CHAPTER 9

MARKET STRUCTURE

Learning Objectives
After reading this chapter, you should be able to:
 Understand the introduction and meaning of market structure
 Understand the Extent of market
 Know the Value and price
 Know the Classification of markets
 Understand the Market competition

INTRODUCTION AND MEANING

The word market is used in many senses. The word is derived from the Latin word
mercatus from the verb “mercari” which means, “to trade”. Market is a term which is
commonly used for 'a particular place or locality where goods are bought and sold. It is the act
or technique of buying and selling.
In economics, a market is more than a geographical area or a “mandi” where goods are
bought and sold. Market is defined “as a complex set of activities by which potential buyers
and potential sellers are brought in close contact for the purchase and sale of a commodity”.
According to Prof. Samuelson, “A market is a mechanism by which buyers and sellers
interact to determine the price and quantity of a good or service”. A market can be regional,
national or international.
In economic sense, the term market does not mean shops or establishments. It has no
reference to a place, but to a commodity, which is being bought and sold. The term market
should imply certain things i.e. the following features:
1. Commodity: There must be a commodity, which is being demanded and sold.
2. Buyers and sellers: There must be buyers and sellers of the commodity.
3. Communication: There must be communication between buyers and sellers i.e.
contact.
4. Place or area: There must be a place or an area where buyers and sellers interact with
each other.
5. Price: There should be a price for the commodity bought and sold.

EXTENT OF MARKET

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 A market can be domestic or international. When domestic, it caters to the needs of a
village, town, state or the country as a whole. The factors, which lead to extension of a
market, are:
1. Kind of Commodity:
 A commodity, which is perishable in use, will have a narrow market [like milk, fruits].
Goods, which are durable in use, will have a wider market [like wheat, rice].
 A commodity which is bulky and cheap [like brick] is less portable and has a narrow
market as compared to commodity like gold and silk, which have large value and
small bulk.
2. Size of Production
Larger the scale of production, wider will be the market and vice-versa.
3. Extent of Demand
Commodities having universal demand like gold, wheat, steel, etc will have a wider
market.
4. Means of Communication and Transport
More developed the means of communication and transport, better will be the
prospects for expansion of market.
5. Peace and Security
Country’s secured law and order conditions provide scope for extension of market.
6. Development of Money Banking and Financial Institutions
A developed currency and credit system helps in expanding the size of the market
7. Trade Policy of the Government
It is a major factor influencing the extent of a market. A favorable trade policy
promoting export promotion will lead to expansion of market. Reverse holds when it is
unfavorable.
8. Portability
Portability and easy transportability of the commodity have an important bearing on
the extent of the market. Heavy and bulky articles like bricks, stones, which cannot be
transported easily, have only local markets.
9. Grading and Sampling
Commodities, which are amenable to grading and sampling can, enjoy national and
international markets, when other things are favorable.

10. Adequate Supply

To have larger markets, the commodities should have adequate supply.
11. Political Stability
Political stability and maintenance of law and order are essential for smooth trade.
War, political unrest, revolutionary and agitated conditions in the country will hamper
national and international trade.
12. Scientific Methods of Business

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 In modern days, these are essential to have wider contacts and markets. Like
salesmanship, up-to-date and scientific advertisement, formation of trade associations and
organization to promote business morality will enable to have wider markets.

VALUE AND PRICE

“Value” is the general purchasing power of a good over other goods. “Price” ‘is the
value of a good in terms of money. The difference between value and price can be done with
an example: If the price of a notebook is Rs. 5/- and the price of a record note is Rs. 15/- then:
a) These are the price statements.
b) On comparing the price of a notebook and a record note, their exchange value is
calculated that is, value of record note is three times that of a notebook.
In economic analysis, value is a relative term. It is the economic worth of a good
expressed in relation to another good. [Money is the means whereby the values of different
goods are compared.

