2. Homogeneous product:-
It is the most important feature. It says that the product which
these large number of buyers buy from large number of sellers are
identical or we can say perfect substitute that means, if one buyer
increase the price the buyer will buy it from other seller as the
products are identical e.g. rice.
5. Perfect Knowledge:
All the buyers and sellers have perfect knowledge about the market.
A market which comes to exhibit all these conditions is the stock
market. About one stock there are many information available as it is
published.
6. No Cost of Transportation:-
It is assumed cost of transportation does not exist.
In short run, firm may continue its production to recover losses in long
run. In short run as we have discussed in cost concept fixed cost is
incurred even if the output is 0. Now when the firm is incurring loss
then it may go on producing till the loss is less then or equal to total
fixed cost. then the firm may go on producing till the loss less is then
and equal to TFC. If the firm is able to cover its variable cost and part
of fixed cost it will go on producing because if it stops, the firm has to
incur the complete fixed cost as loss and as there will be no variable
cost if there is no production but if the loss is more than fixed cost that
is when producers will decide to shut down. Therefore not only the
whole of fixed cost but also the part of variable cost the firm has to
incur from its pocket, not through revenue. It is advisable to shut
down and incur loss equal to fixed cost as there will be no variable cost
when production is nil.
We assume that all the firms have identical cost condition in the
industry. In short run the firm will keep on producing even when it is
incurring loss but in long run the firm not even getting normal profits
will shut down. As due feature of free entry and exit when a firm at
shut down point will exit the industry which will decrease the supply
and the profit increase and other firms who where are incurring loss
will start getting normal profit. When most of the firms are incurring
profits the industry looks attractive many new firms enter the industry
which increase the supply in the industry and the profit comes down
and the existing firms will return to normal profits from super norm at
profits so in long run under perfect competition the firm incurs normal
profit there are no super normal profit and no huge loss.
MONOPOLY
Monopoly is said to exist when one firm is the sole producer or seller
of the product. In case of monopoly, one firm constitutes the whole
industry. Mono means one and Poly means seller.
Conditions
1. One seller or producer.
2. No close substitutes for the product of that firm should be
available.
3. monopoly implies no competition
4. Other firms for one reason or the other reason are prohibited to
enter the industry. There is strong barrier to the entry of the
firms.
Price discrimination
Monopsony
Bilateral monopoly
Monopolistic competition
Monopolistic competition is a form of market structure in which a
large number of independent firms are supplying product that are
slightly differentiated from point of view of buyer. This situation arises
when the same commodity is being sold under brand names e.g. lux,
rexsona, dove etc. each firm is sole producer of particular brand.
They are monopolist as far as that particular brand is concerned.
Since various brands are close substitutes, there is keen competition
with each other.
Product differentiation
It does not mean that the product of various firms are altogether
different, they are slightly different which means they are close
substitutes. They are not identical as in perfect competition but
neither are they remote substitutes as in monopoly. The products are
fairly similar and serves as close substitutes for each other
Two bases of product differentiation
1. Characteristic of the product- such as features, trademark,
trade names etc. real quantitative difference like those of
material used, design and workmanship are no doubt important
means of differentiating products. But imaginary difference
created through advertising, the use of attractive package,
brand name are more usual methods by which products are
differentiated even if physically they are identical or almost so.
2. Condition surrounding the sales of the product- the service
rendered in the process of selling the product by one seller is
not identical to that of the other. E.g. seller’s reputation of fair
dealing, efficiency, general terms, his way of doing business,
seller’s location etc.
Oligopoly
Characteristics
1. Interdependence- the most important feature of oligopoly is the
interdependence in decision making between the few firms
which comprises the industry. When the numbers of
competitors are few, any change in price, output etc by a firm
will have direct effect on the rivals which will then retaliate in
changing their own prices.
2. importance of selling cost and advertisement- a direct effect of
interdependence of oligopolies is that the various firms have to
employ various aggressive marketing weapons to gain a
greater share in the market or to prevent a fall in the share for
which the firms have to incur a great deal of cost on
advertisement and other measures of sales promotion. Thus,
there is great importance for selling cost and advertisement
3. Group behaviour- perfect competition, monopoly and
monopolistic pose no problem of making suitable assumption
about human behaviour. Assumption of profit maximization
gives overall good results in these situations where mass of
people are involved and there is no interdependence of the
firms. But in oligopoly the theory of group behaviors is important
as there is interdependence between the members of the
group. Do they form a group and agree to pull together in
promotion of common interest or will they fight to promote their
individual interest.
The demand curve shows what amount of the product a firm will be
able to sell at various prices. In case of other market situation we can
have definite demand curve but under oligopoly the interdependence
of the firm. Under oligopoly the firm cannot assume the rivals will
keep their price unchanged, so the demand curve faced by
oligopolistic firm loses its definiteness. Since, it goes on constantly
shifting as the rivals change the prices in reaction to price changes by
firm.
Collusive oligopoly
1. cartels
2. price leadership
Cartels
Price leadership
The kinky oligopoly demand curve theory, dose not follow that the
price always remains the same. Whenever the costs and demand
conditions undergo changes and when it is likely to remain inflexible
in the face of changing costs and demand conditions is explained
below
1. Decline in costs- when the cost of production declines, the
price is more likely to remain stable. When the cost of
production falls, then the segment of demand curve above the
prevailing current price will become more elastic because with
lower costs there is a greater certainty that in increase in price
by oligopolist will not be followed by the rivals and thus will
cause greater loss in sales. On the other hand the lower
segment of the demand becomes more inelastic as there is
great certainty that reduction is price will be followed by the
rivals.
2. Rise in price – if there is a rise in the cost, the price is not likely
to stay rigid. When there is rise in the cost of the industry an
oligopolist can reasonably expect that his increase in price will
be followed by the other in the industry. As a result, the
segment of the demand curve above the prevailing price will
become less elastic.