Market Srtucture Analysis

Market Structure Analysis

Microeconomics: B-105
Submitted to : MR. Nahid Rabbani
Associate Professor
Department of Banking
University of Dhaka
Submitted by:
Md. Mezbaul Haider (16-030) …………………………….
Md. Mashrur Ali (16-031) …………………………….
Nazim Reza (16-011) ……………………………

Tauhidul Islam (16-071) …………………………….
Rafsan Mahtab (16-087) …………………………….
Rezaur Rahman (16-040) …………………………….

Nahid Bulbul (16-078) …………………………….
16th Batch
University of Dhaka
Date of Submission : 29th November, 2010

Date: November 29, 2010
Mr. Nahid Rabbani
Course Instructor
Micro economics
Faculty of business studies
University of Dhaka, Bangladesh.
Dear Sir,
It gives us pleasure to submit the report on “Market Structure Analysis” on the basis of the for
market structures: Monopoly, Oligopoly, Monopolistic and Perfect Competition as you
authorized us to prepare by November 22, 2010.
It was a fantastic opportunity for us to prepare the report under your guidance, which really was
a great experience for us. We have collected the information from their text books, Websites and
business articles.
We have worked hard and tried our best to prepare the report. We will be very pleased to provide
further information if necessary.
Sincerely,
Md. Mezbaul Haider (16-030)

Md. Mashroor Ali (16-031)
Nazim Reza (16-011)
Tauhidul Islam (16-071)
Rafsan Mahtab (16-087)
Rezaur Rahman (16-040)
Nahid Bulbul (16-078)

Acknowledge ment
To begin with, We would like to express our infinite gratitude towards Almighty Allah and our
course teacher Mr. Nahid Rabbani, Associate Professor, department of Banking, Faculty of
Business Studies, University of Dhaka, to provide not only extremely well arranged guidelines to
complete our report work but would also help us to confront problems in our future career.
We would like to express our heartiest appreciation to our all classmates, who have been a
constant support to us and have patiently helped us throughout our report. We wish to extend our
thanks to the computer lab assistant and all the peers of the Department who made it possible to
work comfortably even in tough times.

Table of Contents
Chapter Topic Page
1 Introduction 1
2 Monopoly Market 1
2.1 Features of Monopoly 2
2.2 Reasons 3
2.3 Demand and Revenue 4
2.4 Short run production 5
2.5 Advantages of Monopoly 6
2.6 Disadvantages of Monopoly 7
3 Oligopoly 8
3.1 Features of Oligopoly 8
3.2 Behavior of oligopoly 10
3.3 Advantages of Oligopoly 11
3.4 Disadvantages of Oligopoly 11
4 Perfect Competition 12
4.1 Characteristics of Perfect Competition 13
4.2 Demand and revenue 14
4.3 Advantages of Perfect Competition 15
4.4 disadvantages of Perfect Competition 16
4.5 Short Run production 16
5 Monopolistic Competition 18
5.1 Characteristics Of Monopolistic market 18
5.2 Demand and Revenue 20
5.3 Advantages of Monopolistic Market structure 21
5.5 Disadvantages of Monopolistic Market 21
5.6 Short-Run Production 22
6 Comparison of market structure 23
7 Conclusion 24

Executive Summary
In the premises of economics market structure is a very crucial topic. Market structure of an
industry is determined according to the products, customers, suppliers and many others issues.
On the basis of market structure we can construe the demand, revenue and price of a product.
This report discusses about the market structures as we are assign to do. It also compares
different types of market structures after brief discussions.
The way, the market of a product is segmented is called market structure according to
economists. The basis of segmenting the market according to the economists are number and size
of firms that make up the industry, control over price or output, freedom of entry and exit from
the industry, nature of the product – degree of homogeneity of the products in the industry,
extent to which products can be regarded as substitutes for each other, diagrammatic
representation or the shape of the demand curve, etc.
In this report we have discussed about four types of basic market structures but there can be
found more. In the discussion we included characteristics, advantages, disadvantages along with
some important issues and graphs with some examples.
Advantages and disadvantages are given on the basis of prime characteristics as well as pros and
cons. Real life examples are given to make this report more useful. Sometimes real life example
can not be described in a name or something like this. Then some situatio n have described
This report also compares these market structures according to their aspects. In real world this
comparison is valid and more constructive than usual discussions. As it help more to determine
the actual structure of an industry and market power. This comparison enlightens the advantages
and disadvantages of these market structures.
According to the views and materials of economics this report has been written.

1. Introduction
Market structure is the manner in which markets or industries are organized, based largely on the
number of participants in the market or industry and the extent of market control of each
participant. The structure of a market primarily depends on the number of firms operating in the
market.
In Economics there are four general market structures. They are:

1. Monopoly
2. Oligopoly
3. Monopolistic Competition &
4. Perfect Competition
These types of market structured are described below:
2. Monopoly Market
A monopoly is a market structure in which there is only one producer/seller for a product. In
other words, the single business is the industry. Entry into such a market is restricted due to high
costs or other impediments, which may be economic, social or political. For instance, a
government can create a monopoly over an industry that it wants to control, such as electricity.
Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one
entity has the exclusive rights to a natural resource.
For example, in Saudi Arabia the government has sole control over the oil industry.
A monopoly may also form when a company has a copyright or patent that prevents others from
entering the market. Monopoly power is an example of market breakdown that occurs when the
member has the ability to control the price or other outcomes in a particular market.
Figure: M onopoly Profit