CLASSIFICATION OF MARKETS
Economists have given various criteria for the classification of markets. Markets are
classified (1) on geographical basis depending on demand and supply (2) on the basis of time
and (3) on the basis of situations.
The following figure illustrates the classification of market followed by the explanation:

Markets

Demand & supply situations

Local
National perfect monopoly
International
Perfect pure simple discriminating
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 Time

Imperfect
Very short period short period long period very long period

Monopolistic duopoly oligopoly

Competition
1. On the Basis of Size
The market for products may be classified into local, national or international markets.
a) Local market
A product has a local market when buyers and sellers of a commodity carry on
business in a particular locality. Demand for and supply of the commodity comes from a
given area only. For example: market for vegetable, milk, etc. is generally local. These goods
are perishable and cannot be taken to distant places or stored for long time. The, same applies
for the bulky goods. Therefore, markets, for perishable and bulky goods are confined to
particular areas.
b) National market
This market is said to exist when a commodity is demanded and supplied all over the
country. The market for wheat, cotton, sugar etc. is in this sense a national market. National
market is often called domestic market.
c) International market
A commodity commands international or world market when the buyers and sellers of
a product come from all over the world. The market for cotton (for gold can be taken as an
international market.

2. On the Basis of Time

According to Marshall, time plays an important role in deciding the value of the
commodity and time does not have the same meaning as it has in everyday life. Marshall
introduced “time” in value analysis and consequently classifies markets into short and long
period markets. In economics, of marketing and value analysis, it is not time, in the sense of
clock time, it is only the division of time, which is relevant.
a) Very short period
According to Marshall, very short period refers to that type of competitive markets in
which the commodities are perishable and supply of commodities cannot be changed at all.
So, in a very short period, the market supply is almost fixed. Eg: perishable commodities [like
vegetables, fish, egg, fruits, milk, etc] supply cannot be changed in this period. Since supply is
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fixed, demand plays a decisive role in determining the price. Very short period price is called
market price.
b) Short period
It is more or less similar to very short period but with some variations. In this case, the
commodity is not perishable. They are non-perishable and also reproducible. But this supply
is fixed because capital equipment is fixed. This implies that the sellers have little influence
on the price of the commodity. Since the commodity is durable, they can with hold the stocks
if the market price is not sufficient enough to give profits. The stocks can be adjusted to
changes in demand and it may be called as short period normal price. Beyond a point, in the
short period, supply cannot be increased after reaching full capacity. After this Stage, it is
called as short period market price, since supply cannot be adjusted.
c) Long period
Long period is a period in which the commodity in consideration is durable and the
supply of the commodity is also variable by employing more capital. The supply can be
increased or decreased. The price ruling in the long period is called long period price of
normal price. This is determined not by demand alone but also supply. But the cost of
production plays a decisive role. Demand has a weaker role because it may vary several times
in this period. Supply varies comparatively less so the changes in demand forces; change the
supply which in the end brings about changes in the price of the commodity.
d) Very long/secular period
This implies change in the supply conditions. Here the commodities and services are
not taken into account, but a change in the supply of factors of production is taken into
account. The price fixed in the secular period is also similar to long period and the prices in
both cases are governed by cost of production than by demand.
Generally, economists take into consideration the short period market price and long
period normal price. The interaction of demand and supply bring about equilibrium
temporarily in the short period, this price is called market price, in the long period permanent
equilibrium is achieved, and that price is called normal price.
The difference between these two prices can be given in a tabular form:

No Market price Normal price

1 It is short period rice. It is long period rice.
2 It is a temporary, equilibrium between It is comparatively permanent equilibrium
demand. between demand and supply.
3 It is more influenced by demand It is largely determined by supply factors
factors. and cost .of production.
4 Market price fluctuates frequently, Normal price is stable.

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 even daily
5 Market price may be higher. Normal price is equal to the than cost of
production.
6 All goods have a market price. Only reproducible goods alone have
normal price.

3. On the Basis of Situation [Relationship/Competition]

Different situations arise in marketing and determinations of price on the basis of
different relationships between the constituent elements in the market. These situations arise
on the basis of the influence of buyers and sellers and determination of the price. The market -
relationship or structure or how the market is composed of depends upon the following
considerations:
a) The nature of the product
Whether it is identical, homogeneous or not determines the amount of freedom, which
a firm will have in determining its price. The nature of the product determines the price and
output policies of the producer.

b) The number of buyers

The number of buyers in the market determines the size of demand and also
possibilities of combination between them.
c) The number of sellers
This also has similar significance. Combinations of sellers decide the output and
prices. It is more influenced by demand factor.
d) The interdependence of buyers and sellers
They come to a common agreement and the price and output depend on aggregate
demand and supply forces.

