CONCEPTS AND TYPES OF MARKETS

Professor & Lawyer. Puttu Guru PrasadProfessor & Lawyer. Puttu Guru Prasad(ICFAI Trained & Certified Management Faculty) 

M.Com----------------------------- M.Com----------------------------- (Madras University)(Madras University)M.B.A ------------(Dr. Ambedkar University, First Class)M.B.A ------------(Dr. Ambedkar University, First Class)

TOEFL------------------- TOEFL------------------- (Top Scorer, Qualified for I-20)(Top Scorer, Qualified for I-20)

GMAT---------------- GMAT---------------- (Qualified for I-20 US Study Visa)(Qualified for I-20 US Study Visa)

L.L .B -------L.L .B -------(Gold Medalist, Acharya Nagarjuna University)(Gold Medalist, Acharya Nagarjuna University) PGDM -----------------------PGDM -----------------------(Foreign Trade Management)(Foreign Trade Management)

M.Phil------ M.Phil------ (Annamalai University, Distinction Holder)(Annamalai University, Distinction Holder)

F.T.P -----F.T.P -----(ICFAI, 30(ICFAI, 30thth Batch Topper and Domain Topper) Batch Topper and Domain Topper)

APSET----------------------- APSET----------------------- (Qualified with 68% marks)(Qualified with 68% marks)

P.h.D P.h.D --------------------------------(Pursuing from JNJTUK, Kakinada)(Pursuing from JNJTUK, Kakinada)

MARKET• Market is defined as a place or point at which

buyers and sellers negotiate for exchange of well-defined products or services.

• Traditionally, market was referred to a public place in a village or town where provisions and other objects were brought for sale.

• Based on location, markets are classified as rural, urban, national or world markets.

• Market is said to exist wherever there is a potential for trade

August 9, 2017 2

• Today  with  improving  technology  and  modern facilities,  the definition of market has undergone   a sea change

• In the modern context, market refers to a meeting point of buyer and seller, but not necessary a geographical one.

• It is not necessary that the buyer must meet the seller in person.

• While traditional avenues such as Value payable by Post (VPP) continue to be popular, e-commerce through internet has been the latest avenue for firms to sell larger volumes of their products and services via online negotiations where necessary.

August 9, 2017 3

SIZE OF MARKET• The size of the market depends on

many factors such as nature of products, nature of their demand, tastes and preferences of customers, their income level, state of technology, extent of infrastructure, including telecommunications and information technology, time factor in terms of short run or long run and so on

August 9, 2017 4

MARKET CONDUCT• Market conduct refers to the behavioral aspects

of sellers and buyers operating in a market. Market conduct consists of:

• A)  the  business  objectives  of  the  firms  such  as profit  maximization  and  sales  maximization  or market share.

• B) customizing    the products as per  the specific   requirements  of  buyers  such  as  assembling  of  a personal  computer  as  per  the  specifications  of the buyer and making it cost effective.

• C)  improving  the  quality  of  the  product  and making it available at a lower price

August 9, 2017 5

• D)  marketing  strategies  and  tactics  adopted  by the  firms  to  establish  competitive  edge    over   rival firms.

• These  include  various  pricing  strategies  such  as deliberately  charging  a  low  price  in  order  to penetrate  into  the  market  and  expand  sales quickly,  pricing  the  product  deliberately  as  a higher  level  in order  to make as much profits as possible in the quickest possible time.

• Change in advertising and sales promotion strategies, variations in the quality and make of the products, innovative packaging techniques and design etc.,August 9, 2017 6

MARKET PERFORMANCE• When  the  suppliers/sellers  utilize  the  economic 

resource/inputs to their maximum efficiency and to the ultimate benefit of consumers, the market is said to be effective in its performance.

• The following are the essentials of market performance:

• A)Efficiency in production:• When the process of production of goods and services 

is  cost  effective,  efficiency  is  said  to  prevail  in production processes.

• The  firm  should  make  efforts  to  minimize  the  costs while  maximizing  the  output.  Scale  economics  should be fully exploited.

August 9, 2017 7

• B) Efficiency in distribution:• Distribution    is  the    process  of  storing  and 

moving the products to consumers often though intermediaries such as wholesalers and retailers.

• Channel of distribution  is  the route followed for physical  distribution  of  a  product  form  the manufacturer to the ultimate consumer.

• The channel of distribution should be effectively manag3ed to bring down the distribution costs to the minimum and to make the product available to the ultimate customer without any sort of inconvenience.

August 9, 2017 8

• C) Fixation of Prices:• The price should be fixed at reasonable level leaving

reasonable profit/return to the suppliers/sellers.• D) Product performance:• The customers always look for variety,

sophistication in design and quality at reasonable price. The firm should provide value-for-money.

