Module-5
Market Structure Analysis
Characteristics of Perfect
Competition
• Refers to the market structure where competition among
the sellers and buyers prevails in its most perfect form
• The price is determined by the forces of market, i.e.
aggregate market demand and aggregate market supply
conditions
• Each firm produces such a small fraction of total industry
output that an increase or decrease in its own output will
have no perceptible influence up on total supply and
hence price
• Individual sellers have no control over the price at which
they sell
• Every participant whether a buyer or seller is a price
taker
Supply and Demand in Perfect
Competition
• Under perfect competition there is a single ruling
market price, the equilibrium price, determined
by the interaction of forces of total demand and
total supply in the market
• Thus both the market or equilibrium price and
volume of production in a market under perfect
competition are determined by the intersection of
total demand and total supply
Equilibrium of the firm under
Perfect Competition
• Accepting profit maximization as the
fundamental business motive of a rational firm, it
can be stated that the firm is in equilibrium,
when it fulfills its motive
• It means the firm is in equilibrium when it
produces that level of output which maximizes
profit
• When total revenue is greater than total cost, a
firm earns profit, in the accounting sense.
• But economists make a distinction between,
normal profits and supernormal profits
Equilibrium of the Firm in the Short
Run
• When the firm attains a short run
equilibrium position, it does not
necessarily imply, that it makes excess or
supernormal profits
• Its profitability depends up on the
conditions of average revenue and
average cost
Equilibrium of the Firm in the Long
Run
• In the long run, all firms have identical
costs and because they are at liberty to
leave the industry, they will all be earning
normal profits
• In the long run, under conditions of perfect
competition, every firm in the industry and
the industry as a whole will be in full
equilibrium and every firm will be
producing the optimum output
Monopoly
• Monopoly is a market structure where
there is only one seller who controls the
entire market supply, as there are no close
substitutes for his product and there are
barriers to the entry of rival producers
• The monopoly market model is the
opposite extreme of perfect competition
Features of Monopoly
1. The monopolist is the sole producer in the market. Thus, under
monopoly, the firm and industry are identical
2. There are no closely competitive substitutes for the product. So
the buyers have no alternative or choice. They have either to buy
the product or go without it
3. Monopoly is a complete negation of competition
4. A monopolist is a price maker. He can even vary the price from
buyer to buyer. In a perfectly competitive market there is single
price, as against under monopoly, there may be differentials
5. A pure monopolist has no immediate rivals. There are legal,
technological, economic or natural obstacles which may block the
entry of new firms
6. A monopolist has absolute control over the market supply, so he
can control the price as well as quantity supplied
Natural Monopolies
• In many cases, natural factors create a
monopolistic position which is described
as “natural monopolies”
• For instance, in many professional
services, the natural talent and skill allow
some individuals to have monopoly
• E.g. a surgeon, a lawyer, an actor, a
singer
Price Discrimination
• Price discrimination is charging of different
prices for the same product to different
buyers or in different markets
• A monopoly firm which adopts the policy of
price discrimination is referred to as a
Discrimination Monopoly
Types of Price Discrimination
1. Personal discrimination (based on economic status of
the buyer)
2. Age discrimination
3. Gender discrimination
4. Locational discrimination
5. Size discrimination
6. Variation in quality discrimination
7. Special service or comfort
8. Use discrimination
9. Time discrimination
10. Nature of commodity discrimination
The Concept of Monopolistic
Competition
• Monopolistic competition refers to the market
organization in which there is keen competition,
but neither perfect nor pure, among a large
number of producers or suppliers.
• They have some degree of monopoly because
of their differential products
• Thus monopolistic competition is a mixture of
competition and a certain degree of monopoly
power.
• In other words, a market with a blending of
monopoly and competition is described as
monopolistic competition
Major Sectors
• Monopolistic competition is commonly
found in many fields in retail, service and
manufacturing industries
• Examples of retail:- cloth stores, chemists,
electrical appliances, grocery etc
• Service Industry:- restaurants, beauty
saloons, health clubs etc
• Manufacturing:- shoes, garments,
cosmetics, furniture manufacturing etc
Characteristics of Monopolistic
Competition-1
1. Large number of sellers
2. No product homogeneity
3. Product differentiation: it is the most distinguishing
feature of monopolistic competition, that product of
each seller is branded and identified
4. A firm has a limited degree of control over the market
as a relatively small percentage of total market is
shared by individual firms
5. Large number of buyers: unlike perfect competition,
here buying is by choice and not by chance
Characteristics of Monopolistic
Competition-2
6. There is free entry for firms
7. Selling costs:- this too is an unique feature.
Since products are differentiated, advertising
and sales promotion becomes an integral part
of goods marketing. Outlays incurred on this
account are termed as selling costs. This
distinguishes it sharply from perfect
competition, where there is no need to
advertise products, because goods are
homogeneous
Characteristics of Monopolistic
Competition-3
• 8. two-dimensional competition:- a)price
competition, where firms compete with each
other on the price issue and b) non-price
competition, where competition is based on
product variation and selling costs
• The group:- since there is no homogeneity of
product we can’t think of industry. Here the
concept of group was introduced, which is a
cluster of firms, producing very related but
differentiated goods
Types of Product Differentiation
• Product differentiation can be classified
into two types
1. Quality and characteristic of the product
2. Conditions relating to the sale of product
Quality and Characteristic of the
Product
• Product differentiation relating to quality and
characteristics of the product has wide-scale dimensions,
implying real as well as imaginary differences
• Real differences could be related to the physical
features as well as functional areas
• There could be differences in size, design and style,
strength, durability, differences in the quality of materials,
chemical compositions, workmanship, cost of inputs etc
• There may be imaginary differences relating to brand
names, colour and packing. Advertising also sometimes
emphasizes the imaginary differences
Conditions Relating to Sale of
Product
• Product differentiation may be due to the
conditions of sale and marketing
• This is apparent in many different forms
like:- proximity and prestige of the location
of business, attitude of the staff, business
reputation of the firm, terms of trade like
discounts offered, guarantee, repairs etc