COMPETITION
Let us now see the different types of competition in detail:
1. Perfect Competition
Perfect competition refers to a market situation in which there are large number of
buyers and sellers of homogeneous products. The price of the product is determined by
industry with the forces of demand and supply. There must be one price prevailing throughout
the market. A perfect competition is a market structure characterized by complete absence of
rivalry among individual firms. A good example of perfect competition is the agriculture
market. Otherwise, it is an ideal situation, which rarely exists, in the real word.
According to Boulding, “Perfectly Competitive market is a situation where large
number of buyers and sellers are engaged in the purchase and sale of identically similar

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commodities, who are in close contact with one another and who buy and sell freely among
themselves”.
According to Bilas, “The perfect competition is characterized by the presence of many
firms, they all sell identically the same product. The seller is a price taker”.
According to Mrs. Joan Robinson, “Perfect competition prevails when the demand for
the output of each producer is perfectly elastic”.
According to Ferguson, “Perfect competition describes a market in which there is
complete absence of direct competition among economic groups”.
There is said to be perfect competition in an industry when certain conditions are
satisfied. These conditions or assumptions are as follows:
 Large number of buyers and sellers.
 Homogeneous products.
 Perfect knowledge.
 Free entry or exit of firms.
 Perfect mobility.
 Profit maximization.
 No selling cost.
 No transport costs.
Many economists choose to use the “Perfect competition” rather than “Pure
competition”. Prof. Chamberlin made a distinction between them. According to him pure
competition includes:
 Large number of buyers and sellers.
 Homogeneous products.
 Free entry or exist of firms.
 Free from checks.
 Lack of selling cost and
 Lack of transport costs.
Pure competition is said to exist when element of monopoly is absent from the market.
The perfect competition is a broader term than pure competition, which involves absence of
monopoly as well as perfection in many other respects, such as, perfect mobility of factors of
production and perfect knowledge of the market.
Therefore, producers have a perfect knowledge of the quantity and quality of available
factors of production as well as the prices, which can be charged for its product. Thus, the
distinction between pure and perfect competition is merely of degree.

2. Monopoly
The word monopoly has been derived from the combination of two words i.e. “Mono”
and “Poly”. Mono refers to a single and poly to control. In this way, monopoly refers to a
market situation in which there is only one seller of a commodity. There are no close

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substitutes for the commodity it produces and there are barriers to entry. The single producer
may be in the form of individual owner or a single partnership or a joint stock company.
In other words, under monopoly there is no difference between firm and industry.
Monopolist has full control over the supply of commodity. Having control over the supply of
the commodity, he possesses the market power to set the price. Thus as single seller,
monopolist may be a king without a crown. If there is to be monopoly, the cross-elasticity of
demand between the product of the monopolist and the product of any other seller must be
very small. Eg: state has the monopoly in providing water' supply, railways, post and
telegraph services, etc.
According to Koutsoyiannis, “Monopoly is a market situation in which there is a
single seller. There are no close substitutes of the commodity it produces, and there are
barriers to entry”.
According to AJ Braff, “Under pure monopoly there is a single seller in the market.
The monopolist demand is market demand. The monopolist is a price maker. Pure monopoly
suggests no substitute situation”.
According to Ferguson, “A pure monopoly exists when there is only one producer in
the market. There are no directs competitions.
According to Me Connel, “Pure or absolute monopoly exists when a single firm is the
sole producer for a product for which there are no close substitutes”.
Features
a) One seller and large number of buyers
The monopolist’s firm is the only firm it is an industry. But the number of buyers is
assumed to be large.
b) No close substitutes
There shall not be any close substitutes for the product sold by the monopolist. The
cross- elasticity of demand between the product of the monopolist and others must be
negligible or zero.
c) Difficulty of entry of new firms
There are either natural or artificial restrictions on the entry of firms into the industry,
even when the firm is making abnormal profits.
d) Monopoly is also an industry
Under monopoly there is only one firm, which constitutes the industry. Difference
between firm and industry comes to an end.
e) Price maker
Monopolist has full control over the supply of the commodity. But due to large number
of buyers, demand of any one buyer constitutes an infinitely small part of the total demand.
Therefore, buyers have to pay the price fixed by the monopolists.
f) Perfect knowledge

