBILITY OF FACTORS :: The resources used in the production process like energy, labour,raw material can move easily in and out of an industry.There are
No artificial barriers (trade union,license requirement,patent rights, legal restrictions,
etc) and factors can move to industry which pays the highest remuneration
No natural barrier which may take the form of huge capital expenditure required to start a new firm

IMPLICATION ::The market supply of the commodity and FOP is equal in all parts of the market . There cannot exist shortage of the commodity and FOP in some parts of the market and their excess in other parts of the market

(6) NO EXTRA TRANSPORTATION COST : It is assumed that different firms work close to each other in such a way that there is no transportation cost and ,if any, is part of cost of production.This is also necessary condition for price to be uniform.

(7) DEMAND CURVE IS PARALLEL TO X-AXIS :: It means every additional is sold at prevailing price and hence AR = MR = perfectly elastic curve.In other words a firm can sell any quantity at a price determined by intersection of market demand & market supply by industry.

EFFECT OF FREE ENTRY AND EXIT

(1) ABNORMAL PROFIT OR SUPER NORMAL PROFITS IN THE SHORT RUN :: Suppose market price as given (determined) by the industry is high enough such that the firms are making ABNORMAL PROFIT (ALSO CALLED POSITIVE PROFIT) This situation will ATTRACT NEW FIRMS TO ENTER THE INDUSTRY.
 

(i) On the one hand, more firms will mean more supply leading to fall in the price of the product and
(ii) on the other, it will lead to more demand for factors like land ,labour which causes factor prices { rent , wages } to rise and consequently higher average cost (AC).

Thus, the fall in the price of the product and rise in AC of production will lead to fall in abnormal profit. This process will continue till abnormal profits are becomes zero. Hence, free entry will push down the long period price to the level of AC of production and thus firms will earn only normal profits

(2) LOSSES IN THE SHORT RUN :: Suppose market price as determined by the industry is low enough such that firms are incurring losses. In short run a firm can afford to incur losses (equal to fixed costs) but never in long run . Hence, in the situation of losses (abnormal losses) some EXISTING INEFFICIENT FIRMS WILL QUIT (LEAVE) THE INDUSTRY. Less number of
firms in the industry will mean LESS SUPPLY (OUTPUT) AND CONSEQUENTLY RISE IN THE
 PRICE OF THE PRODUCT. This process of quitting the industry by firms will continue till there are
no abnormal losses (also called negative profits).

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Thus, the effect of free entry and exit of firms will be zero abnormal profit in the long run
 equilibrium and there will be no entry or exit.

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PURE AND PERFECT COMPETITION

Pure competition is part and parcel of perfect competition and it is use in a restricted sense.If first
three(3) conditions are fulfilled it is Pure competition and when all conditions are prevailing
it is a case of Perfect competition.
Concept of Pure competition was given by CHAMBERLIN
Pure competition is more realistic concept than Perfect competition

The difference is only of degree and not of kind(type)

UNDER P.C , INDUSTRY IS PRICE MAKER AND FIRM PRICE TAKER ? EXPLAIN
 OR
 “FIRM IS PRICE-TAKER AND NOT PRICE-MAKER UNDER P.C ” ? JUSTIFY

Industry is aggregate of all the firms producing similar product.For example all shoe firms (reebok, nike, bata ,woodland etc) give rise to shoe industry.Under Perfect competition,Price of the commodity is DETERMINED BY MARKET DEMAND AND MARKET SUPPLY .Firms accept this price and sells any quantity at this given price . No individual firm can influence Price due to
(1) Large No. Of Sellers
(2) Homogenous Product
(3) No Extra Transportation Cost
(4) Perfect Knowledge Of Buyers

Thus Under P.C ,it is NEITHER POSSIBLE NOR DESIRABLE( as by decreasing price a firm cut
its profit margin) for an individual firm to change price.Hence A FIRM IS PRICE-TAKER AND
 NOT A MAKER.

