Market Structure. Market structure – identifies how a market is made up in terms of: The number of...
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Transcript of Market Structure. Market structure – identifies how a market is made up in terms of: The number of...
Market Structure
Market Structure
Market structure – identifies how a market is made up in terms of:
The number of firms in the industryThe nature of the product producedThe degree of monopoly power each firm hasThe degree to which the firm can influence priceProfit levelsFirms’ behaviour – pricing strategies, non-price
competition, output levels The extent of barriers to entryThe impact on efficiency
Types of Market Structure
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Market Structure
More competitive
Perfect Competition
Pure Monopoly
Greater degree of monopoly power
Perfect Competition
Large number of buyers and sellersHomogeneous productsPerfect mobility of factors of productionFree entry & free exit of firmsPerfect knowledgeAbsence of collusion or artificial restaraintNo govt. intervention
Features
Price Determination under Perfect Competition
Market period or very short runShort runLong run
Price determination under perfect competition is analyzed under three different time periods:
Supply determined Price
Pricing in “Market Period”Demand
determined Price
industry Firm
Pricing in the “Short Run”
Industry Firm
Pricing in the “Long Run”
MonopolyOnly one seller of a particular product
Characteristics of Monopoly
Single ProducerNo close substituteInelastic demand curvePrice MakerBarriers to entryLegal restrictions or barriers to entry of
other firmsControl over key raw materialExamples: Public utilities – telephones and
electricity etc.
Pricing & Output Decision: Monopoly
Costs / Revenue
Output / Sales
AC
MC
ARMR
AR (D) curve for a monopolist likely to be relatively price inelastic.
Q1
7.00
3.00
Monopoly Profit
Given the barriers to entry, the monopolist will be able to exploit abnormal profits in the long run as entry to the market is restricted.
Price Discrimination It refers to discrimination of price for
different consumers on the basis of their income or purchasing power, geographical location, age, sex, colour, marital status, quantity purchased, time of purchase etc. for eg:-
• Physicians and hospitals• Merchandise sellers• Railways and Airlines• Cinema shows or musical concerts• Domestic and foreign markets
Necessary conditions• Different Markets must be separable for
a seller
• The Elasticity of demand must be different in different markets
• There must be imperfect competition in the market
• Profit maximizing output should be larger than the quantity demanded in a single market or section of consumers
First Degree of Price Discrimination
Costs / Revenue
Output / Sales
S
DQ
P
0
Second Degree of Price Discrimination
Costs / Revenue
Output / Sales
S
DQ
P
0
P3
P2
P1
Q3Q2Q1
Third Degree of Price Discrimination
Costs / Revenue
Output / SalesOutput / SalesOutput / Sales
QA QBQ0 00
MRB
ARA
MRAARB
Market A
MC
MR
AR=D
Total MarketMarket B
PA
PB
Monopolistic Competition
Large no. of sellersFree entry & free exitPerfect factor mobilityComplete dissemination of market
informationDifferentiated product
Features:
Differentiated & Homogeneous productsDecision making
Monopolistic vs. Perfect Competition
Price & output decisions in “Short Run”
Price & output decisions in “Long Run”
Two common forms of non price competition are
Product InnovationAdvertisement
Non Price Competition: Selling Cost
Oligopoly
Ipod Zune
OligopolyFew producers control supply and price
Characteristics of Oligopoly
Small number of sellersHomogenous or differentiated productsInterdependence of decision makingBarriers to entryIndeterminate price and outputExamples : Aluminum, steel, cigarettes,
cars etc
Sweezy’s Kinked Demand Curve
d1 is relatively elastic
d2 is relatively inelastic
The kinked demand curve indicates the possibility of price rigidity
Changes in cost do not impact output and prices as long as MC remains in the vertical portion of MR
Price Leadership Models Sometimes, a Leading role is played by the
dominant firm due to its size, efficiency, economies of scale or firm’s ability to forecast market conditions accurately. It initiates a change in price and other small firms follow.
The dominant firm may also serve as a means to price discipline and price stabilization which is knows as “Effective Price leadership”
Price Leadership by Low Cost Firm
AC’
MC
AR
MR
Q1 Q2
P3
Costs / Revenue
Output / Sales
MC’
AC
P2
P1
0
E
E’
Price Leadership by Dominant Firm
Cost/Revenue
Output/SalesQD
Cost/Revenue
Output/Sales 0
MCD
P3
P’
P2
P1
P
DM DD
SD
MRD0
FC
A B
E P3
P’
P2
P1
Barometric Price Leadership The barometric Firm may not necessarily
be the largest firm but it is supposed to have a better knowledge of the prevailing market conditions.
Advantages:Better PriceDependenceReaction to Economics warfare
Collusion Model : The Cartel
A cartel is an association of business firms formed by an explicit agreement between them. They jointly establish a cartel organization to:
Make Price and output decisionsEstablish Production Quotas. Supervise market activities of the firms.
Market Allocation under Cartel
Costs / Revenue
Output / SalesOutput / SalesOutput / Sales
q1 q2 Q0 00
mc2
ac1
mc1 ac2
Firm A
MC
MR
AR=D
C
P
IndustryFirm B
Thank You!