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 Monopolist is assumed to be having perfect knowledge about market conditions.
Hence, uncertainty about developments in the market is ruled out.

Discriminating Monopoly
This is a market structure where the monopolist changes different prices from different
consumers for the same good or service at me same time. Such a monopolist who practices
price discrimination is called discriminating monopolist.
Examples of discriminating monopoly are:
a) Electricity power companies have different rates for different slabs of consumption of
electricity.
b) Doctors charge high fees from rich patients than from poor.
c) Bus transport pass for students is for a small amount, others pay higher amount.
d) Senior citizens get discount, which is not available for people who are of lesser age.

3. Imperfect Competition
The concept of imperfect competition was introduced in economics by Mrs. Joan
Robinson in 1933 in her book, “Economics of Imperfect Competition” in England. This is a
real situation found in the market, while perfect competition and monopoly are rare situations.
Imperfect competition possesses some features of perfect competition and monopoly.
Therefore, imperfect competition is a wider term which comprises of monopolistic
competition, oligopoly and duopoly.

4. Monopolistic Competition
This concept was put forth by an American economist Prof. E.H. Chamberlin in his
book, “The Theory of Monopolistic Competition” published in 1933. Monopolistic
competition refers to a market situation where there are many sellers of a commodity, but the
product of each seller differs from each other. No seller can influence on the prices output
policies of the other seller. Thus, product differentiation is the hallmark of the monopolistic
competition.
The product differentiation can be done in several ways like difference in product
brand, trademark, quality, color, etc. E.g.: firms producing soaps, toothpaste, etc. The
monopolist competition is a market situation, which lies between monopoly and perfect
competition.
According to Leftwich, “Monopolistic competition is a market situation in which there
are many sellers of a particular product, but the product of each seller is in some way
differentiated in the minds of consumers from the product of every other seller”.

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 According to Lim Chong Yah, “Monopolistic Competition is a market situation where
there are many producers but each offers a slightly differentiated product”.
Features
a) Large number of buyers and sellers of the commodity.
b) Free entry or exist of firms — can move freely in and out.
c) Product differentiation - This is done by the sellers but is close substitutes of one
another. Product differentiation can be real or artificial. This gives the seller some
degree of price-making power, which he can exploit. Since there are many close
substitutes, the firm faces an elastic demand.
d) Buyers and sellers do not possess a perfect knowledge of market conditions. Buyers
are guided by advertising and other selling activities undertaken by the sellers.
e) Incurs to increase the demand for its product. E.g.: advertisements, window displays,
salesmen’s salaries,
f) Cost of transporting the commodity from one place to another place is very high under
monopolistic competition.
In monopolistic competition, the concept of industry is undefined as products are
differentiated. Instead of industry the word “group” should be used.

5. Oligopoly
The term Oligopoly is coined from two Greek words “oligoi” meaning “a few” and
“pollein” means, “to sell”. It occurs when an industry is made up of a few firms producing
either an identical product or differentiated product. .
In simple words, “Oligopoly is a situation in which there are so few sellers that each of
them is conscious of the results upon the price of the supply which he individually places
upon the market”. The number of sellers is greater than one, yet not big enough to render
negligible the influence of any one upon the market price.
In other words, it is defined as “a market organization in which there are a few sellers
of the homogeneous or differentiated products”. The number of sellers depends on the size of
the market. If there are two sellers, then it is called duopoly.
According to J. Stigler, “Oligopoly is that situation in which a firm bases its markets
policy in part on the expected behavior of a few close rivals”.
According to RC. Dooley, “An Oligopoly is a market of only a few sellers, offering
either homogeneous or differentiated products. There are so few sellers that they recognize
their mutual dependence”.
According to McConnel, “Oligopoly is a market situation in which number of firms in
an industry is so small that each must consider the reaction of rivals in formulating its price
policy”.