2.1 Features of Monopoly
The Monopoly Market structure has some special characteristics. Those are:
A single firm selling all output in a market: There is only one firm producing the good. In a real
world monopoly, such as the operating system monopoly, there is one firm that provides the
overwhelming majority of sales (ex: Microsoft), and a handful of small companies that have little
or no impact on the dominant firm
A unique product: A monopoly achieves single-seller status because the good supplied is unique.
There are no close substitutes available for the good produced by a monopoly.
Restrictions on entry into the industry: A monopoly often acquires and generally maintains
single seller status due to restrictions on the entry of other firms into the market. Some of the key
barriers to entry are:
i. government license or franchise,

ii. resource ownership,
iii. patents and copyrights,
iv. high start-up cost, and
v. Decreasing average total cost.
These restrictions might be imposed for efficiency reasons or simply for the benefit of the
monopoly.
Specialized information about production techniques unavailable to other potential producers: A

monopoly often possesses information not available to others. This specialized information
comes in the form of legally-established patents, copyrights, or trademarks.
Price Control: In a monopoly, on account of a single market entity controlling supply and
demand, degree of price and supply control exerted by the enterprise or the individual is greater.
The absence of competition spares the monopolizing company from price pressure. Nevertheless,
to evade the entry from new market participants, the company needs to regulate the set product
or service price within the paradigms of the Monopoly Theorem. Monopoly has scope for
entrepreneurship to make available limited goods and/or services at a higher price. The price and
production decisions of such firms target profit maximizing via predetermined quantity choice.
This helps to cut even on the marginal and revenue outcomes.
Increased Scope for Mergers: In a monopoly, due to the dictates of a single entity, scope for
vertical and/or horizontal mergers increase. The mergers take on coercive form to effectively blot
out competitors and carry on supply chain management.
Legal Sanctions: Competition laws restrict a monopoly with regards to the extent of dominant

position held and exhibit of illegal and abusive behavior. This is, however, milder in the case of a
government- granted monopoly. Such a legal monopoly is offered as an incentive to a risky,
domestic venture.
Predatory Pricing: This feature of monopoly benefits the consumers. These are short term market
gains when prices drop to meet scarce demand for the product. The suppliers and direct
consumers benefit from the monopolizing company's attempt to increase sale for business
marketing. This kind of pricing also helps the government to step in and address any unregulated
monopoly. If the predatory pricing is not managed efficiently, the monopoly environment could
be split.
Price Elasticity: With regards to the demand of the prod uct or service offered by the
monopolizing company or individual, the price elasticity to absolute value ratio is dictated by
price increase and market demand. It is not uncommon to see surplus and/or a loss categorized as
'dead-weight' within a monopoly. The latter refers to gain that evades both, the consumer and the
monopolist.
Lack of Innovation: On account of absolute market control, monopolies display a tendency to

lose efficiency over a period of time. With a one-product-shelf- life, innovative designing and
marketing techniques take a back seat.
Lack of Competition: When the market is designed to serve a monopoly, the lack of business
competition or the absence of viable goods and products shrinks the scope for 'perfect
competition'.
Monopoly Litigation: Lack of competition does not eliminate consumer dissatisfaction. High
market share results in consumers defying increased prices and welcome new entrants to the
seller's market. Competition law dictates are designed to pronounce a monopoly illegal, if found
to be abusing market power via practices of exclusionary nature. The law addresses abusive
conduct in the form of product tying, supply cuts, price discrimination and exploitative deals.
2.3 Reasons
Monopolies achieve their single-seller status for three interrelated reasons:
i. economies of scale,
ii. government decree,
iii. And resource ownership.
While a monopoly can emerge and persist for any one of these reasons, most monopolies rely on
two or all three.

Economies of Scale: Many real world monopolies emerge due to economies of scale and
decreasing average cost. If average cost decreases over the entire range of demand, then a single
seller can provide the good at lower per unit cost and more efficiently than multiple sellers. This
often leads to what is termed a natural monopoly. The market might start with more than one
seller, but it naturally ends up with a single seller that can best take advantage of decreasing
average cost. Many public utilities (such as electricity distribution, natural gas dis tribution,
garbage collection) have this natural monopoly inclination.
Government Decree: The monopoly status of a firm can be established by the mandate of
government. Government simply gives one and only one firm the legal authority to supply a
particular good. Such single seller legal status is usually justified on economic grounds, such as
an electric company that naturally tends to monopolize a market. However, it might also result
from political forces, such as mandating monopoly status to a firm controlled by a campaign
donor or close political associate.
Resource Ownership: A monopoly is likely to arise if a firm has complete control over a key
input or resource used in production. If the firm controls the input, then it controls the output.
Monopolies have arisen over the years due to control over material resources (petroleum and
bauxite ore), labor resources (talented entertainers and skilled athletes), or information resources
(patents and copyrights).
2.4 Demand and Revenue

Single-seller status means that monopoly faces a negatively- Demand Curve,
sloped demand curve, such as the one displayed in the exhibit Monopoly
to the right. In fact, the demand curve facing the monopoly is
the market demand curve for the product.
The top curve in the exhibit is the demand curve (D) facing the
monopoly. The lower curve is the marginal revenue curve
(MR).
Because a monopoly is a price maker with extensive market, it

faces a negatively-sloped demand curve. To sell a larger
quantity of output, it must lower the price. For example, the
monopoly can sell 1 unit for $10. However, if it wants to sell 2
units, then it must lower the price to $9.50.

