Market structure

BY: NEHA SHARMA

Market structure
Market structure means how firms are differentiated and categorized based
on the type of goods they sell (homogeneous/heterogeneous) and how their
functions and operations are affected by external factors and elements.
Market structure makes it easier to understand the different characteristics
of diverse markets.
Perfect competition
Perfect competition is a market structure where there are large number of
firms (seller) which produce and sell homogeneous product. Individual firm
produces only a small portion of the total market supply. Therefore, a single
firm cannot affect the price.
Price is fixed by industry.
Firm is only a price taker.
So the price of the commodity is uniform.
Large number of buyers and sellers :
The number of buyers and sellers is so large that none of them can influence the price in the
market individually. Price of the commodity is determined by the forces of market demand
and market supply.
Homogeneous Product: The product produced by all the firms in the industry are
homogeneous. - They are identical in every respect like color, size, etc. - Products are perfect
substitutes of each other.
Free entry and exit of the firms from the markets : New firms are free to enter the industry
any time. Old firms or loss incurring firms can leave industry any time. The condition of free
entry and exit applies only to the long run equilibrium of the industry.
Perfect knowledge of the market: Under perfect competition, all firms (sellers) and buyers
have perfect knowledge about the market. Both have perfect information about prices at which
commodities can be sold and bought.
Perfect mobility : The factors of production can move freely from one occupation to another
and from one place to another.
No transport cost: Transport cost is ignored as all the firms have equal access to the market.
No selling cost: Under perfect competition commodities traded are homogeneous and have
uniform price. Therefore, firm need not make any expenditure on publicity and advertisement.
MONOPOLY
‘Mono’ means single and ‘Poly’ means seller.
Monopoly refers to that market structure where there is a single firm
producing and selling a commodity which has no close substitute.
As there is no rival firms producing close substitute, - the monopoly firm
itself is industry, and - its output constitutes the total market supply.
Single seller and Large number of buyers: There is only one seller or producer
of a commodity in the market but there are many buyers. As a result, the
monopoly firm has full control over the supply of the commodity.
No close substitutes: The commodity sold by the monopolist generally has no
close substitutes. Therefore, the cross elasticity of demand between monopolist's
commodity and other commodity is zero or less than one. As a result monopoly
firm faces a downward sloping demand curve.
Restrictions to entry for new firms: The monopoly firm controls the situation
in such a way that it becomes difficult for new firms to enter the monopoly
market and compete with monopoly firm. There are many barriers to the entry of
new firm which can be economic, institutional or artificial in nature.
Price maker: A monopoly firm has full control over the supply of the
commodity Price is solely fixed by the monopoly firm. So, a monopoly firm is a
“price maker".
Monopolistic Competition
As the name implies, monopolistic competition is a blend of competitive
market and monopoly elements. There is competition because of large
number of firms with easy entry into the industry selling similar product.
The monopoly element is due to the fact that firms produce differentiated
products. The products are similar but not identical. This gives an individual
firm some degree of monopoly of its own differentiated product. E.g. NUT
and APTECH supply similar products, but not identical. Similarly, bathing
soaps, detergents, shoes, shampoos, tooth pastes, mineral water, fitness and
health centers, readymade garments, etc. all operate in a monopolistic
competitive market.
Large number of buyers and sellers : There are large number of firms. So each
individual firms can not influence the market. - Each individual firm share
relatively small fraction of the total market. The number of buyers is also very
large and so single buyer cannot influence the market by demanding more or less.
Product Differentiation: The product produced by various firms are not
identical but are somewhat different from each other but are close substitutes of
each other. Therefore, the products are differentiated by brand names. E.g. -
Colgate, Close-Up, Pepsodent, etc. Brand loyalty of customers gives rise to an
element of monopoly to the firm.
Freedom of entry and exit : New firms are free to enter into the market and
existing firms are free to quit the market.
Non-Price Competition: Firms under monopolistic competitive market do not
compete with each other on the basis of price of product. They compete with each
other through advertisements, better product development, better after sales
services, etc. Thus, firms incur heavy expenditure on publicity advertisement, etc.
Oligopoly
‘Oligo' means few and ‘Poly' means seller. Thus, oligopoly refers to the market structure where there are few
sellers or firms. They produce and sell such goods which are either differentiated or homogeneous products.
Oligopoly is an important form of imperfect competition. E.g.- Cold drinks industry; automobile industry; Idea;
Airtel. Hutch, BSNL mobile services in Nagpur; tea industry; etc.
Types of Oligopoly:—
Pure or perfect oligopoly occurs when the product is homogeneous in nature, e.g. Aluminum industry.
Differentiated or imperfect oligopoly where products are differentiated. E.g. toilet products.
Open oligopoly where new firms can enter the market and compete with already existing firm.
Closed oligopoly where entry of new firm is restricted.
Collusive oligopoly when some firms come together with some common understanding and act in collusion
with each other in fixing price and output.
