MARKETS AND ECONOMIC ENVIRONMENT MARKET

Market is a place where buyer and seller meet, goods and services are offered for the sale and
transfer of ownership occurs. A market may be also defined as the demand made by a certain
group of potential buyers for a good or service. The former one is a narrow concept and later
one, a broader concept. Economists describe a market as a collection of buyers and sellers who
transact over a particular product or product class (the housing market, the clothing market, the
grain market etc.). For business purpose we define a market as people or organizations with
wants (needs) to satisfy, money to spend, and the willingness to spend it. Broadly, market
represents the structure and nature of buyers and sellers for a commodity/service and the
process by which the price of the commodity or service is established. In this sense, we are
referring to the structure of competition and the process of price determination for a commodity
or service. The determination of price for a commodity or service depends upon the structure
of the market for that commodity or service (i.e., competitive structure of the market). Hence
the understanding on the market structure and the nature of competition are a pre-requisite in
price determination.

Different Market Structures

Market structure describes the competitive environment in the market for any good or service.
A market consists of all firms and individuals who are willing and able to buy or sell a particular
product. This includes firms and individuals currently engaged in buying and selling a
particular product, as well as potential entrants.
The determination of price is affected by the competitive structure of the market. This is
because the firm operates in a market and not in isolation. In making decisions concerning
economic variables it is affected, as are all institutions in society by its environment.

Perfect Competition: Perfect competition refers to a market structure where competition

among the sellers and buyers prevails in its most perfect form. In a perfectly competitive
market, a single market price prevails for the commodity, which is determined by the forces of
total demand and total supply in the market.
Characteristics of Perfect Competition: The following features characterize a perfectly
competitive market:
1. A large number of buyers and sellers: The number of buyers and sellers is large and the share
of each one of them in the market is so small that none has any influence on the market price.
2. Homogeneous product: The product of each seller is totally undifferentiated from those of
the others.
3. Free entry and exit: Any buyer and seller is free to enter or leave the market of the
commodity.
4. Perfect knowledge: All buyers and sellers have perfect knowledge about the market for the
commodity.
5. Indifference: No buyer has a preference to buy from a particular seller and no seller to sell
to a particular buyer.
6. Non-existence of transport costs: Perfectly competitive market also assumes the non-
existence of transport costs.
7. Perfect mobility of factors of production: Factors of production must be in a position to move
freely into or out of industry and from one firm to the other.

Under such a market no single buyer or seller plays a significant role in price determination.
One the other hand all of them jointly determine the price. The price is determined in the
industry, which is composed of all the buyers and seller for the commodity. The demand curve
facing the industry is the sum of all consumers‟ demands at various prices. The industry supply
curve is the sum of all sellers‟ supplies at various prices.