MONOPOLY :: It is a market situation in which there is a SINGLE FIRM selling the commodity and there are NO CLOSE SUBSTITUTE of commodity .It is derived from two greek words “MONOS” meaning Single and “POLY” meaning Seller
For example :: MCD , Railways owned by GOI , until 1960 Xerox was the only company to manufacture and sold paper photocopying machine.
Monopoly is exactly opposite situation of Perfect competition

FEATURES

(1) SINGLE SELLER AND LARGE LUMBER OF BUYERS :: There is a single seller of commodity and it may be in the form of a firm, group of firm, a joint stock company, state corp. or Govt. undertaking. However there are large number of buyer having weak bargaining power and no influence on price

IMPLICATION :: Since a monopoly produces industry’s entire output , there is no distinction between firm and industry. Monopoly firm is also an industry in itself .Having full control over the supply makes monopoly Price - maker
Monopoly firm usually exploits the buyers by charging a higher price for its product
Thus firm is able to earn supernormal profit in the long run

(2) NO CLOSE SUBSTITUTE :: The product sold by monopolist have no perfect substitute . For example , there is no close substitute of electricity services provided by NDPL . However the product may have distinct subdtitute like inventer and generator
 

IMPLICATION :: Because of CROSS ELASTICITY IS ZERO , the consumers have to buy the
product from monopolist or go without it.
The monopoly firm has no fear of competition from new or existing products . This feature
help monopolist to determine the Price he likes.
Example : There is no substitute of railways as bulk carrier

(3) BARRIERS TO ENTRY :: There are legal, natural or technical barriers for entry of new firm so as to avoid competition and control the supply and hence price of the commodity.Barriers can be in the forms of patent right, control over technique or raw material, Govt. Laws etc.

IMPLICATION :: Thus firm is able to earn supernormal profit in the long run

(4) FULL CONTROL OVER PRICE :: A monopoly firm is an industry in itself and hence a price maker. Above noted feature makes firm to exert full control over the supply of the product and hence full control over the price of product.
As a result , a monopoly firm can earn abnormal profits and losses in the long run

(5) POSSIBILITY OF PRICE DISCRIMINATION :: A monopolist often charges different prices from different customers or market or uses for the same product.This price policy is called as Price Discrimination and the monopolistic practising this is termed as Discriminating Monopoly .It can be of three types

(1) PERSONAL PRICE DISCRIMINATION :: In this , same product is sold at different prices to different kinds of buyers . Example :: Railway ticket is cheaper for senior citizens as compared to young citizens , Doctor charging more from rich person and less from poor patient for the same service

(2) GEORAPHICAL DISCRIMINATION :: Under this same product is sold at different places . For example :: Electricity charges are lower for rural areas compared to urban areas , Food Corporation Of India ( FCI) selling rice at different price in Jammu ‘n’ Kashmir and Himachal Pradesh
 

(3) USE BASIS DISCRIMINATION :: In this type , same product is sold at different prices on the basis for different use . Electricity Board charging different rate slab for electricity being used for commercial, industry, agricultural and household purposes.
 

IMPLICATION :: A monopolist can increase its profit if it is possible to charge different prices from different markets . So consumer are exploited

(6) DEMAND CURVE IS DOWNWARD SLOPING :: To sell more quantity a monopoly firm has to reduce price of the product inspite of being price maker. Full control over price doesn’t means that a firm can sell any amount at fixed price.
If he fixes high price, buyers will purchase less .Thus an inverse relation exist between price fixed by monopolist and quantity sold .This makes Demand curve(AR curve) downward sloping and MR curve is below AR curve.

IMPLICATION :: The Monopolist tries to INCREASE PROFIT by restricting the supply of product
and fixing high price . Accordingly , greater the monopoly power in any market , lesser would be the output and higher would be the price. This form of Market goes in favour of SELLER

MONOPOLISTIC :: It is a market situation which has element of both Perfect competition and Monopoly.It is a MID-WAY SITUATION BETWEEN PERFECT COMPETITION AND MONOPOLY .
 