Competitive oligopoly where there is no understanding or collusion among the firms.
Partial oligopoly where the industry is dominated by one large firm which is looked upon by other firms as the
leader of the group. The dominating firm will be the price leader.
Full oligopoly where there is absence of price leadership.
Syndicated oligopoly where the firms sell their products through a centralized syndicate.
Organized oligopoly where the firms organize themselves into a central association for fixing prices, output,
quotas, etc.
Interdependence: In an oligopoly market, there is interdependence among firms. A firm
cannot take independent price and output decisions. This is because each firm treats
other firms as rivals. Therefore, it has to consider the possible reaction to its rivals price-
output decisions.
Importance of advertising and selling costs: Due to interdependence, the various
firms have to use aggressive and defensive marketing tools to achieve larger market share.
For this the firms spend heavily on advertisement, publicity, sales promotion, etc. to
attract large number of customers. Firms avoid price-wars but are engaged in non-price
competition. E.g.- free set of tea mugs with a packet of Duncan’s Double Diamond Tea.
Indeterminate Demand Curve: The nature and position of the demand curve of the
oligopoly firm cannot be determined. This is because it cannot predict its sales correctly
due to indeterminate reaction patterns of rival firms. Demand curve goes on shifting as
rivals too change their prices in reaction to price changes by the firm. Group behavior:
The theory of oligopoly is a theory of group behavior. The members of the group may
agree to pull together to promote their mutual interest or fight for individual interests or
to follow the group leader or not. Thus the behavior of the members is very uncertain
Other Important Market Forms
(1)Duopoly: in which there are only TWO firms in the market. It is subset
of oligopoly.
(2)Monopoly: is a market where there is a single buyer. It is generally in
factor market.
(3) Oligopsony: market where there are small number of large buyers in
factor market.
(4) Bilateral monopoly: market where there is a single buyer and a single
seller. It is mix of monopoly and monopsony markets.
Law Of Supply
 The law of supply describes the relationship between price and amount supplied when all other
variables remain constant (ceteris paribus).
 Assuming all else being constant, an increase in the price of goods will result in a
corresponding direct increase in the supply thereof. The law works similarly with a decrease in
prices.
 Assumptions of Law of Supply
 The phrase “keeping other factors constant or ceteris paribus” is used when describing the law
of supply. This expression refers to the following presumptions that the law is based on:
 The price of other commodities is constant.
 The state of technology has not changed.
 The price of factors of production is constant.
 The taxation laws remain the same.
 The producer’s objectives are constant.
Law of Supply Schedule and Graph
Reasons for Law of Supply
 1. Profit Motive:
Maximizing profits is the primary goal of producers when they supply a good or service. Their profits
grow when the price of a commodity rises without a change in costs. Therefore, by increasing production,
manufacturers increase the commodity’s supply. On the other hand, as price fall, supply also declines
since low price result in lower profit margins.
 2. Change in Number of Firms:
When the price of a specific commodity increases, potential producers are encouraged to enter the
market and produce the good to make money. The market supply rises as the number of businesses
increases. However, once the price begins to decline, some businesses that do not anticipate making any
money at a low price may stop production or cut it back. As the number of businesses in the market
declines, it decreases the supply of the given commodity.
 3. Change in Stock:
When the price of an item rises, sellers are eager to supply additional things from their stocks. However,
the producers do not release significant amounts from their stock at a significantly cheaper price. They
work on building up their inventory in anticipation of potential price increases in the future.
Exceptions of Law of Supply
 1. Future Expectations:
The law of supply is not valid if sellers expect a fall in the price in the future. The sellers will be willing to
sell more in this situation, even at a cheaper price. However, if sellers expect an increase in the future
price, they will reduce supply to deliver the item later at a higher price.
 2. Agricultural Goods:
Agricultural products are exempted from the rule of supply as they are produced in response to climatic
circumstances. If the production of agricultural goods is low because of unexpected weather changes,
supply cannot be expanded, even at higher prices.
 3. Perishable Goods:
Sellers are willing to offer more perishable commodities, such as fruits, vegetables, and other foods,
even if prices are dropping. This occurs because sellers cannot keep such things for an extended period.
 4. Rare Articles:
The law of supply does not apply to precious, rare, or artistic items. For example, even if the price
increases, the number of rare items like the Mona Lisa artwork cannot be increased.
Role of demand and supply in Price Determination
Determination of Prices means to determine the cost of goods sold and services
rendered in the free market. In a free market, the forces of demand and supply
determine the prices.
Price is arrived at by the interaction between demand and supply. Price is
dependent upon the characteristics of both these fundamental components of a
market. Demand and supply represent the willingness of consumers and
producers to engage in buying and selling. An exchange of a product takes place
when buyers and sellers can agree upon a price.
Equilibrium
Price When a product exchange occurs, the agreed upon price is called an
"equilibrium" price, or a "market clearing" price. Graphically, this price occurs at
the intersection of demand and supply
Graph