For this reason, the marginal revenue generated from selling extra output is less than price.
While the price of the second unit sold is $9.50, the marginal revenue generated by selling the
second unit is only $9. While the $9.50 price means the monopoly gains $9.50 from selling the
second unit, it loses $0.50 due to the lower price on the first unit ($10 to $9.50). The net gain in
revenue, that is marginal revenue, is thus only $9 (= $9.50 - $0.50).
2.5 Short-Run Production

The analysis of short-run production by a
monopoly provides insight into efficiency (or lack Short-Run Production,
Monopoly
thereof). The key assumption is that a monopoly,
like any other firm, is motivated by profit
maximization. The firm chooses to produce the
quantity of output that generates highest possible
level of profit, given price, market demand, cost
conditions, production technology, etc.
The short-run production decision for monopoly

can be illustrated using the exhibit to the right.
The top panel indicates the two sides of the profit
decision--revenue and cost. The hump-shaped
green line is total revenue (TR). Because price
depends on quantity, the total revenue curve is a
hump-shaped line. The curved red line is total
cost (TC). The difference between total revenue
and total cost is profit, which is illustrated by the
lower panel as the brown line.
A firm maximizes profit by selecting the quantity

of output that generates the greatest gap between
the total revenue line and the total cost line in the
upper panel or at the peak of the profit curve in
the lower panel. In this example, the profit
maximizing output quantity is 6. Any other level
of production generates less profit.

2.6 Advantages of Monopoly
Advantages of monopoly markets are there is no risk of over production. The owners
have edge that he knew his product will be sold because people prefer his product then
other. All the capital is invested in Research & Development. Reduction in price is
advantage to the monopoly market owner because by lowering prices, demand will get
high and efficiently used the organization resources.
Research and Development: Monopolist will have better resources to spend on research
and development and will be able to bring new techniques and products to strengthen its
position. Successful research can be used for improved products and lower costs in the
long term. E.g. Telecommunications and Pharmaceuticals. Supernormal Profit can be
used to fund high cost capital investment spending.
Economies of scale: A monopolist reacts to demand changes in a more effective manner

than other forms. Increased output will lead to a decrease in average costs of production.
These can be passed on to consumers in the form of lower prices.
International Competitiveness: A domestic firm may have Monopoly power in the

domestic country but face effective competition in global markets. E.g. British Steel
A firm may become a monopoly through being efficient and dynamic. A monopoly is
thus a sign of success not inefficiency.
For example – Google
Other advantages of monopoly are:
 reduction in price of good

 efficiently use of recourses
 control over entire market
 only producer of a particular product or service
 others are price takers

2.7 Disadvantages of Monopoly
Disadvantages of monopolies also exist. Increase in prices of product any time because the
organization knows that there is no competitor, it leads to restriction of consumer choice.
Exploitation of labor and no competitor in market leads to inefficiency.
They abuse consumers in this way. Monopolist has the power to restrict market supply. It is also
argued that because there is no competition monopolist have little incentive to introduce new
products and techniques. Monopolies also restrict entries of new firms and drive them out of
business. Moreover there is lack of choice for consumers in the market. In a monopoly firm do
not respond to consumer demand. When there is competition forms supply more of what
consumers demand.
The major disadvantages of Monopoly are:
Higher Prices: Higher Price and Lower Output than under Perfect Competition. This leads to a
decline in consumer surplus and a deadweight welfare loss.
Allocatively Inefficiency: Assuming that a monopolist and a competitive firm have the same
costs, the welfare loss under monopoly is shown by a deadweight loss of consumer and producer
surplus compared to the competitive price and output. A monopoly is allocatively inefficient
because in monopoly the price is greater than MC. P > MC. In a competitive market the price
would be lower and more consumers would benefit
Productive Inefficiency: Under monopoly, however, the presence of barriers of entry allows the
monopolist to earn abnormal profits in the long run. The monopolist is not forced to operate at
the lowest point on the AC curve. The monopolist is therefore unlikely to be productively
efficient (unlike the firm in perfect competition).
X – Inefficiency: It is argued that a monopoly has less incentive to cut costs because it doesn't
face competition from other firms. Therefore the AC curve is higher than it should be.
Supernormal Profit: A Monopolist makes Supernormal Profit QM * (AR – AC) leading to an

unequal distribution of income.
Higher Prices to Suppliers: A monopoly may use its market power and pay lower prices to its
suppliers. E.g. Supermarkets have been criticized for paying low prices to farmers.
Diseconomies of Scale: It is possible that if a monopoly gets too big it may expe rience
diseconomies of scale. Higher average costs because it gets too big
Worse products: Lack of competition may also lead to improved product innovation.