Monopoly + Competition = Monopolistic Competition

Markets of products like SOAP , TOOTHPASTE , AC , TEA , CYCLES etc are examples of
monopolistic competition

FEATURES

(1) LARGE NO. OF SELLERS AND BUYERS :: Each firm acts independently and each firm has limited share of market and size of each firm is small. However this number is less than the number of sellers in Perfect competition .

IMPLICATION :: Large number of firms leads to competition in the market .This prevent firm to have full control over price.
However firms are in the position to influence the price of its own product depending upon the
popularity of their brands

(2) FREEDOM OF ENTRY AND EXIT :: The freedom to entry and exit is there but firms don’t have absolute freedom to enter into industry as some firm are LEGALLY PATENTED AND CARRY A BRAND NAME .

IMPLICATION ::
There are many sellers but each producer is the sole producer of its brand or product. Thus it enjoys “monopoly “ position as far as a particular brand is concerned
However ,since the VARIOUS BRANDS ARE CLOSE SUBSTITUTE , its monopolistic position is influenced due to stiff “competition” from other firms .
All firms earn normal profit in the long run

(3) PRODUCT DIFFERENTIATION :: Product differentiation refers to differentiating the product on the basis of brand , size , colour , shape etc. Differentiating can be based on

(A) REAL DIFFERENCE :: It may be due to difference in shape , flavour , colour , packing , after sale service , warranty period , design, workmanship , colour and packaging etc.

(B) IMAGINARY DIFFERENCES :: It means differences which are not really obvious but buyers are made to believe that such differences exist through selling costs ( advertising ) ,
display , attractive showroom , credit facilities and home delivery system

Examples :: we have product differentiation in soaps(____ ______) , toothpaste(_________________ ) , cosmetic(____________________)

IMPLICATION ::
High degree of Product differentiation ( better brand image) increases demand for the product and enables the firm to charge a price higher than its competitors products.
Product differentiation creates a monopoly position for a firm i.e. some monopoly power to influence price .This give monopolistic PARTIAL CONTROL OVER PRICE as if a particular product is preferred by the consumer , he will be ready to pay higher price

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This feature also requires huge selling cost

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(4) SELLING COST :: Selling costs are the expenses which are incurred for promoting sales or for inducing customers to buy the good of a particular brand. These include the cost of advertisement through newspapers, TV and radio, free sampling, show windows, salaries of salesmen and costs on other sales promotion activities. These costs are also called advertisement costs .

IMPLICATION :: Selling cost creates artifcial superiority in the minds of the consumer. As a result firm’s demand curve shift to the right .However , it also tend to increase the cost of production

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CHAMBERLIN defines selling costs as costs incurred in order to alter the position (or
 shape) of demand curve for a product.

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(5) LACK OF PERFECT KNOWLEDGE :: Due to large no. of buyers and product differentiation it is not possible to compare the prices of different products and thus buyers are not fully aware about the prevailing prices of all products.
(6) NON-PRICE COMPETITION :: Monopolistic firm generally don’t disturb the price of product and they attract customers by giving free gifts, services, coupon and other attractive schemes .Thus Non Price Competition refers to competiting with other firms by offering free gifts , making favourable credit terms etc without changing prices of their own products
E.g. with purchase of Surf a customers get a bucket free or a scratch card to win exotic holidays
with every purchase of samsung Product or O % finance facility

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SPECIAL POINT :: Firms under monopolistic competition compete in a number of ways to attract
 customers . they use both Price competition ( i.e competition by reducing price of the
 product ) and Non Price Competition to promote their sales

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(7) DOWNWARD SLOPING DEMAND CURVE :: It means to sell more a firm has to reduce price , but due to availability of close substitute it is more elastic or flatter than demand curve of monopoly firm.
(8) LESS MOBILITY :: There is no perfect mobility of factor owners as FOP are not fully aware of prices being paid by different firms to factor owners for their services.

