Module 3
Market
Part I
Market is a place or a process where the interaction between buyers and sellers
takes place in order to buy or sell a product.
There are different types of market structures in an economy. It depends on the nature
of competition, type of product, number of buyers and sellers, freedom of entry and
exit from the market etc.
Perfect Competition
Perfect competition is a market situation in which there are a large number of buyers and sellers dealing in a
homogeneous product with perfect knowledge about the market conditions and perfect mobility of goods and
factors of production.
The following are the important features of perfect competition.
1. Large number of buyers and sellers
2. Homogeneous product
3. Freedom of entry and exit
4. Perfect knowledge
5. Perfect mobility of goods and factors of production
6. Absence of transport cost
7. Perfectly elastic demand curve.
AR curve and MR curve of a firm under perfect
competition
Under perfect competition price of a product is determined for the entire industry by
the forces of market demand and market supply. This price is accepted by each firm
in the industry. Therefore a seller under perfect competition is called a price taker. A
seller can sell any amount of the commodity at this price. Hence the demand curve
facing a seller under perfect competition is perfectly elastic. It is a horizontal straight
line parallel to the x-axis.
Equilibrium of a Firm
Under any market situation a firm is in equilibrium when it gets maximum profit.
TC, TR Approach
Under this approach a firm will be in equilibrium when it produce that level of output where the difference between
TR and TC(profit) is the maximum
MC MR Approach
Under this approach profit will be maximum when the following two conditions are satisfied.
[Link] the equilibrium point marginal cost of the firm should be equal to
its marginal revenue (MC = MR)
2. At the point of equilibrium MC should be rising
Industrial Economics and
Foreign Trade
Module 3 – Market - Part 2
By
Dr. Johnson T T
Assistant Professor in Economics
CET
Mob. 9447450408
MC, MR Approach under perfect competition
A firm is in equilibrium when it gets maximum profit. Profit will be maximum when it satisfy the two equilibrium
conditions. That is MC = MR and MC is rising at the point of equilibrium. Usually in the short period a firm may
earn supernormal profit, normal profit or incur a loss. But in the long run a firm get normal profit only because
whenever there is supernormal profit new firms will enter and when there is loss some of the existing firms will leave
the market.
Monopoly
Monopoly means a single seller. It is a market situation in which a single seller controls the entire supply of a commodity.
Features of monopoly
1. Single seller
2. No close substitutes
3. Barriers to entry
4. Price maker
5. Downward sloping demand curve
MR curve and AR curve(demand curve) of a monopolist
Equilibrium Price and Output Determination
Regulation of Monopoly
Gregory Mankiw has suggested the following measures to control monopoly.
1. Increasing competition with Antitrust Laws
2. Regulation
3. Public Ownership
Monopolistic Competition
It is a market situation in which, there are a large number of buyers and sellers dealing in a differentiated product.
Since the product is differentiated, the product of each seller has a unique feature.
At the same time product of each seller is a close substitute for the product of another producer and there are large number
of buyers and sellers. Hence the competitive element is present. Thus monopolistic competition is a combination of
perfect competition and monopoly.
Features of Monopolistic competition
1. Large number of buyers and sellers
2. Product differentiation
3. Selling cost
4. Freedom of entry and exit
5. Downward sloping more elastic demand curve
Price and output determination
Industrial Economics and
Foreign Trade
Module 3 – Part 3 Oligopoly
By
Dr. Johnson T T
Assistant Professor in Economics
CET
Mob. 9447450408
Oligopoly
Oligopoly is a market situation in which there are a few sellers selling either a homogenous or differentiated product.
Features
1. Few sellers –
2. Homogenous or differentiated product –.
3. Barriers to entry
4. Mutual Interdependence –
5. Existence of price rigidity -
6. Indeterminate Demand Curve
Price and output determination-Kinked demand curve model
The kinked demand curve model was developed by Paul M Sweezy in 1939. Kinked demand curve explains price
rigidity under oligopoly on the basis of following assumptions.
i. If a firm increases its price others will not follow.
ii. If a firm decreases its price others will also do the same.
Collusive oligopoly
Under oligopoly firms are interdependent and face cut throat competition. To avoid price war and loss, firms
enter into an agreement regarding uniform price and output. This agreement is known as collusion.
Collusion helps the firms in preventing uncertainties, prevent the entry of new firms and strengthen the
bargaining power of the firms against buyers. Collusion may be formal or tacit in nature. In formal collusion,
there will be an explicit agreement among the firms. The most common form of explicit collusion is cartel On the
other hand, in tacit collusion firms collide in an informal way. In a tacit or implicit collusion firms do not
form a cartel, but informally agree to charge the same price.
Non-Price Competition
Non-price competition is a marketing strategy that typically includes promotional expenditures such as sales staff, sales
promotions, special offers, free gifts, coupons, and advertising. In other words, it means marketing a firm’s brand and
quality of products, rather than lowering prices.
There are two main branches of non-price competition. They are product differentiation and promotion or advertising.
Product differentiation means differentiating the product with respect to packing, colour, smell, quality etc. This helps to
attract more customers and to increase the market share. Promotion includes advertising, branding, public relations etc.
Advertising can be informative or persuasive.
The following are some of the examples of non-price competition.
Loyalty card –
Subsidized delivery –
Offering good after-sales service:.
Advertising/brand loyalty
Cultivation of good reviews: .
Coupons and free gifts
Perfect Competition Monopoly Monopolistic Competition Oligopoly
Large no. of buyers Single Seller and Large number of buyers Few sellers and large
and sellers large no. of buyers and sellers no of buyers
Homogenous product Single product Differentiated product Homogenous or
without close substitutes Differentiated product
Freedom of entry and Freedom of entry Freedom of entry Barriers to entry
Exit restricted and exit
No selling cost No selling cost Selling cost Selling cost
Perfectly elastic Downward sloping Downward sloping Indeterminate
demand curve less elastic demand more elastic demand demand curve
curve curve
Product Pricing
The following are the important pricing strategies.
1. Cost Plus or Markup Pricing - Price = AC + m
2. Target Return Pricing
3. Penetration Pricing
4. Predatory Pricing
5. Going Rate Pricing
6. Price Skimming
7. Administered Pricing