Charge higher prices to suppliers: Monopolies may use their supernormal profits to charge
higher prices to suppliers.
Unequal distribution of income: The high profits of monopolists may be considered by many as
unfair. The scale of this problem depends upon the size of the monopoly and the degree of its
power. The monopoly profits of a village store may seem of little consequence when compared
to that of a giant national or international company.
Other disadvantages are:

 exploitation of consumers
 restriction of consumer’s choice
 Exploitation of labor i.e. when price is greater than marginal cost.
3. Oligopoly
When the whole market structure of several firms controls the major share of market sales, then
the resulting structure is referred as Oligopoly. Oligopoly is a market structure characterized by a
small number of relatively large firms that dominate an industry. The market can be dominated
by as few as two firms or as many as twenty, and still be considered oligopoly.
Because an oligopolistic firm is relatively large compared to the overall market, it has a
substantial degree of market control. It does not have the total control over the supply side as
exhibited by monopoly, but its capital is significantly greater than that of a monopolistically
competitive firm.
Relative size and extent of market control means that interdependence among firms in an
industry is a key feature of oligopoly. The actions of one firm depend on and influence the
actions of another. Such interdependence creates a number of interesting economic issues. One is
the tendency for competing oligopolistic firms to turn into cooperating oligopolistic firms. When
they do, inefficiency worsens, and they tend to come under the scrutiny of government.
Alternatively, oligopolistic firms tend to be a prime source of innovations, innovations that
promote technological advances and economic growth.
3.1 Features of Oligopoly

The main function of oligopoly is to engage in collusion, either by tacit or overt, and also thereby
work out market power. An open agreement belonging to oligopoly is called as cartel which
takes care of the market price or its resolution. Here, Oligopoly is a market conquered by some
large dealers. The amount of market concentration is very high and leading firms will take a
large percentage. Firms which are within an oligopoly produce more identified products. In that

case, advertising and marketing is the major feature of competition in case of such markets and
so, there is also no obstruction to other entries. The four most important characteristics of
oligopoly are:
Small Number of Large Firms: An oligopolistic industry is dominated by a small number of

large firms, each of which is relatively large compared to the overall size of the market. This
generates substantial market control, the extent of market control depending on the number and
size of the firms.
Identical or Differentiated Products: Some oligopolistic industries produce identical products,

while others produce differentiated products. Identical produc t oligopolies tend to process raw
materials or intermediate goods that are used as inputs by other industries. Notable examples are
petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer
goods that satisfy the wide variety of consumer wants and needs. A few examples of
differentiated oligopolistic industries include automobiles, household detergents, and computers.
Barriers to Entry: Firms in a oligopolistic industry attain and retain market control through
barriers to entry. The most common barriers to entry include patents, resource ownership,
government franchises, start-up cost, brand name recognition, and decreasing average cost. Each
of these makes it extremely difficult, if not impossible, for potential firms to enter an industry.
Inter-dependence of firms: Another important feature of an oligopoly is the dependence between

two firms. This is nothing but, that each firm should always take into account the possible
reactions of other firms in the market when they are making pricing and investment decisions.
This may generate improbability in such markets. The behavior of firms in perfect case, in
monopoly concept can be treated as a simple optimization.
Some other characteristics of Oligopoly are:

 Some of the firms are selling product with similarity.
 The production of each firms branded products.
 To make the barriers to enter into the market in the long run that allows firms to make
supernormal profits.
 High Barriers to entry
 Goods could be homogeneous or highly differentiated
 Branding or Brand loyalty may be a potent source of competitive advantages

3.2 Behavior
Although oligopolistic industries tend to be diverse, they also tend to exhibit several
behavioral tendencies:
Interdependence: Each oligopolistic firm keeps a close eye on the activities of other firms in
the industry. Decisions made by one firm invariably affect others and are invariably affected
by others. Competition among interdependent oligopoly firms is comparable to a game or an
athletic contest. One team's success depends not only on its own actions but on the actions of
its competitor. Oligopolistic firms engage in competition among the few.
Rigid Prices: Many oligopolistic industries (not all, but many) tend to keep prices relatively
constant, preferring to compete in ways that do not involve changing the price. The prime
reason for rigid prices is that competitors are likely to match price decreases, but not price
increases. As such, a firm has little to gain from changing prices.
Non price Competition: Because oligopolistic firms have little to gain through price
competition, they generally rely on non price methods of competition. Three of the more
common methods of non price competition are:
i. Advertising,
ii. Product differentiation, and
iii. Barriers to entry.
The goal for most oligopolistic firms is to attract buyers and increase market share, while
holding the line on price.
Mergers: Oligopolistic firms perpetually balance competition against cooperation. One way
to pursue cooperation is through merger--legally combining two separate firms into a single
firm. Because oligopolistic industries have a small number of firms, the incentive to merge is
quite high. Doing so then gives the resulting firm greater market control.
Collusion: Another common method of cooperation is through collusion--two or more firms

that secretly agree to control prices, production, or other aspects of the market. When done
right, collusion means that the firms behave as if they are one firm, a monopoly. As such
they can set a monopoly price, produce a monopoly quantity, and allocate resources as
inefficiently as a monopoly. A formal method of collusion, usually found among
international produces is a cartel.