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(Q) WHY MONOPOLISTIC FIRM HAVE PARTIAL CONTROL OVER PRICE ?

Ans) A monopolistic have partial control over price due to product differentiation which gives firm an element of monopoly power and to influence price by creating an impression in minds of customers that their brands are different and superior to other brands e.g Fair ‘n’ lovely charges high price as it advertises that it can give fairness faster than any other cream in the market. But a firm don’t have full control over price due to
(a) Large no. of substitute available
(b) Free entry which creates competition

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OLIGOPOLY

Oligopoly is a market situation with only a FEW LARGE SELLER. The oligopoly is derived from Greek words “Oligoi” means few and Poly means “Control” or “Seller”.
Thus it is a market situation where a few large firms sell either homogenous or differentiated products with high degree of interdependence among the sellers regarding their price and output policy.
EXAMPLES :: (1) Airlines ( Air India, Indian Airlines, Jet Airways, Sahara Airways)
(2) Automobile producers ( Maruti, Hindustan, Tata, Mahendra and
Mahendra, Ceilo, Honda)
(3) Insurance Sector , Steel , Cement , Telecommunication Sector etc

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P.C Dooley “ An Oligopoly is a market of only a few seller, offering either homogenous or
differentiated products. There are so few seller that they recognise their mutual dependence”

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SPECIAL CASE OF OLIGOPOLY :: DUOPOLY is a special case of oligopoly in which
there are EXACTLY TWO SELLERS selling almost same (homogenous product )
EXAMPLE :: Pepsi and Coca-Cola in soft drink market
Airbus and Boeing in large jet aircraft
Intel and AMD in microprocesssors for computers

FEATURES // CHARACTERISTIC OF OLIGOPOLY
 

(1) FEW SELLERS AND MANY BUYERS :: Oligopoly is a market structure in which few firms dominate the industry : For examples in India, Maruti, Hyundai and Tata, produce majority of small cars.
The number of buyers in oligopoly will be quite large and hence have no control over
Market demand and price
IMPLICATION :: Each firm commands a significant share of the market and thus can impact market price of the product . Also there exists severe competition amog different firms and every firm keeps a close watch on the activities of rival firms.
(2) HOMOGENOUS OR DIFFERENTIATED PRODUCT : Firms in Oligopolistic Industry may produces either homogenous or differentiated products.
If the firms produce a HOMOGENOUS PRODUCT like Cement or Steel or LPG or
Aluminium the industry is called a PURE OR PERFECT OLIGOPOLY.
If the firms produce a DIFFERENTIATED PRODUCED like automobiles , the industry
is called differentiated or IMPERFECT OLIGOPOLY

(3) MUTUAL INTERDEPENDENCE : A very important feature of oligopoly is mutual interdependence of the Firms. Mutual interdependence means that firms are significantly affected by each other’s price and output decision.
Since in oligopoly, a limited number of firms compete with each other the sales of one firm depend
upon that firm's price and the price charged by other firms.

IMPLICATION :: It leads to price war as if one firm lowers the price, its own sales will increase,
but the sales of other firms in the industry decrease. In such a situation, the other firms will, most
likely, lower their prices, too.
There are large number of difficulties faced in price determination . The inderterminate demand
curve is major difficulty faced by each firm

(4) ADVERTISEMENT :: An oligopoly firm has to incur much expenditure on advertisement. Given HIGH CROSS ELASTICITY OF DEMAND FOR PRODUCTION AND PRICE RIGIDITY, the only way open to the oligopolist firm is to promote his sales by advertising his product.
The expenditure on advertisement is aimed primarily at shifting the demand in
favour of the advertised product.
In this contect Prof. Baumol rightly remarks, " Under oligopoly, advertising can become a life and
death matter”

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Thus selling cost are more important in Oligopoly as compared to monopolistic

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(5) EXISTENCE OF PRICE RIGIDITY : The term price rigidity means that firms would not like to change the prices. It will stick to its price.
If a firm tries to reduce the price the rivals will also reduce their prices, so it will not be of any advantage to it.
Likewise if a firm tries to raise its price, other firms will not do so. As a result, the firm will lose its customers and incur loss. So there is price rigidity in an oligopolistic market.

