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Market forms for Managerial Economics Mcom Delhi University

Market forms for Managerial Economics Mcom Delhi University

Market forms for Managerial Economics Mcom Delhi University

In economics, market structure (also known as market form) describes the state of a market with respect to competition.

Most market forms given below talk about a homogeneous product. This simply means that they all make the same kind of product (like sugar, or soap), and that the individual consumer does not care where he or she buys from. They simply want to get the cheapest one, since all kinds of sugars (or soaps) look the same anyway.

The major market forms are:

  • Perfect competition: there are many firms making a homogeneous product.
  • Monopolistic competition, also called competitive market: there are a large number of independent firms. Each firm has a very small proportion of the market share.
  • Oligopoly: A market is dominated by a small number of firms which own more than 40% of the market share.
  • Oligopsony: A market dominated by many sellers and a few buyers.
  • Monopoly: There is only one provider of a product or service.
  • Natural monopoly: A monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm.
  • Monopsony: There is only one buyer in a market.

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolistsexist and dominate the market conditions.

These somewhat abstract concerns usually determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade.

Market StructureSeller Entry BarriersSeller NumberBuyer Entry BarriersBuyer Number
Perfect competitionNoManyNoMany
Monopolistic competitionNoManyNoMany
OligopolyYesFewNoMany
OligopsonyNoManyYesFew
MonopolyYesOneNoMany
MonopsonyNoManyYesOne

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.

The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.

Market structure refers to the nature and degree of competition in the market for goods and services. The structures of market both for goods market and service (factor) market are determined by the nature of competition prevailing in a particular market.

Market forms for Managerial Economics Mcom Delhi University-Meaning of Market:

Ordinarily, the term “market” refers to a particular place where goods are purchased and sold. But, in economics, market is used in a wide perspective. In economics, the term “market” does not mean a particular place but the whole area where the buyers and sellers of a product are spread.

This is because in the present age the sale and purchase of goods are with the help of agents and samples. Hence, the sellers and buyers of a particular commodity are spread over a large area. The transactions for com­modities may be also through letters, telegrams, telephones, internet, etc. Thus, market in economics does not refer to a particular market place but the entire region in which goods are bought and sold. In these transactions, the price of a commodity is the same in the whole market.

According to Prof. R. Chapman, “The term market refers not necessarily to a place but always to a commodity and the buyers and sellers who are in direct competition with one another.” In the words of A.A. Cournot, “Economists understand by the term ‘market’, not any particular place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of the same goods tends to equality, easily and quickly.” Prof. Cournot’s definition is wider and appropriate in which all the features of a market are found.

Market forms for Managerial Economics Mcom Delhi University-Contents :

  1. Meaning of Market
  2. Characteristics of Market
  3. Market Structure
  4. Forms of Market Structure

Market forms for Managerial Economics Mcom Delhi University-Characteristics of Market:

The essential features of a market are:

(1) An Area:

In economics, a market does not mean a particular place but the whole region where sellers and buyers of a product ate spread. Modem modes of communication and transport have made the market area for a product very wide.

(2) One Commodity:

In economics, a market is not related to a place but to a particular product.

Hence, there are separate markets for various commodities. For example, there are separate markets for clothes, grains, jewellery, etc.

(3) Buyers and Sellers:

The presence of buyers and sellers is necessary for the sale and purchase of a product in the market. In the modem age, the presence of buyers and sellers is not necessary in the market because they can do transactions of goods through letters, telephones, business representatives, internet, etc.

(4) Free Competition:

There should be free competition among buyers and sellers in the market. This competition is in relation to the price determination of a product among buyers and sellers.

(5) One Price:

The price of a product is the same in the market because of free competition among buyers and sellers.

On the basis of above elements of a market, its general definition may be as follows:

The market for a product refers to the whole region where buyers and sellers of that product are spread and there is such free competition that one price for the product prevails in the entire region.

Market forms for Managerial Economics Mcom Delhi University-Market Structure:

Meaning:

Market structure refers to the nature and degree of competition in the market for goods and services. The structures of market both for goods market and service (factor) market are determined by the nature of competition prevailing in a particular market.

Determinants:

There are a number of determinants of market structure for a particular good.

They are:

(1) The number and nature of sellers.

(2) The number and nature of buyers.

(3) The nature of the product.

(4) The conditions of entry into and exit from the market.

(5) Economies of scale.