3.4 Advantages of Oligopoly
Innovations: Of the four market structures, oligopoly is the one most likely to develop the
innovations that advance the level of technology, expand production capabilities, promote
economic growth, and lead to higher living standards. Oligopoly has both the mo tive and the
opportunity to pursue innovation. Motive comes from interdependent competition and
opportunity arises from access to abundant resources.
Economies of Scale: Oligopoly firms are also able to take advantage of economies of scale that
reduce production costs and prices. As large firms, they can "mass produce" at low average cost.
Many modern goods--including cars, computers, aircraft, and assorted household products--
would be significantly more expensive if produced by a large number of small firms rather than a
small number of large firms.
Some other Advantages of the Oligopoly are:
 Firms are able to reap economies of scale, due to large scale competition. Products cannot
be produced by individual firms on a small scale.
 There is an incentive to engage in Research & Development. They have the ability to
earn super normal profits and capture larger market share.
 Firms enjoy lower costs due to technological improvement. This results in higher profits
which will improve firm's capacity to withstand price war.
 more profits due to decreased competition
 allows for greater efficiency through standardization, economies of scale (for production
and new product development)
 and avoidance of a monopoly
3.5 Disadvantages of Oligopoly

Like much of life, Oligopolies in a market have several problems. They are:
Inefficiency: First and foremost, oligopoly does NOT efficiently allocate resources. Like any
firm with market control, an oligopoly charges a higher price and produces less output than the
efficiency benchmark of perfect competition. In fact, oligopoly tends to be the worst efficiency
offender in the real world, because perfect competition does not exist, monopolistic competition
inefficiency is minor, and monopoly inefficiency has the potential for being so bad that it is
inevitably subject to corrective government regulation.
Concentration: Another bad is that oligopoly tends to increase the concentration of wealth and
income. This is not necessarily bad, but it can be self- reinforcing and inhibit pursuit of the

microeconomic goal of equity. While the concentration of wealth is not bad unto itself, such
wealth can then be used (or abused) to exert influence over the economy, the political system,
and society, which might not be beneficial for society as a whole.
The other disadvantages of the oligopoly are:

 Firms have extensive amounts of power and may even collude to set prices, which is
illegal.
 For the consumer this means high prices accompanied by the possibility of a low quality
product.
 It could be argued that it ends up being a less competitive market as smaller firms find it
impossible to compete with these brands established firms.
 less innovation and hiring because competition is limited
4. Perfect Competition:
Market for a homogeneous product in which there are many producers and consumers, none of
which are large enough to have any individual effect upon the market on their own. In theory
such a market produces the largest output at the lowest price. There are few, if any, real- world
markets of this nature; probably the closest is markets for farm products.
An ideal market structure characterized by a large number of small firms, identical products sold
by all firms, freedom of entry into and exit out of the industry, and perfect knowledge of prices
and technology. This is one of four basic market structures which is pure or perfect competition.
Perfect competition is an idealized market structure that is not observed in the real world. While
unrealistic, it does provide an excellent benchmark that can be used to analyze real world market
structures. In particular, perfect competition efficiently allocates resources.
Perfect competition a market structure characterized by a large number of firms so small relative
to the overall size of the market, such that no single firm can affect the market price or quantity
exchanged. Perfectly competitive firms are price takers. They set a production level based on the
price determined in the market. If the market price changes, then the firm re-evaluates its
production decision. This means that the short-run marginal cost curve of the firm is its short-run
supply curve.
Examples: If a bakery set the market price for bread is tk10, charging more of that of other
bakeries of that area than no one will buy bread from that bakery as the customers can buy bread
at a cheaper rate. This policy is applicable for agricultural products like wheat, rice, potato and
spices for many fruit and flower market.

4.1 Characteristics of Perfect Competition
Large Number of Small Firms: A perfectly competitive industry contains a large number of
small firms, each of which is relatively small compared to the overall size of the market. This
ensures that no single firm can exert market control over price or quantity. If one firm decides to
double its output or stop producing entirely, the market is unaffected. The price do there is not
discernible change in the quantity exchanged in the market.
Identical Products: Each firm in a perfectly competitive market sells an identical product, what
is often termed "homogeneous goods." The essential feature of this characteristic is not so much
that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern
any difference. In particular, buyers cannot tell which firm produces a given product. There are
no brand names or distinguishing features that differentiate products.
Perfect Resource Mobility: Perfectly competitive firms are free to enter and exit an industry.
They are not restricted by government rules and regulations, start-up cost, or other barriers to
entry. While some firms incur high start-up cost or need government permits to enter an industry,
this is not the case for perfectly competitive firms. Likewise, a perfectly competitive firm is not
prevented from leaving an industry as is the case for government-regulated public utilities.
Perfect Knowledge: In perfect competition, buyers are completely aware of sellers' prices, such
that one firm cannot sell its good at a higher price than other firms. Each seller also has complete
information about the prices charged by other sellers so they do not inadvertently charge less
than the going market price. Perfect knowledge also extends to technology. All perfectly
competitive firms have access to the same production techniques. No firm can produce its good
faster, better, or cheaper because of special knowledge of information.
Price takers: Individual firms exert no significant control over product price; a firm only can
measure the price according to the demand and supply of the product but can not set price. Each
firm produces such a small fraction of total output that increasing or decreas ing its output will
not perceptibly influence total supply or product price. The individual competitive producer is at
the mercy of the market; asking a price higher than the market price would be futile. Because the
market is filled with an infinite number of firms all selling the same product, any single firm
represents a minuscule portion of the whole market causing. no single firm can change market
price by adjusting output as it makes up a small percentage of the entire market supply . So
competitive firm is a price taker, because it cannot change market price; it can only adjust to it.
There is no profit to be made because the price each business operates at is only enough to cover
a unified normal profit, therefore going below the price would result in an economic loss.