(6) SOME BARRIERS TO ENTRY : Usually an oligopolistic firm is also characterised by barriers to entry in the industry. Some common barriers to entry are economics of scale, absolute cost advantage of old firms, patent rights, control over important inputs, preventive price and prevailling excess capacity, etc. Such barriers prevent the entry of new firms.

(7) NON-PRICE COMPETITION :: same as point no. 6 of monopolistic competition .

Example :: In India both Coca - Cola and Pepsico drink sell at same price . However in order to
increase sale and market share , each firm tries resort to non-price competition like
(a) Sponsoring different Games and Shows
(b) Offering many schemes
(c) Sponsoring school and college canteen

(8) INDETERMINATE FIRM’S DEMAND CURVE ::

EMERGENCE OF OLIGOPOLY // MONOPOLY OR
 WHY DOES OLIGOPOLY // MONOPOLY EXIST

(1) INNOVATIONS : Difficulty due to innovations, limits the entry of number of firms in an oligopoly. Oligopoly is often found in industries started by a major invention or innovation. The innovation may have enabled, the innovating firms to establish and then maintain their dominance of the industry.
Example :: Companies making operating system for computers and mobiles

(2) CONTROL OF AN ESSENTIAL RESOURCE : An oligopoly may result because a few firms have control of an essential resources.
For example DeBeers Company of South Africa controls about 80% of the world’s production
of diamonds
(3) SUCCESSFUL DIFFERENTIATION : Some firms are able to establish successfully their brands of differentiated products. The successful differentiation can actually make entry more difficult. The new firms who want entry should have to spend a huge amount on advertisement to complete with the established brands. Thus successful differentiation also leads to oligopoly.
(4) LARGE FIXED COSTS : If huge capital investment is necessary to operate a business, new firms will be discouraged to enter the industry. A new firm cannot enter or quit an industry because of the large fixed costs.
Example :: Operating Railways involves huge exp. on infrastructure
(5) MERGERS : Many oligopolies were created by combining two or more previously independent firms. The combination of two or more firms into one firm is called a merger.

The motives of mergers include

Increasing market power
Economics of scale
Market Extension and Economies of Wide Scope.

(6) PATENTS :: A Patent is an exclusive right granted by the government to use some productive technique or to produce a certain product. These are granted to the inventor of a technique or product as a reward for risk taking and investment in R ‘n’ D .

It is a sort of LEGAL RIGHT TO MONOPOLY.

(7) GOVERNMENT POLLCY :: The government may grant a license to a firm to have the exclusive privilege to produce a given good or service in a particular area. No firm can enter into that area without a license provided by the government.
These licenses are awarded in case of public utility like electricity, gas, telephones and a variety of other situations.

(8) CARTEL :: It is a business combination under which firms coordinate their output and price to reap the benefits of monopoly . Thus a cartel is a group of firms which jointly sets “ output and prices” of its product to exercise monopoly power

EXAMPLE :: In 1960 some oil producing companies formed a cartel by the name of OPEC which
sets production quotas for member states and thereby tries to manipulate pices of petroleum th
derive highest possible profit

ANTI -TRUST LEGISLATIONS :: These refer to the laws that prevent big firms to form trusts or cartels with a view to preventing them from acquiring monopoly control over the market .

Example :: MRTP , 1969 Act of India . Now it being replaced by Competition Act’ 2002