MONOPOLY: The word monopoly is made up of two syllables, Mono and poly. Mono means
single while poly implies selling. Thus monopoly is a form of market organization in which
there is only one seller of the commodity. There are no close substitutes for the commodity
sold by the seller. Pure monopoly is a market situation in which a single firm sells a product
for which there is no good substitute.
Features of monopoly
The following are the features of monopoly.
1. Single person or a firm: A single person or a firm controls the total supply of the commodity.
There will be no competition for monopoly firm. The monopolist firm is the only firm in the
whole industry.
2. No close substitute: The goods sold by the monopolist shall not have closely competition
substitutes. Even if price of monopoly product increase people will not go in far substitute. For
example: If the price of electric bulb increase slightly, consumer will not go in for kerosene
lamp.
3. Large number of Buyers: Under monopoly, there may be a large number of buyers in the
market who compete among themselves.
4. Price Maker: Since the monopolist controls the whole supply of a commodity, he is a price-
maker, and then he can alter the price.
5. Supply and Price: The monopolist can fix either the supply or the price. He cannot fix both.
If he charges a very high price, he can sell a small amount. If he wants to sell more, he has to
charge a low price. He cannot sell as much as he wishes for any price he pleases.
6. Downward Sloping Demand Curve: The demand curve (average revenue curve) of
monopolist slopes downward from left to right. It means that he can sell more only by lowering
price.
Types of Monopoly: Monopoly may be classified into various types. The different types of
monopolies are explained below:
1. Legal Monopoly: If monopoly arises on account of legal support or as a matter of legal
privilege, it is called Legal Monopoly. Ex. Patent rights, special brands, trade means, copyright
etc.
2. Voluntary Monopoly: To get the advantages of monopoly some private firms come together
voluntarily to control the supply of a commodity. These are called voluntary monopolies.
Generally, these monopolies arise with industrial combinations. These voluntary monopolies
are of three kinds (a) cartel (b) trust (c) holding company. It may be called artificial monopoly.
3. Government Monopoly: Sometimes the government will take the responsibility of supplying
a commodity and avoid private interference. Ex. Water, electricity. These monopolies, created
to satisfy social wants, are formed on social considerations. These are also called Social
Monopolies.
4. Private Monopoly: If the total supply of a good is produced by a single private person or
firm, it is called private monopoly. Hindustan Lever Ltd. Is having the monopoly power to
produce Lux Soap.
5. Limited Monopoly: if the monopolist is having limited power in fixing the price of his
product, it is called as „Limited Monopoly‟. It may be due to the fear of distant substitutes or
government intervention or the entry of rivals firms.
6. Unlimited Monopoly: If the monopolist is having unlimited power in fixing the price of his
good or service, it is called unlimited monopoly. Ex. A doctor in a village.
7. Single Price Monopoly: When the monopolist charges same price for all units of his product,
it is called single price monopoly. Ex. Tata Company charges the same price to all the Tata
Indiana Cars of the same model.
8. Discriminating Monopoly: When a Monopolist charges different prices to different
consumers for the same product, it is called discriminating monopoly. A doctor may take Rs.20
from a rich man and only Rs.2 from a poor man for the same treatment.
9. Natural Monopoly: Sometimes monopoly may arise due to scarcity of natural resources.
Nature provides raw materials only in some places. The owner of the place will become
monopolist. For Ex. Diamond mine in South Africa.

MONOPOLISTIC COMPETITION: Perfect competition and pure monopoly are rate

phenomena in the real world. Instead, almost every market seems to exhibit characteristics of
both perfect competition and monopoly. Hence in the real world it is the state of imperfect
competition lying between these two extreme limits that work. Edward. H. Chamberlain
developed the theory of monopolistic competition, which presents a more realistic picture of
the actual market structure and the nature of competition. Characteristics of Monopolistic
Competition
The important characteristics of monopolistic competition are:
1.Existence of Many firms: Industry consists of a large number of sellers, each one of whom
does not feel dependent upon others. Every firm acts independently without bothering about
the reactions of its rivals. The size is so large that an individual firm has only a relatively small
part in the total market, so that each firm has very limited control over the price of the product.
As the number is relatively large it is difficult for these firms to determine its price- output
policies without considering the possible reactions of the rival forms. A monopolistically
competitive firm follows an independent price policy.
2. Product Differentiation: Product differentiation means that products are different in some
ways, but not altogether so. The products are not identical but the same time they will not be
entirely different from each other. IT really means that there are various monopolist firms
competing with each other. An example of monopolistic competition and product
differentiation is the toothpaste produced by various firms. The product of each firm is different
from that of its rivals in one or more respects. Different toothpastes like Colgate, Close-up,
Forehans, Cibaca, etc., provide an example of monopolistic competition. These products are
relatively close substitute for each other but not perfect substitutes. Consumers have definite
preferences for the particular verities or brands of products offered for sale by various sellers.
Advertisement, packing, trademarks, brand names etc. help differentiation of products even if
they are physically identical.
3. Large Number of Buyers: There are large number buyers in the market. But the buyers have
their own brand preferences. So the sellers are able to exercise a certain degree of monopoly
over them. Each seller has to plan various incentive schemes to retain the customers who
patronize his products.
4. Free Entry and Exist of Firms: As in the perfect competition, in the monopolistic competition
too, there is freedom of entry and exit. That is, there is no barrier as found under monopoly.
5. Selling costs: Since the products are close substitute much effort is needed to retain the
existing consumers and to create new demand. So each firm has to spend a lot on selling cost,
which includes cost on advertising and other sale promotion activities.
6. Imperfect Knowledge: Imperfect knowledge about the product leads to monopolistic
competition. If the buyers are fully aware of the quality of the product they cannot be influenced
much by advertisement or other sales promotion techniques. But in the business world we can
see that thought the quality of certain products is the same, effective advertisement and sales
promotion techniques make certain brands monopolistic. For examples, effective dealer service
backed by advertisement-helped popularization of some brands through the quality of almost
all the cement available in the market remains the same.
7. The Group: Under perfect competition the term industry refers to all collection of firms
producing a homogenous product. But under monopolistic competition the products of various
firms are not identical through they are close substitutes. Prof. Chamberlin called the collection
of firms producing close substitute products as a group.