Free entry and exit: There are no legal, technological, financial, or other obstacles that prevent
firms from entering or leaving a competitive market. It is easy for firms to enter or exit the
industry. This is only possible in a purely competitive market because firms in this type of
market are "price takers," and the number of firms does not affect the price of a product.
Perfectly elastic demand: A perfectly elastic demand means that the firm can produce as much as
they want at that price and it will still be sold. Purchasers will be willing to buy any quantity at
that price. In this market structure perfectly elastic demand is seen.

The characteristics of perfect competition mean a perfectly competitive firm faces a horizontal
or elastic demand curve, such as the one displayed in the exhibit below.
Demand Curve, Perfect Competition
Each firm in a perfectly competitive market is a price taker and can sell all of the output that it
wants at the going market price, in this case tk2.5. A firm is able to do this because it is a
relatively small part of the market and its output is identical to that of every other firm. As a
price taker, the firm has no ability to charge a higher price and no reason to charge a lower one.
Because it can sell all of the output it wants at the going market price, it has no reason to charge
less. If it tries to charge more than the going market price, then buyers can simply buy output
from any of the large number of perfect substitutes produced by other firms.

Because the price facing a perfectly competitive firm is unrelated to the quantity of output
produced and sold, this price is also equal to the marginal revenue and average revenue
generated by the firm. If a firm is able to sell any quantity of output for tk250 each, then the
average revenue, revenue per unit sold, is also tk2.5 Moreover, each additiona l unit of output
sold, marginal revenue, generates an extra tk2.5.
4.3 Advantages of perfect competition
Optimal allocation of resources: All the firms want to minimize the cost of product as they have
to offer a lower price. The finest way of minimizing the cost of production is minimizing the
misuse of and assuring the optimal use of resources. Thus the best use of resources is secured,
Competition encourages efficiency: In pure competition the intensity of contest compel the
firms to attain efficiency. The pure competition market is more efficient than any other markets.
Such markets are usually allocatively and productively efficient.
Consumers charged a lower price : As in pure competition there are many firms participating in
the business and all of the goods are identical, the customers buy the commodity from the firm
which offers lest price, So every firm wants to offer lower price than other firms. As a result the
consumers can get product at a lower rate.
Responsive to consumer wishes: In pure competition, the firms of the industry response
according to the claims and wishes of consumers. In a short the customers can have their wishes
fulfilled.
Change in demand: In pure competition if there is any change in demand the suppliers can react
to the change more easily, as there are a large numbers of suppliers.
Leads extra supply: The large numbers of suppliers lead to extra large supply.
Easy entry and exit: It is relatively easy to enter or exit as a business in a perfectly competitive
market for its characteristics.
Knowledge and information: In this market structure the suppliers known about the customers
and the customers knows about the suppliers well.

4.4 Disadvantages of Perfect Competition
Lack of product variety: The product introduced in this market are same, all the suppliers supply
same product, so their is not any variety.
Lack of competition over product design and specification: All the suppliers try to provide goods
at a cheap rate, to attain this goal they seldom concentrate on improving the product. So this
causes a lacking of competition over product design and specification.
Unequal distribution of goods and income: The consumers who can pay more can get more and
the suppliers who can invest more can earn more in pure competition, this cause’s unequal
distribution of goods and income.
Lack of capital: In pure competition there are a large numbers of small firms so they do not have
a huge capital.
Price setting: An individual firm can not set a price; it can only measure a price according to the
demand and supply and sell the product.
Other drawbacks:
 Price undercutting,,
 advertising, innovation,
 Activities that - the critics argue - characterize most industries and markets.

The analysis of short-run production by a perfectly competitive firm provides insight into
market supply. The key assumption is that a perfectly competitive firm, like any other firm, is
motivate by profit maximization. The firm chooses to produce the quantity of output that
generates highest possible level of profit, based on price, market demand, cost conditions,
production technology, etc.
The short-run production decision for perfect competition can be illustrated using the exhibit to
the below. The top panel indicates the two sides of the profit decision--revenue and cost. The
straight green line is total revenue. Because price is constant, the total revenue curve is a straight

line. The curved red line is total cost. The shape of the total cost curve is based on increasing
then decreasing marginal returns. The difference between total revenue and total cost is profit,
which is illustrated by the lower panel as the brown line.
Short-Run Production,
Perfect Competition
A firm maximizes profit by selecting the quantity of output that generates the greatest gap
between the total revenue line and the total cost line in the upper panel or at the peak of the profit
curve in the lower panel. In this example, the profit maximizing output quantity is 7. A ny other
level of production generates less profit.

