Market Structure

Types of Market Structure

Market Structure

No. of firms
and degree
of
production
differentiatio
n

Nature of
industry
where
prevalent

Control over
price

Method of
Marketing

Perfect Competition

Large No. of
firms with
identical
products

Financial
markets and
some farm
products

None

Market
Exchange or
Auction

Imperfect Competition
(a)

Monopolistic
Competition

Many firms
with real or
perceived
product
differentiatio
n

Manufacturin Some
g: Tea,
toothpaste,
TV, shoes,
etc

Competitive
Advertising
Quality
rivalry

(b)

Oligopoly

Little or no
product
differentiatio
n

Aluminum,
Steel, Cars,
Cigarettes,
etc.

Some

Competitive
Advertising
Quality
rivalry

(c)

Monopoly

A single
producer

Public
Utilities:

Considerable
but

Promotional
advertising if

Characteristics of Perfect
Competition
Large Number of sellers and buyers
Homogeneous Products
Perfect mobility of factors of production
Free entry and exit of firms
Perfect knowledge
Absence of collusion or artificial restraint
No government Intervention

Price determination under

perfect competition
In a perfect competitive market, the main

1.
2.
3.

problem for a profit maximizing firm is not

to determine the price of its product but to
adjust its output to the market price so
that profit is maximum. Price
determination is analyzed under three
different time periods:
Market period or very short run
Short run
Long run

Pricing in market period

In market period, the total output of
a product is fixed. Each firm has a
stock of commodity to be sold. The
stock of goods with all the firms
makes the total supply Since the
stock is fixed, the supply curve is
inelastic.

Pricing in the short run

A short run is by definition, a period

in which firms can neither change

their size nor quit, nor can new firms
enter the industry. It is possible to
increase or decrease the supple by
increasing or decreasing the variable
inputs. In short term, the supply
curve is elastic.

 Profit is maximum at the level of

output where MR = MC. Since price is

fixed at PQ, Firms AR = PQ. If AR is
given MR = AR. The firms MR is shown
by the AR = MR line. The firms upward
sloping Mc curve intersects AR = MR
at point E. At point E, MR = MC. Point E
is therefore the firms Equilibrium Point.
An ordinate EM drawn from point E.

Pricing in the long run

In contrast to the short run, firms can adjust

their size or quit the industry and new firms

can enter the industry. If the market price is
such that AR>AC, then the firms make
economic or super-normal profit. As a result,
new firms get attracted to the industry
causing a rightward shift in the supply curve.
Similarly if AR< AC, then the firm makes
losses. This causes a leftward shift in the
supply curve. The rightward shift reduces the
prices while the leftward shift increases it.
This goes on until AR = AC.