Market Structure

Md. Hasan Tarik

Chief Instructor, NAPD

Concept of Market

• Generally Market is known to be a specific place where products are bought and sold.

• But in Economics market does not refer to a specific place

• Market is meant by where there is an existence of the buyer and seller of a product and transaction of the product by a price which is fixed by joint bargaining of the seller and the buyer

• Transaction can occur in any place of through correspondence

Market Structure

• Setting the price of the firm’s product is one of the important decisions made by the managers

• If price is set too high, the firm will be unable to compete with other suppliers

• If the price is too low, the firm may not be able to earn a normal rate of profit

Market Structure

• A firm in a competitive market may have little or no control over price

• In that case managerial attention must be focused on the rate of output to be produced

• A firm that is the only seller of a product may have considerable freedom in setting price

Market Structure

• Market Structures can be characterized on the basis of four characteristics:

1. Number and size distribution of sellers

2. Number and size distribution of buyers

3. Product differentiation

4. Conditions of entry and Exit

Number and size distribution of sellers

• If there are numerous sellers of nearly equal size, the influence of any one firm is likely to be small over price and total supply. Conversely it is also true

• A dominant firm or few large firms that provide a substantial proportion of total business, exert considerable impact over price and product attribute. Such as Microsoft

Number and size distribution of buyers

• Where there are many small purchaser of a product, all buyers are likely to pay about the same price

• If there is only one purchaser, that buyer in a position to demand lower prices from sellers

• If a market consists of many small buyers and one or a few firms making volume purchases, the larger firms may be able to buy at lower prices. For example IBM and AT&T buy at lower prices

Product Differentiation

• Product differentiation refers to the degree that the output of one firm differs from that of other firms in a market

• When products are undifferentiated, decisions to buy are made strictly on the basis of price

• Product differentiation indicates a firm’s ability to affect price

Conditions of Entry and Exit

• When it is extremely difficult for new firms to enter, existing firms will have much greater freedom in making pricing and output decisions

• In case of exit if the resources used to produce the product can easily be transferred from one use to another they can earn a higher rate of return

Classification of Market

• The classification of market can be presented in the following diagram:

P erfec t Im p erfec t

M arke t

Classification of Imperfect Market

Imperfect market can be classified as follows:

M on op o ly D u op o ly O lig op o ly M on op o lis t icC om p etit ion

Im p erfec t M arke t

Characteristics of Perfect Market

1. Large number of small buyers and sellers2. Homogeneous product which is standardized and

can be easily graded3. Perfect information (Price, quality of product,

mode of payment)4. Easy entry and exit5. Perfect mobility of factors of production (land,

labour, capital, organization)6. Product undifferentiated. Decisions to buy are

made on the basis of price

Price is fixed is perfect market through the interaction between

buyers and sellers

AR and MR under Perfect Market

• In perfect market there are many buyers and sellers. So it is not possible for a buyer to shift the market demand curve.

• Again a seller or firm produce a little amount of total supply. So it is not possible for him to influence the market supply curve of the product

• Price of the product is fixed by the market supply and demand curve

AR and MR under Perfect Market

• As the product is homogeneous in Perfect Market, the price which is fixed in the market has to taken by buyer and seller both

• This price can not be changed by buyer and seller

• A seller under Perfect Market is a price taker

• For this reason in Perfect Market P=AR=MR

AR and MR under Perfect Market

Q P TR MR

1 10 10 10

2 10 20 10

3 10 30 10

4 10 40 10

5 10 50 10

AR and MR under Perfect Market

• From Table we see that fixed market price of product Q is P=10 Taka

• The value of total income TR increases with the same rate as the value of Q

• So it is obvious to be P=AR=MR=10

• The firm will charge the same price for each Q amount

P

Pe

AR=MR=10

0 Q1 Q2 Q

TR TR

Q0 1 2 3

10

20

30

Limitations of Perfect Market

• Unrealistic• External Effects• Economies of large scale• Non-Homogeneous product• Ignorance of buyer and seller• Non-perfect Mobility of factors• Transport Cost• Freedom of Consumers and producers limited

Imperfect market

• In imperfect market individual sellers have some measure of control over the price of output in that industry. Economies of scale or decreasing average costs, are the major sources of imperfect competition.

Difference between perfect and imperfect competition

• Figure shows that a perfect competitor faces a horizontal demand curve, indicating that it can sell all it wants at the going market price. A seller under perfect competition is a price taker

• An imperfect competitor faces a downward sloping demand curve showing that if it increases its sales, it definitely depress the market price of its output.

Monopoly

• The word monopoly originates from two Greek words: ‘monos’ means single and ‘polis’ means dealer or seller/producer

• Monopoly is that type of market in which a single seller has control over the market and monopoly product has no close substitute

• Monopoly is a price maker basically due to three reasons: single producer, single seller, no close substitute, restriction or prohibition on entry

Causes of the Rise of Monopoly

• Demand for product is low

• Personal goodwill

• No mobility of items

• Control over supply

• Ignorance of the probable competitors

• Unhealthy competition

Characteristics of Monopoly

• Single seller/producer

• Absence of competition

• No close substitute of monopoly product

• Control over supply

• Restriction/prohibition on entry into market

• No distinction between firm and industry

• Monopoly is a price maker

Marginal Revenue and Monopoly

• Marginal revenue (MR) is the increment in total revenue that comes when output increases by 1 unit. MR can be either positive or negative

• Marginal revenue is positive when demand is elastic and negative when demand is inelastic

Total, average and marginal revenue under Monopoly

Q AR=P TR=PQ MR Cum. MR

1 10 10 10 10

2 9 18 8 18

3 8 24 6 24

4 7 28 4 28

5 6 30 2 30

6 5 30 0 30

7 4 28 -2 28

TR, AR and MR under monopoly

• Monopoly market can control the price or the supply of the product

• But can not control both• If it wants to sell more product it has to take less

price for every extra unit• Because it has to compete with the others products

of the which is included in the consumer’s budget• In monopoly market total income increases in the

descending order• MR decreases more than AR

Some important comments about Monopoly

• Does Monopolist make profit always?

• Does Monopolist always earns excess profit?

Duopoly

• The word ‘Duo’ means two and ‘Poly’ means seller.

• A market system where there are only two sellers

• Duopoly is a special type of Oligopoly market system

• Fierce competition is prevalent

Oligopoly

• Greek word ‘Oligos’ means a few and Latin word ‘Polis’ means seller

• Industry is dominated by few firms• Action on the part of any one firm may bring on a

reaction by other firm or firms having significant effects on the original firm

• OPEC is an example• Products may be homogeneous or different

Characteristics of Oligopoly market

• Interdependence

• Nature of the product: homogeneous or different

• Homogeneous product: Pure Oligopoly

• Different products: Differentiated Oligopoly

• Demand curve is undefined

• Importance of advertisement and selling cost

• Group nature

Collusive Oligopoly

• When firms cooperate completely, they engage in collusion.

• This term denotes a situation in which two or more firms jointly set their prices or outputs

• Divide the market among them or make their business decision jointly

• Firms are tempted to collude when they recognize that their profits depend on their joint actions

Monopolistic Competition

• Large number of firms• Produce slightly differentiated product• Entry and exit easy• Firms take other firms price as give• Product differentiation leads to a downward

slope in each seller’s demand curve• Change in price of one firm can create little

effect on other firms product

Characteristics of Monopolistic Competition

• Many sellers• Product differentiation• Easy entry and exit• Advertisement and selling expense• Nature of Demand• Group equilibrium• Similar cost and demand• Alternate activities of firm• Similarity and resemblance