• E) Improved technology:• Innovations in technology bring down the costs of

product and process manufacturing and inprove the features of the product.

• The growing demands of the customers can be met better though introduction of process and product innovations. These also reduce the supply costs in real terms.

August 9, 2017 9

MARKET STRUCTURE• Market structure refers to the

characteristics of a market that influence the behavior and performance of firms that sell in that market.

• The  structure  of  market  is  based  on  the following features:

• 1.The degree of seller concentration:• This refers to the number of sellers and

their market share for given product or service in the marketAugust 9, 2017 10

• 2.The degree of buyer concentration:• This refers to the number of buyers and their extent

of purchase of a given product or service in the market.

• 3.The degree of product differentiation:• A firm may differentiate its product form that of

the competitor though advertising, creating a brand image, product design, variation in quality, packagining location and so on.

• This refers to the extent by which the product of each trader is differenciated from that of the other.

• Product differentiation can take several forms such as varieties, brands, all of which are sufficiently similar to distinguish them, as a group, from other product

August 9, 2017 11

• 4. The conditions of entry to the market:• Often, there could be certain

restrictions to enter or exit from the market. The degree of ease with which one can enter the market or exit from it also determines the market structure.• In other words there could be large

number of firms if there aren’t many restrictions on entering the market and vice versa

August 9, 2017 12

COMPETITIVE MARKET SITUATIONS

• The lesser the power an individual firm has to influence the market in which it operates, the more competitive the market is. If a firm can influence the market by offering products and services at better or attractive terms and conditions, it is said to have grater power to influence the market.

August 9, 2017 13

TYPES OF COMPETITION• The interconnected characteristics of a market, such as

the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market

• Four basic types of market structure are (1) Perfect competition: many buyers and sellers, none being able to influence prices. (2) Oligopoly: several large sellers who have some control over the prices. (3) Monopoly: single seller with considerable control over supply and prices. (4) Monopsony: single buyer with considerable control over demand and prices.

August 9, 2017 14

PERFECT COMPETITION• The theoretical free-market situation in which the

following conditions are met: (1) buyers and sellers are too numerous and too small to have any degree of individual control over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access toinformation regarding availability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another. Also called perfect market or pure competition.

August 9, 2017 15

Features of perfect competition• 1. Large number of buyer and sellers:• Each buyer buys a small quantity of the total

amount. • Each seller is so large that no single buyer or

seller can influence the price and affect the market.

• Buyers and sellers are price takers in the purely competitive market.

• Each seller (or firm) sells its products at the price determined by the market.

• Similarly, each buyer buys the commodity at the price determined by the market.

August 9, 2017 16

• 2.Free entry and exit:• Under perfect competition, there will be

no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market. However, such free entry or free exit is possible only in the long run, but not in the short-run.

August 9, 2017 17

• 3.Perfect knowledge:• Perfect competition implies perfect

knowledge on the part of buyers and sellers regarding the market conditions. As a results, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has no scope.

August 9, 2017 18

• 4.Perfect mobility of factors of production:• The second perfection mobility of

factors of production from one use to another use. This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned. This is essential to enable the firms and industry to achieve equilibrium.

August 9, 2017 19

• 5. Homogenous Product• In this case, all sellers produce

homogeneous i.e. perfectly identical products. All products are perfectly same in terms of size, shape, taste, colour, ingredients, quality, trade marks etc. This ensures the existence of single price in the market.

August 9, 2017 20

• 6. Each firm is a price taker:• A firm in a perfect market cannot

influence the price though its own individual actions. • It has no alternative other than

selling its products at the price prevailing in the market

August 9, 2017 21

Total Revenue(TR), Average Revenue(AR) and

Marginal Revenue(MR)

• Total revenue ( TR ) is the total amount of money(or some other good) that a firm receives from the sale of its goods. It the firm practices single pricing rather than price discrimination, TR = total expenditure of the consumer = P x Q

August 9, 2017 22

Total Revenue, Average Revenue and Marginal Revenue

• Average revenue ( AR ) is the total amount of money(or some other good) that a firm receives from the sale divided by the number of units of goods sold. • AR = TR/Q, since TR=P x Q, then AR =

P for single pricing practiceAugust 9, 2017 23

Total Revenue, Average Revenue and Marginal Revenue

• Marginal revenue ( MR ) is the change in total revenue resulting from selling an extra unit of goods. • MR = ∆TR/∆Q, where ∆TR =

change in TR due to change in Q, ∆Q = change in Q

August 9, 2017 24

• Imagine that one more book is sold. Since the selling is done at a given market price of rs.10 the additional revenue (MR) by selling one more unit will be rs.10

• Consider this example. Your are selling notebooks. Each books cost rs.10 your are not going to given any discount or concession even if a buyer purchases more number of books at a time. Suppose 10m books are sold.