5. Monopolistic Competition:
Monopolistic competition is a market structure characterized by a large number of relatively
small firms. While the goods produced by the firms in the industry are similar, s light differences
often exist. As such, firms operating in monopolistic competition are extremely competitive but
each has a small degree of market control.
In effect, monopolistic competition is something of a hybrid between perfect competition and

monopoly. Comparable to perfect competition, monopolistic competition contains a large
number of extremely competitive firms. However, comparable to monopoly, each firm has
market control and faces a negatively-sloped demand curve.
The real world is widely populated by monopolistic competition. Perhaps half of the economy's
total production comes from monopolistically competitive firms. The best examples of
monopolistic competition come from retail trade, including restaurants, clothing stores, and
convenience stores.
Monopolistic Competitive Industries:

 Shoes -Nike, Addidas, Reebok
 Jewelry
 Asphalt paving
 Signs
 Bottled water
 ice cream- Breyers, Tom & Jerry
 Mobile Phone- Nokia, Samsung, Sony Ericcson
5.1 Characteristics Of Monopolistic Competition

Many Numbers of Firms: A monopolistically competitive industry contains a large number of
small firms, each of which is relatively small compared to the overall size of the market. This
ensures that all firms are relatively competitive with very little market control over price or
quantity. In particular, each firm has hundreds or even thousands of potential competitors.
Similar Products but not perfect substitute: Each firm in a monopolistically competitive market
sells a similar, but not absolutely identical, product. The goods sold by the firms are close
substitutes for one another, just not perfect substitutes. Most important, each good satisfies the
same basic want or need. The goods might have subtle but actual physical differences or they

might only be perceived different by the buyers. Whatever the reason, buyers treat the goods as
similar, but different.
Relative Resource Mobility: Monopolistically competitive firms are relatively free to enter and
exit an industry. There might be a few restrictions, but not many. These firms are not "perfectly"
mobile as with perfect competition, but they are largely unrestricted by government rules and
regulations, start-up cost, or other substantial barriers to entry.
Extensive Knowledge: In monopolistic competition, buyers do not know everything, but they
have relatively complete information about alternative prices. They also have relatively complete
information about product differences, brand names, etc. Each seller also has relatively complete
information about production techniques and the prices charged by their competitors.
Price maker: A monopolistically competitive firm is a price maker, with some degree of control
over price. Once again, unlike perfect competition, a monopolistically competitive firm has the
ability to raise or lower the price a little, not much, but a little. And like monopoly, the price
received by a monopolistically competitive firm which is also the firm's average revenue is
greater than its marginal revenue.
Product Differentiation: The goods produced by firms operating in a monopolistically

competitive market are subject to product differentiation. The goods are essentially the same, but
they have slight differences.
Product differentiation is usually achieved in one of three ways:
 physical differences,
 perceived differences, and
 Support services.
Physical Differences: In some cases the product of one firm is physically different form the
product of other firms. One good is chocolate, the other is vanilla. One good uses plastic, the
other aluminum.
Perceived Differences: In other cases goods are only perceived to be different by the buyers,
even though no physical differences exist. Such differences are often created by brand names,
where the only difference is the packaging.
Support Services: In still other cases, products that are physically identical and perceived to be
identical are differentiated by support services. Even though the products purchased are identical,
one retail store might offer "service with a smile," while another provides express checkout.
Product differentiation is the primary reason that each firm operating in a monopolistically
competitive market is able to create a little monopoly all to itself.

Advertising: A unique feature of a monopolistic competitive market is that there are product
differentiations. Therefore, companies rely on advertising to flaunt their products and try to get
consumers to buy their product over another.

The four characteristics of monopolistic competition mean that a monopolistically competitive
firm faces a relatively elastic, but not perfectly elastic, demand curve, such as the one displayed
in the exhibit to the right.
Demand Curve, Monopolistic Competition
Each firm in a monopolistically competitive market can sell a wide range of output within a
relatively narrow range of prices. Demand is relatively elastic in monopolistic competition
because each firm faces competition from a large number of very, very close substitutes.
However, demand is not perfectly elastic (as in perfect competition) because the output of each
firm is slightly different from that of other firms. Monopolistically competitive goods are close
substitutes, but not perfect substitutes.

5.3 Advantages of Monopolistic Market structure
Monopolistic competition can bring the following advantages:
Price setting: The firms here can set the price product by changing the product or some other
alterations.
Elastic demand: The demand faced here is not perfectly elastic but elastic.
Service orientation: There is a provision of after sale services in this type of market structure.
Successful service improvement by one firm encourages other firms to also improve or imitate.
Product Varity and betterment: Each firm has a product that is distinguishable in some way from
those of the other producers. Therefore, firms are able to have profit from differentiation. In the
long run, monopolistic competitive markets will only earn a normal profit due to easy entr y and
exit of the industry.
Satisfaction of customers: Product variety, services satisfies a wide range of consumer tastes.
Entry and exit: In this structure a firm can easily enter or exit in the industry.
5.4 Disadvantages of Monopolistic Market

There are several potential disadvantages associated with monopolistic competition, including:
Complex situation: Situation of a monopolistic competitor is complex due to its ability to

engage in non price competition. This complex situation is not expressed in a single simple
economic model.
Cost increase: Advertisement, product variety, service and other factors cause increased cost.
Allocatively Inefficiency: Firms produce at a point where P>MC, meaning that resources are
under allocated; not allocatively efficient.
Productive Inefficiency: Firms do not produce where Price= min Average Total Cost; therefore,
no productively efficient

