MARKET STRUCTURE AND COMPETITION

Market Structure
 Market Structure is the organizational and other characteristics of a
market
 Tend to focus on those characteristics of a market which affect the
degree of competition between firms and their pricing decisions.
 Market Structure – Identifies how a market is made up in terms of
 The number of firms in the industry
 The nature of the product
 The degree of power each firm has
 The degree to which the firm can influence price
 Profit levels
 Firm’s behaviour – Pricing Strategies, Non-price competition,
Output levels
 The extent of barriers to entry
 The impact on efficiency

TYPES OF MARKET

Perfect Competition Imperfect Competition

Monopoly Duopoly Oligopoly Monopolistic Competition

 Monopsony
 Duopsony
 Information Asymmetry
Perfect Competition Monopoly Duopoly Oligopoly Monopolistic
Competition
 Large number of  Single Seller Two Sellers  Interdependence Large number of
buyers and sellers Producers
 No Close Completely  Group Behaviour
 Homogeneous Substitutes Independent Product
Product  Price Rigidity
differentiation
 Increase the
 Perfect Knowledge price & Entry and Exit are
on the part of Control over easy
Buyers and Sellers Supply
Selling Cost
 Perfect Mobility on
 Restrictions on
Factors of Absence of Inter-
Entry
Production dependence
 Absence of
Transport Cost
 Absence of
Artificial
Restrictions
CHARACTERISTICS
THE INDIVIDUAL FIRMS UNDER PERFECT COMPETITION
 The demand curve for the output of the single, therefore, must be a horizontal line at the ruling
price; in other words, a perfectly elastic demand curve.
 It can sell its entire output at the ruling market price.

PERFECT COMPETITION

 The market price is determined by the market forces (Demand & Supply)
 Uniform Price in the market
 All the units of output are sold at same price,
As a result, Average Revenue in Perfectly Elastic (AR curve Horizontal parallel to X-axis)
 AR Curve of firm represents, Demand Curve for the product produced by the firm

Short-Run Equilibrium
 Perfectly Competitive market is price taker, he has to adjust its of output to maximize its profit
 Short run is the period which the number and plant size are fixed, the firm can produce more
only by increasing variable inputs.
 Entry of new firms are not possible either earn super-normal profit or normal profit or incur loss
in short period
 Super-Normal Profit
 When Average Revenue greater that Average Cost, firm is earning Super-Normal Profit
 OP is the prevailing Market Price
 PL is the Demand Curve or AR and MR Curve
 SAC and SMC are Short run average and Marginal
Cost Curve
 Firm is in equilibrium at point ‘E’, where MR = MC
and MC Curve cuts MR curve below the point of
equilibrium
 Firm producing OM level of output
ME – Average Revenue
MF – Average Cost
The Profit per unit of output EF
(Difference between ME and MF)
 The total profits will be equal to EF multiplied by OM or HF (Total output)
Total Profit - HFEP

Long-Run Equilibrium
 Factors are variable
 Firms can increase their output by increasing the number
and plant size of the firm
 New firm can enter industry and existing industry can leave
the industry
As a result, firms will earn normal profit
 A fall in Average Revenue and the rise in Average Cost both
become equal
 Equilibrium at point S
LMC = MC = AR = LAC
MONOPOLY
PRICE AND OUTPUT DETERMINATION
 A Monopoly firm faces a downward sloping demand curve, that is, its average revenue
 Downward sloping curve implies that larger output can be sold only by reducing the price. Its
marginal revenue curve will be below the average revenue curve.
 Monopolist will be in equilibrium when MC = MR and MC curve cuts the MR Curve
 AR curve is falling and MR curve lies below AR.
 The monopolist is in equilibrium at E where MR = MC.
 He produces OM Units of output and fixes price at OP.
 At OM output, the average revenue is MS and average cost MT.
 There the profit unit is MS-MT = TS
 Total Profit is average profit (TS) multiplied by output (OM),
which equals to HTSP
 The monopolist is in equilibrium at point E produces OM
output at which he is earning maximum profit.
 The Monopoly price is higher than the Marginal revenue and
marginal cost

Restrictions on Entry
 Concentration of raw materials
 Technical barriers
 Advertising and branding
 Legal Barriers
 Transport costs and tariffs
 Restrictive practices
MONOPOLISTIC COMPETITION

 Although each producer is a monopolist, and the demand

curve for the product will slope downwards, the availability of
close substitutes will mean that the demand curve for his
product will be fairly elastic
 The demand curve (AR) slopes downwards because brand
loyalties exist.
 An increase in price would result in some loss of sale but some
customers would be retained.
 A cut in price would capture some customers from
competitors, but others will remain loyal to the brands they
have become accustomed to.
 In the short run, output is determined where MC = MR and
abnormal profits are earned. This would be typical of a
successful new product.
 In the long run, if there are no barriers to entry, new firms
would be attracted by the abnormal profits and the increased
completion would push the demand curve to the left until it
was tangential to the AC curve
 In this situation the firm is only making normal profits.
 At any output other than OQ’ the firm would be making
losses. The most profitable output (OQ’), as always is
determined where M = MR
OLIGOPOLY

 Demand curves used in the preceding analysis are drawn on

the assumption that if a firm changes its price other things
will not change.
 If a firm cuts its price it may finish up with increased sales or
it may find itself selling less. It all depends on how its rivals
react.
 If they counter-attack by making even larger price cuts, the
firm which started the process may well lose some of its
market.
 If its competitors react with relatively smaller price cuts, the
firm may be able to increase its share of the market.
 The uncertainty about what happens when an oligopolistic
changes his price means that we cannot use the normal
demand curve in analyzing the determination of output.
 Economists do, however, use a diagram of a kinked demand
curve in order to explain why price in oligopolistic markets
tends in order to explain why price in oligopolistic markets
tends to be much more stable than in the competitive
conditions.