MARKET STRUCTURES

LEARNING OBJECTIVES

To know about the market

Classification of market

Market Structure

Price and output determination under

market structure

What is Market

"Market refers to an arrangement,

whereby buyers and sellers come in
contact with each other directly or
indirectly, to buy or sell goods."

Classification or Types of
Market

Market Structure

Perfect Competition
A market having very large number of
firms, each of which produces the same
standardized products and takes the
market price as given

Salient Features

Large no. of buyers and sellers.

Homogeneous product.

Free entry and exist of firms in an industry..

Perfect knowledge of market conditions.

No transport cost.

Firms are price takers.

Uniform Price

Firms
Equilibrium
Perfect Competition

under

An individual firm is equilibrium when two

conditions are met
Firm is earning maximum profit .
MC=MR and MC cuts the MR from below
There

are

methods

equilibrium
i.

TR and TC method

ii. MR and MC method

of

knowing

TR-TC Method

Total cost, revenue

TC
$385
350
315
280
245
210
175
140
105
70
35
0

TR

Loss
Maximum
profit

Profit

Loss

1 2 3 4 5 6 7 8 9

Quantity

MR-MC Method :Costs

60

MC
MR=MC

50
40
30

C
P = D = MR
B

20
10
0

1 2 3 4 5 6 7 8 9 10 Quantity

Perfect Competition
Short Run
Firm can have 3 situations when in
equilibriuma) Profit Situation
b) Loss Situation
c) Normal Profit Situation

Price, Revenue and Cost

a) Profit Situation
MC

MR=MC

AC

P1

P= MR= AR

profit

AVC

Q2 *

Output

Q2 *

ES= Avg. Profit

Price, Revenue and Cost

b) Loss Situation
MC

AC
AVC
C

B
loss

P4

E
E

P4= MR4= AR4

Q4 *

Output

EB= Avg. Loss

Shutdown Point
The point
where price is

Price, Revenue and Cost

MC

below AVC &

as soon as firm

AC

attains this
point it should

AVC

stop
production so

loss

that loss can

P5

S
0

Q5
Output
*

P5= MR5= AR
be5 FC only.
Q

c) Normal Profit situation

Price, Revenue and Cost

MC

AR=AC

AC

P3

Q3 *

Output

P3= MR3= AR3

P=AR=AC=MR=MC

Perfect Competition
COS
T

Long Run

LMC
LA
C
E

LMR=LA
R
Q

Monopolistic Competition

There are many firms, each selling a

differentiated product. Because products
sold by different firms are not perfect
substitutes, each firm has some control
over price. There are no barriers to
entering the market.

Features of Monopolistic
Market

Many Firms
Few Artificial Barriers to Entry
Slight Control over Price
Differentiated Products
Non Price Competition

Non Price competition

Nonprice competition is a way to attract

customers through style, service, or
location, but not a lower price.

Conditions of non-price
competition

Characteristics of Goods
The simplest way for a firm to
distinguish its products is to offer a new
size, color, shape, texture, or taste.

Location of Sale
A convenience store in the middle of the
desert differentiates its product simply
by selling it hundreds of miles away from
the nearest competitor.

Conditions of non-price
competition
Service Level
Some sellers can charge higher prices
because they offer customers a higher
level of service.
Advertising Image
Firms also use advertising to create
apparent differences between their own
offerings and other products in the
marketplace.

Price and Output

Determination in
Monopolistic Competition

Monopolistic Competition
short
run

Monopolistic Competition
Normal
profit
E

Monopolistic Competition
loss

Long run

Oligopoly

Oligopoly describes a market

dominated by a few large, profitable
firms, a result of two sorts of barrier to
entry ;
Economies of scale
Government may limit the number of
firms in the market.

Types of Oligopoly
Collusion
A Collusion is an agreement among
members of an oligopoly to set prices
and production levels. Price- fixing is an
agreement among firms to sell at the
same or similar prices.
Cartels
A cartel is an association by producers
established to coordinate prices and
production.

Monopoly
A single firm serves the entire market. A
monopoly occurs when the barriers to
entry are very strong, which could result
from a large economies of scale or the
government limit on the number of
firms.

Barrier to Entry
Factors that make it difficult for new firms
to enter a market are called barriers to
entry.

Barrier to Entry (contd)

Start-up Costs
The expenses that a new business must
pay before the first product reaches the
customer are called start-up costs.
Technology
Some markets require a high degree of
technological know-how. As a result, new
entrepreneurs cannot easily enter these
markets.

Characteristics of Monopoly

Single Seller
Barrier to entry
No close substitutes
Price Maker
Price Discrimination

Forming a Monopoly
Different market conditions can create
different types of monopolies. There are
several ways in which monopolies are
formed

Forming a Monopoly (contd)

Economies of Scale
If a firm's start-up costs are high, and its
average costs fall for each additional
unit it produces, then it enjoys what
economists call economies of scale. An
industry that enjoys economies of scale
can easily become a natural monopoly.
e.g Local Phone Service
Electric Power Generation

Forming a Monopoly (contd)

Natural Monopolies
A natural monopoly is a market that runs
most efficiently when one large firm
provides all of the output. Sometimes the
development of a new technology can
destroy a natural monopoly.
Government Monopoly
Government monopoly is a monopoly
created by the government. These take
several forms

Government Monopolies

Technological Monopolies: The government

grants patents, licenses that give the
inventor of a new product the exclusive
right to sell it for a certain period of time
e.g Drugs covered by patents
Franchises and Licenses: A franchise is a
contract that gives a single firm the right
to sell its goods within an exclusive
market. A license is a government-issued
right to operate a business.

Price Discrimination

Price discrimination is the division of

customers into groups based on how
much they will pay for a good.
Although price discrimination is a feature
of monopoly, it can be practiced by any
company with market power. Market
power is the ability to control prices and
total market output.

Price Discrimination

Targeted discounts, like student

discounts and manufacturers rebate
offers, are one form of price
discrimination.
Price discrimination requires some
market power, distinct customer groups,
and difficult resale.

Comparison of market
structures

Number of firms
Variety of goods

Control over prices

Barriers to entry and

exit
Examples

Perfect
Competition

Monopolistic
Competition

Oligopoly

Monopoly

Many

Many

Two to four
dominate

One

None

Some

Some

None

None

Little

Some

Complete

None

Low

High

Complete

Wheat,
shares of
stock

Jeans,
books

Cars,
movie
studios

Public water

Thank You