The analysis of short-run production by a monopolistically competitive firm provides insight
into market supply. The key assumption is that a monopolistically competitive firm, like any
other firm, is motivated by profit maximization. The firm chooses to produce the quantity of
output that generates the highest possible level of profit, given price, market demand, cost
conditions, production technology, etc.
The short-run production decision for monopolistic competition can be illustrated using the
exhibit to the above. The top panel indicates the two sides of the profit decision--revenue and
cost. The slightly curved green line is total revenue. Because price depends on quantity, the total
revenue curve is not a straight line. The curved red line is total cost. The difference between total
revenue and total cost is profit, which is illustrated in the lower panel as the brown line.
Short-Run Production,
Monopolistic Competition
A firm maximizes profit by selecting the quantity of output that generates the greatest gap
between the total revenue line and the total cost line in the upper panel or at the peak of the profit
curve in the lower panel. In this example, the profit maximizing output quantity is 6. Any other
level of production generates less profit.

6. Comparison of market structures
As we have discussed about the four market structures that is Monopoly, Oligopoly, Monopoly
and Perfect Competition market and their Characteristics, advantages, disadvantages, Demand
curve, How they arises, number of suppliers and buyers, price strategy, market power, profit
maximization etc, we can easily see some basic differences among themselves.
Here is a Brief comparison of these market structures:
Characteristics Perfect Oligopoly Monopolistic Monopoly

Competition competition
Number of firms Large number of Industry Many buyers and Where only one
buyers and sellers – dominated by sellers producer exists in
no individual seller small number of the industry. In
can influence price large firms. Many reality, rarely
firms may make exists –always
up the industry some form of
substitute
available!
Type of product Homogenous product Products could be Products Product is very

– identical so no highly differentiated limited.
consumer preference differentiated –
branding or
homogenous
Barriers to entry Free entry and exit to High barriers to Relatively free High barriers to
industry entry entry and exit entry
Pricing Large number of In Oligopoly Firm has some In Monopoly
buyers and sellers – sellers are price control over sellers are price
no individual seller maker price maker
can influence price.
Sellers are price
takers – have to
accept the market
price
Profit maximization Always Not always Not always Usually, but not
always
Economic In perfect In oligopoly In monopolistic In monopoly

efficiency competition economic economic economic
economic efficiency efficiency is Low efficiency is low efficiency is Low
is high
Innovative behavior Weak Very Strong Strong Potentially strong

7. Conclusion:
The graphs and models can be used as a comparison of structures. When looking at real world
examples, focus on the behaviour of the firm in relation to what the model predicts would
happen – that gives the basis for analysis and evaluation of the real world situation. Regulation
or the threat of regulation may well affect the way a firm behaves. Remember that these models
are based on certain assumptions – in the real world some of these assumptions may not be valid,
this allows us to draw comparisons and contrasts. The way that governments deal with firms may
be based on a general assumption that more competition is better than less.

Bibliography:
1. Microeconomics, Michael Parkin, 8th Edition
2. www.myeconlab.com/

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Market Structure Analysis

Market Structure Analysis

Submitted to : MR. Nahid Rabbani

Md. Mashrur Ali (16-031) …………………………….

Nazim Reza (16-011) ……………………………

Rafsan Mahtab (16-087) …………………………….

Rezaur Rahman (16-040) …………………………….

Date of Submission : 29th November, 2010

Market Structure Analysis

Mr. Nahid Rabbani

University of Dhaka, Bangladesh.

Md. Mezbaul Haider (16-030)

Market Structure Analysis

Market Structure Analysis

Market Structure Analysis

Market Structure Analysis

In Economics there are four general market structures. They are:

These types of market structured are described below:

Figure: M onopoly Profit

Market Structure Analysis

i. government license or franchise,

Specialized information about production techniques unavailable to other potential producers: A

Market Structure Analysis

Lack of Innovation: On account of absolute market control, monopolies display a tendency to

Market Structure Analysis

2.4 Demand and Revenue

Because a monopoly is a price maker with extensive market, it

Market Structure Analysis

2.5 Short-Run Production

The short-run production decision for monopoly

A firm maximizes profit by selecting the quantity

Market Structure Analysis

Economies of scale: A monopolist reacts to demand changes in a more effective manner

International Competitiveness: A domestic firm may have Monopoly power in the

For example – Google

Other advantages of monopoly are:

 reduction in price of good

Market Structure Analysis

The major disadvantages of Monopoly are:

Supernormal Profit: A Monopolist makes Supernormal Profit QM * (AR – AC) leading to an

Market Structure Analysis

Other disadvantages are:

3.1 Features of Oligopoly

Market Structure Analysis

Small Number of Large Firms: An oligopolistic industry is dominated by a small number of

Identical or Differentiated Products: Some oligopolistic industries produce identical products,

Inter-dependence of firms: Another important feature of an oligopoly is the dependence between

Some other characteristics of Oligopoly are:

Market Structure Analysis

Collusion: Another common method of cooperation is through collusion--two or more firms

Market Structure Analysis

Some other Advantages of the Oligopoly are:

3.5 Disadvantages of Oligopoly

Market Structure Analysis

The other disadvantages of the oligopoly are:

Market Structure Analysis

Market Structure Analysis

4.2 Demand and Revenue

Demand Curve, Perfect Competition

Market Structure Analysis

4.3 Advantages of perfect competition

Market Structure Analysis

4.5 Short-Run Production