Market forms for Managerial Economics Mcom Delhi University-Forms of Market Structure:

On the basis of competition, a market can be classified in the following ways:

  1. Perfect Competition
  2. Monopoly
  3. Duopoly
  4. Oligopoly
  5. Monopolistic Competition

1. Perfect Competition Market:

A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of market at a time. In the words of A. Koutsoyiannis, “Perfect competition is a market structure characterised by a complete absence of rivalry among the individual firms.” According to R.G. Lipsey, “Perfect competition is a market structure in which all firms in an industry are price- takers and in which there is freedom of entry into, and exit from, industry.”

Market forms for Managerial Economics Mcom Delhi University-Characteristics of Perfect Competition:

The following are the conditions for the existence of perfect competition:

(1) Large Number of Buyers and Sellers:

(2) Freedom of Entry or Exit of Firms:

(3) Homogeneous Product:

(4) Absence of Artificial Restrictions:

(5) Profit Maximisation Goal:

(6) Perfect Mobility of Goods and Factors:

(7) Perfect Knowledge of Market Conditions:

(8) Absence of Transport Costs:

(9) Absence of Selling Costs:

Market forms for Managerial Economics Mcom Delhi University-Perfect Competition vs Pure Competition:

Perfect competition is often distinguished from pure competition, but they differ only in degree. The first five conditions relate to pure competition while the remaining four conditions are also required for the existence of perfect competition. According to Chamberlin, pure competition means, competi­tion unalloyed with monopoly elements,” whereas perfect competition involves perfection in many other respects than in the absence of monopoly.” The practical importance of perfect competition is not much in the present times for few markets are perfectly competitive except those for staple food products and raw materials. That is why, Chamberlin says that perfect competition is a rare phenomenon.”

Though the real world does not fulfil the conditions of perfect competition, yet perfect competi­tion is studied for the simple reason that it helps us in understanding the working of an economy, where competitive behaviour leads to the best allocation of resources and the most efficient organisation of production. A hypothetical model of a perfectly competitive industry provides the basis for appraising the actual working of economic institutions and organisations in any economy.

2. Monopoly Market:

Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others. The product has no close substitutes. The cross elasticity of demand with every other product is very low. This means that no other firms produce a similar product. According to D. Salvatore, “Monopoly is the form of market organisation in which there is a single firm selling a commodity for which there are no close substitutes.” Thus the monopoly firm is itself an industry and the monopolist faces the industry demand curve.

The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes, and incomes of his customers. It means that more of the product can be sold at a lower price than at a higher price. He is a price-maker who can set the price to his maximum advantage.

However, it does not mean that he can set both price and output. He can do either of the two things. His price is determined by his demand curve, once he selects his output level. Or, once he sets the price for his product, his output is determined by what consumers will take at that price. In any situation, the ultimate aim of the monopolist is to have maximum profits.

Market forms for Managerial Economics Mcom Delhi University-Characteristics of Monopoly:

The main features of monopoly are as follows:

  1. Under monopoly, there is one producer or seller of a particular product and there is no differ­ence between a firm and an industry. Under monopoly a firm itself is an industry.
  2. A monopoly may be individual proprietorship or partnership or joint stock company or a co­operative society or a government company.
  3. A monopolist has full control on the supply of a product. Hence, the elasticity of demand for a monopolist’s product is zero.
  4. There is no close substitute of a monopolist’s product in the market. Hence, under monopoly, the cross elasticity of demand for a monopoly product with some other good is very low.
  5. There are restrictions on the entry of other firms in the area of monopoly product.
  6. A monopolist can influence the price of a product. He is a price-maker, not a price-taker.
  7. Pure monopoly is not found in the real world.
  8. Monopolist cannot determine both the price and quantity of a product simultaneously.
  9. Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist can increase his sales only by decreasing the price of his product and thereby maximise his profit. The marginal revenue curve of a monopolist is below the average revenue curve and it falls faster than the average revenue curve. This is because a monopolist has to cut down the price of his product to sell an additional unit.

Market forms for Managerial Economics Mcom Delhi University

3. Duopoly:

Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both the sellers are completely independent and no agreement exists between them. Even though they are inde­pendent, a change in the price and output of one will affect the other, and may set a chain of reactions. A seller may, however, assume that his rival is unaffected by what he does, in that case he takes only his own direct influence on the price.

If, on the other hand, each seller takes into account the effect of his policy on that of his rival and the reaction of the rival on himself again, then he considers both the direct and the indirect influences upon the price. Moreover, a rival seller’s policy may remain unaltered either to the amount offered for sale or to the price at which he offers his product. Thus the duopoly problem can be considered as either ignoring mutual dependence or recognising it.