• The total (TR) revenue is rs.100. the average revenue (AR) is rs.10 (100/10).

• Suppose you are selling one more notebook. Since you are selling at the given market price of rs.10, the additional revenue (MR) by selling one more unit will be rs.10

• Thus, under perfect competition Price =Average Revenue (AR) = Marginal Revenue (MR)

August 9, 2017 25

IMPERFECT COMPETITION

• Real world' competition that is less effective in lowering price levels nearer to the cost levels than the theoretical perfect competition. Conditions that help cause imperfect competition include (1) restricted flow of information on costs and prices, (2) near monopoly power of some suppliers, (3) collusion among sellers to keep prices high, and (4) discrimination by sellers among buyers on the basis of their buying power.

August 9, 2017 26

MONOPOLY• Market situation where one producer (or

a group of producers acting in concert) controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers. August 9, 2017 27

• Most governments therefore try to control monopolies by (1) imposing price controls, (2) taking over their ownership (called 'nationalization'), or (3) by breaking them up into two or more competing firms. Sometimes governments facilitate the creation of monopolies for reasons of national security, to realize economies of scale for competing internationally, or where two or more producers would be wasteful or pointless (as in the case of utilities). Although monopolies exist in varying degrees (due to copyrights, patents, access to materials, exclusive technologies, or unfair trade practices) almost no firm has a complete monopoly in the era of globalizationAugust 9, 2017 28

MONOPOLY COMPETITION• Market situation midway between the extremes of

perfect competition and monopoly, and displaying features of the both. In such situations firms are free to enter a highly competitive market where several competitors offer products that are close (but not perfect) substitutes and, therefore, prices are at the level of average costs (a feature of perfect competition).

• Also, some consumers have a preference for one product over another that is strong enough to make them keep buying it even when its price increases, thus giving its producer a small amount of market power (a feature of monopoly). Monopolistic situation is a common situation in all free markets

August 9, 2017 29

DUOPOLY• Market situation in which only

sellers supply a particular commodity to many buyers. Either seller can exert some control over the output and prices, but must consider the reaction of its sole competitor (unless both have formed an illegal collusive duopoly).

August 9, 2017 30

Example

• A soft drink market with two companies such as Pepsi and Coke is called duopoly.• Basic facilities for satellite

communication are presently provided by the Mahanagar Tlelphoine Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL)August 9, 2017 31

OLIGOPOLY• Market situation between, and much more common

than, perfect competition (having many suppliers) and monopoly (having only one supplier). In oligopolistic markets, independent suppliers (few in numbers and not necessarily acting in collusion) can effectively control the supply, and thus the price, thereby creating a seller's market.

• They offer largely similar products, differentiated mainly by heavy advertising and promotional expenditure, and can anticipate the effect of one another's marketing strategies. Examples include airline, automotive, banking, and petroleum markets. Mirror image of oligopsony.

August 9, 2017 32

Example • Car manufacturing companies (such as Maruti-

Suzuki, Hindustan Motors, Daewoo, Toyota etc.,) and Newspapers (such as The Hindu, Indian Express, Times of India, Economic Times, Eenadu, etc,)

• In oligopoly, each individual seller or firm can affect the market price. When The Times of India slashed the price of ots daily newspaper, most other companies such as Indian Express and The Hindu followed suit.

• Oligopolistic market situations are very common in sectors relating to manufacturing, transportation, communication and so on.

August 9, 2017 33

MONOPSONY• A term used to describe a market

where a very large buyer typically dominates the price action. In a monopsony, the large buyer is typically able to force prices to decline and this type of market contrasts with a monopoly where a large seller is able to drive up prices.August 9, 2017 34

Example

• The Food Corporation of India is the only government organization that purchase agricultural produce such as rice and so on.

August 9, 2017 35

DUOPSONY

•Market situation in which only two buyers create the entire demand for a commodity supplied by many sellers a mirror image of duopoly.

August 9, 2017 36

OLIGOPSONY

•Market situation where presence of few buyers and many suppliers creates a buyer's market. Mirror image of oligopoly.

August 9, 2017 37

Example

• A few news paper publishing companies in India and all these buy newsprint from the Government of India.• A good number of computer

assembly operators who buy computer components on a wholesale basis.

August 9, 2017 38

3931-07-2013