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Types of Oligopoly
a) Pure oligopoly
It occurs if the product is homogeneous. Examples - industries producing cement,
steel, chemicals, cooking gas and basic metals are pure oligopolists.
b) Differentiated oligopoly
It occurs if the products are differentiated. Examples - industries of automobiles,
refrigerators, computers, microwave, etc.
Features
a) Their are few dominate or large firms, each producing a significant portion of the total
output.
b) The output in an oligopolistic market may be either homogeneous or differentiated.
c) There are restrictions to entry of new firms;
d) This is the main and only feature, which sets oligopoly apart from other market
structures. It means that price and output decisions of one firm affect the similar
decisions of other firms.
e) Heavy selling costs are incurred by firms to attract customers.
f) Lack of uniformity.
g) Existence of price rigidity.
h) No unique pattern of pricing behavior.

6. Duopoly
Augustin Cournot, a French Economist, was the first to develop a formal duopoly
model in 1828. He assumed that
a) Two firms, prevailing.
b) Both operate at zero marginal cost.
c) Both face a demand curve with constant negative slope.
d) Each seller acts on the assumption that his competitor will not react to his decision to
change his output and price.
This is Coumot’s behavioural assumption.
Cournot has concluded that each seller ultimately supplies one- third of the market
demand and charges the same price, while one- third of the market remains not supplied.
Since there are only two sellers who control the entire supply, the output and price policy of
one is dependent on the other.
a) The other economists who worked on this are Prof. Chamberlin, Bertrand, a French
Mathematician, and Prof. Edge worth, who have contributed much. The other
situations prevailing in the market are: [the other forms of imperfections]
b) Bilateral monopoly - refers to a market situation where there is only one seller and
only one buyer. This situation exists only in the nationalized industry, which is the sole
employer of a particular type of labor. For example: railways or posts are monopolies

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 of government. Their trade unions have to negotiate with government and decide
matters.
c) Monophony - is a condition where there are many sellers, but only one buyer. It is the
opposite of monopoly but it is a rare market situation.
Under perfect competitions, economists made difference between pure and perfect
competitions, under monopoly there are pure and discriminating monopoly. Similarly under
Oligopoly there are pure and differentiated oligopolies. Thus there are infinite varieties of
market situations to be studied. The classification mainly rests on the number of firms and the
type of product.

SUMMARY
The function of a market is to enable an exchange of goods and services to take place.
A market is that area which brings buyers and sellers into contact with one another. A market
is any area over which buyers and sellers are in such close touch with one another, either
directly or through dealers that the prices obtainable in one part of the market affect the prices
paid in other parts. Thus it is not necessary that a market should be in a building or at a
particular place; it is also not necessary that buyers and sellers should be physically close to
each other. A market is a body of persons in such commercial relations that each can easily
acquaint himself with the rates at which certain kinds of exchanges of goods or services are
from time to time made by the others.
The word market has been generalized so as to mean any body of persons who are in
intimate business relations and carry on extensive transactions in any commodity. The main
feature of a market is that sellers and buyers should be able to get in close contact with each
other-may be through telephonic conversation or tele-printer or any such modern device.
What is required is that those dealing with each other (buying and selling) should be well
informed about prices prevailing and other conditions.
The popular basis of classifying market structures rests on two crucial elements, (1)
The number of firms producing a product and (2) The nature of product produced by the firms
that is whether it is homogeneous or differentiated.

KEY TERMS
Discriminating Situation National Market
Duopoly Oligopoly
Homogeneous Products Perfect Competition
Monopolistic Competition Political Stability
Monopoly Price
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Value

EVIEW QUESTIONS
1. Discuss the concept of market.
2. What are the criteria for market classification?
3. What are the types of oligopoly?
4. What do you mean by duopoly?
5. What are the features of perfect competition?
6. Bring out the classification of market.
7. Compare the features of different market structures.
8. Discuss market on the basis of time.

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