4. Oligopoly:

Oligopoly is a market situation in which there are a few firms selling homogeneous or differenti­ated products. It is difficult to pinpoint the number of firms in ‘competition among the few.’ With only a few firms in the market, the action of one firm is likely to affect the others. An oligopoly industry produces either a homogeneous product or heterogeneous products.

The former is called pure or per­fect oligopoly and the latter is called imperfect or differentiated oligopoly. Pure oligopoly is found primarily among producers of such industrial products as aluminium, cement, copper, steel, zinc, etc. Imperfect oligopoly is found among producers of such consumer goods as automobiles, cigarettes, soaps and detergents, TVs, rubber tyres, refrigerators, typewriters, etc.

Market forms for Managerial Economics Mcom Delhi University-Characteristics of Oligopoly:

(1) Interdependence:

(2) Advertisement:

(3) Competition:

(4) Barriers to Entry of Firms:

(5) Lack of Uniformity:

(6) Demand Curve:

(7) No Unique Pattern of Pricing Behaviour:

Market forms for Managerial Economics Mcom Delhi University

5. Monopolistic Competition:

Monopolistic competition refers to a market situation where there are many firms selling a differ­entiated product. “There is competition which is keen, though not perfect, among many firms making very similar products.” No firm can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by their actions. Thus monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes for each other.

Market forms for Managerial Economics Mcom Delhi University – It’s Features:

The following are the main features of monopolistic competition:

(1) Large Number of Sellers:

In monopolistic competition the number of sellers is large. They are “many and small enough” but none controls a major portion of the total output. No seller by chang­ing its price-output policy can have any perceptible effect on the sales of others and in turn be influenced by them. Thus there is no recognised interdependence of the price-output policies of the sellers and each seller pursues an independent course of action.

(2) Product Differentiation:

One of the most important features of the monopolistic competi­tion is differentiation. Product differentiation implies that products are different in some ways from each other. They are heterogeneous rather than homogeneous so that each firm has an absolute monopoly in the production and sale of a differentiated product. There is, however, slight difference between one product and other in the same category.

Products are close substitutes with a high cross-elasticity and not perfect substitutes. Product “differentiation may be based upon certain characteristics of the prod­ucts itself, such as exclusive patented features; trade-marks; trade names; peculiarities of package or container, if any; or singularity in quality, design, colour, or style. It may also exist with respect to the conditions surrounding its sales.”

(3) Freedom of Entry and Exit of Firms:

Another feature of monopolistic competition is the freedom of entry and exit of firms. As firms are of small size and are capable of producing close substitutes, they can leave or enter the industry or group in the long run.

Market forms for Managerial Economics Mcom Delhi University

(4) Nature of Demand Curve:

Under monopolistic competition no single firm controls more than a small portion of the total output of a product. No doubt there is an element of differentiation neverthe­less the products are close substitutes. As a result, a reduction in its price will increase the sales of the firm but it will have little effect on the price-output conditions of other firms, each will lose only a few of its customers.

Likewise, an increase in its price will reduce its demand substantially but each of its rivals will attract only a few of its customers. Therefore, the demand curve (average revenue curve) of a firm under monopolistic competition slopes downward to the right. It is elastic but not perfectly elastic within a relevant range of prices of which he can sell any amount.

(5) Independent Behaviour:

In monopolistic competition, every firm has independent policy. Since the number of sellers is large, none controls a major portion of the total output. No seller by changing its price-output policy can have any perceptible effect on the sales of others and in turn be influenced by them.

Market forms for Managerial Economics Mcom Delhi University

(6) Product Groups:

There is no any ‘industry’ under monopolistic competition but a ‘group’ of firms producing similar products. Each firm produces a distinct product and is itself an industry. Chamberlin lumps together firms producing very closely related products and calls them product groups, such as cars, cigarettes, etc.

(7) Selling Costs:

Under monopolistic competition where the product is differentiated, selling costs are essential to push up the sales. Besides, advertisement, it includes expenses on salesman, allowances to sellers for window displays, free service, free sampling, premium coupons and gifts, etc.

(8) Non-price Competition:

Under monopolistic competition, a firm increases sales and profits of his product without a cut in the price. The monopolistic competitor can change his product either by varying its quality, packing, etc. or by changing promotional programmes.

Market forms for Managerial Economics Mcom Delhi University

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Market forms for Managerial Economics Mcom Delhi University

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