OLIGOPOLY
The term oligopoly is derived from two Greek words, oligos meaning a few, and pollen
meaning to sell. Oligopoly is the form of imperfect competition where there are a few firms in
the market, producing either a homogeneous product or producing products, which are close
but not perfect substitute of each other.
Characteristics of Oligopoly The main features of oligopoly are:
1. Few Firms: There are only a few firms in the industry. Each firm contributes a sizeable share
of the total market. Any decision taken by one firm influence the actions of other firms in the
industry. The various firms in the industry compete with each other.
2. Interdependence: As there are only very few firms, any steps taken by one firm to increase
sales, by reducing price or by changing product design or by increasing advertisement
expenditure will naturally affect the sales of other firms in the industry. An immediate
retaliatory action can be anticipated from the other firms in the industry every time when one
firm takes such a decision. He has to take this into account when he takes decisions. So the
decisions of all the firms in the industry are interdependent.
3. Indeterminate Demand Curve: The interdependence of the firms makes their demand curve
indeterminate. When one firm reduces price other firms also will make a cut in their prices. So
he firm cannot be certain about the demand for its product. Thus the demand curve facing an
oligopolistic firm loses its definiteness and thus is indeterminate as it constantly changes due
to the reactions of the rival firms.
4. Advertising and selling costs: Advertising plays a greater role in the oligopoly market when
compared to other market systems. According to Prof. William J. Banumol “it is only oligopoly
that advertising comes fully into its own”. A huge expenditure on advertising and sales
promotion techniques is needed both to retain the present market share and to increase it. So
Banumol concludes “under oligopoly, advertising can become a life-and-death matter where a
firm which fails to keep up with the advertising budget of its competitors may find its customers
drifting off to rival products.”
5. Price Rigidity: In the oligopoly market price remain rigid. If one firm reduced price it is with
the intention of attracting the customers of other firms in the industry. In order to retain their
consumers, they will also reduce price. Thus the pricing decision of one firm results in a loss
to all the firms in the industry. If one firm increases price. Other firms will remain silent there
by allowing that firm to lost its customers. Hence, no firm will be ready to change the prevailing
price. It causes price rigidity in the oligopoly market.

OTHER MARKET STRUCTURES

Duopoly: Duopoly refers to a market situation in which there are only two sellers. As there are
only two sellers any decision taken by one seller will have reaction from the other E.g. Coca-
Cola and Pepsi. Usually these two sellers may agree to co-operate each other and share the
market equally between them, so that they can avoid harmful competition.
The duopoly price, in the long run, may be a monopoly price or competitive price, or it may
settle at any level between the monopoly price and competitive price. In the short period,
duopoly price may even fall below the level competitive price with the both the firms earning
less than even the normal price.
Monopsony Mrs. Joan Robinson was the first writer to use the term Monopsony to refer to
market, which there is a single buyer. Monopsony is a single buyer or a purchasing agency,
which buys the show, or nearly whole of a commodity or service produced. It may be created
when all consumers of a commodity are organized together and/or when only one consumer
requires that commodity which no one else requires.
Bilateral Monopoly: A bilateral monopoly is a market situation in which a single seller
(Monopoly) faces a single buyer (Monopsony). It is a market of monopoly-monoposy.

Oligopsony: Oligopsony is a market situation in which there will be a few buyers and many
sellers. As the sellers are more and buyers are few, the price of product will be comparatively
low but not as low as under monopoly.