FORMS OF MARKET

MARKET : Any place or anything which facilitates contact between buyers and sellers constitutes
a market. It may be a face to face meeting at some place or simply verbal negotiations through
telephone, internet, etc The markets are classified into these states: Perfect competition, monopoly,
monopolistic competition and oligopoly
PERFECT COMPETITION
A perfectly competitive market is a market where there are large number of buyers and sellers, the
firms produce homogeneous products, the buyers and sellers have perfect knowledge and the firm
are free to entry or make an exit in and out of industry. In terms one in which an individual firm
cannot influence the prevailing market price of the product on its own.
1. Very Large Number of Buyers & Sellers The words 'large number' imply that the number of
sellers is large enough and a single firm has an insignificant share in market supply. It has a
further implication that no single seller has the ability to determine the price at which the
commodity will be sold. Insignificant share means that if only one individual firm reduces or raises
its own supply, he is not able to cope up with market demand. so, One single seller has no option
but to sell what it produces at this market determined price. This position of an individual firm in the
total market is referred to as Price taker firm. Price is determined by the market forces of demand
and supply. So, Industry is the price maker. Price is given exogenously to the firm.
Similarly, the 'large number' of buyers also has the same implication. A single buyer's share in total
market demand is so insignificant that the buyer cannot influence the market price on his own by
changing his demand. This makes a single buyer also a price taker. To sum up, the feature 'large
number' indicates ineffectiveness of a single seller or a single buyer in influencing the prevailing
market price on its own, rendering him simply a price taker.
Average Revenue and marginal revenue curves of a perfectly competitive firm
The forces of market supply (i.e. supply by industry) and market demand (demand by all the
buyers) determine the market price. The firm, being a price taker, adopts this price and is free to
sell any quantity it likes at this price. The price taker feature determines the shape of the firms AR
and MR curves . Demand curve of a firm is parallel to x axis. MR=AR IN PERFECT
COMPETITION.

AR curve is also demand curve of the firm, which is perfectly elastic or parallel of X axis.
2. The products of all the firms in the industry are homogenous
It means that the buyers treat the products of all the firms in the industry as homogenous. The
products produced by the firms are identical, or treated as identical, or perfect substitutes .
The buyers do not distinguish the output of one firm from that of the other. The implication of this
feature is that since the buyers treat the products as identical they are not ready to pay a
different price for the product of any one firm. They will pay the same price for the products of all
the firms in the industry. On the other hand, any attempt by a firm to sell its product at a higher
price will fail. To sum up, the 'homogenous products' feature ensures a uniform price for the
products of all the firms in the industry.

3. Perfect knowledge about markets for outputs and inputs.

The firms have all the knowledge about the product market and the input markets. Buyers also
have perfect knowledge about the product market.
The implication of perfect knowledge about the product market is that any attempt by any firm
to charge a price higher than the prevailing uniform price will fail. The buyers will not pay
because they have perfect knowledge. There is no ignorance factor operating in the market. The
sellers do not charge a lower price due to ignorance. The buyers do not pay a higher price due to
ignorance. A uniform price prevails in the market. As regards the knowledge about the input
markets, the implicit assumption is that each firm has an equal access to the technology and the
inputs used in the technology.

4. Freedom to firms to enter or to leave the industry in the long run

Freedom of entry means that there are no barriers in the way of a new firm wishing to enter into
industry. Freedom of exit means no barriers in the way of a firm deciding to leave the industry.
Government rules, labour laws, loss of huge fixed capital etc. do not come in the way. This
ensures that no firm can earn above normal profits in the long run. Each firm earns just the
normal profits, Suppose the existing firms are earning above normal profits, Attracted by the
supernormal profits, the new firms enter the industry. The industry's output, i.e. market supply,
goes up. The price comes down. New firms continue to enter and the price continues to fall till
supernormal profits are reduced to zero. Now suppose the existing firms are incurring losses. The
firms start leaving. The industry's output starts falling, price starts going up, and all this continues
till losses are wiped out. The remaining firms in the industry then once again earn just the normal
profits. Only normal profit in the long run is the basic outcome of a perfectly competitive
market.

5. Perfect mobility of factors of production

The factors of production [land labour, capital ] are perfectly mobile. There is no geographical or
occupational restriction on their movement. The factors are free to move to the industry in which
they get the best price.

6. Absence of transportation costs:

In order to ensure uniform price in the market, it is assumed that transportation costs are zero. A
producer can sell his product at any place and a buyer can buy it from the palce he likes
7. Absence of selling costs;

selling costs refers to cost of advertisement of the product. I perfect comp. there are no selling
costs because of perfect knowledge amongst buyers and sellers.
There is no example of any commodity in perfect competition in real world due o unrealistic
features like perfect knowledge, no transportation costs, free mobility of factors, uniform
price. This type of market is a myth.
PURE OR PERFECT COMPETITION:
When only three fundamental features exist it is said to be pure comp.
a. large no. of buyers and sellers.
B. homogeneous product
c. freedom of entry and exit.
MONOPOLY
Monopoly refers to a market situation where there is a single seller selling a product which has no
close substitutes. For example, Railways in India.
FEATURES OF MONOPOLY:
1. Single seller
A monopoly is a market controlled by a single seller. The "mono" part of monopoly
means single. The "poly" part of monopoly means to sell. So monopoly, means a single
seller. A firm is considered a monopoly if it is the sole seller of its product. Its product
does not have close substitutes. It has some ability to influence the market price of its
product. However there are large number of buyers in the market.
There may be an individual, a group of partners or a joint stock company or state,
being the only source of supply for the goods or services with no close substitute. In
this market structure, the firm itself is the industry
2. BARRIERS TO ENTRY
Under a monopoly it is difficult for a new firms to enter the market to produce closely similar to
that of the monopolist. There are barriers to entry and some of the causes are which give a
monopolist a monopoly right.
CAUSES
Patent and copyright laws are a major source of government-created monopolies. At times, big
companies are engaged in research and development. They come up with new products or
new technologies. As a reward for their risk and investment in research, govt. grants them
patent rights.
This gives rise to monopolies.
1. Governments also restrict entry by giving a single firm the exclusive right to sell a particular
good in certain markets thru licensing. This also gives rise to monopolies.

2. An industry is a natural monopoly when a single firm can supply a good or service to an entire
market at a smaller cost than could two or more firms.This features allows a firm to earn
supernormal profits in long run.
3. Cartels also give monopoly right to producers. The firms agree among themselves to restrict
their total output to maximise joint profits.eg OPEC( organisation of petroleum exporting
countries formed in 1960, has led to monopoly in the world market for oil.

3. HOMOGENEOUS PRODUCT AND NO CLOSE SUBSTITUTE

A monopoly firm manufactures a commodity that has no close substitute and is a homogeneous
product. With the absence of availability of a substitute,the firm has no fear of competition from new
or existing firms,and the buyer is bound to purchase what is available at the tagged price. For instance:
there is no substitute for railways as the 'bulk carrier'. Thus, to be the sole seller, in the monopolistic
setup, a unique product must be produced.
So the monopolist has full control over supply and price of the product.
 4. FULL CONTROL OVER PRICE

In a monopoly market, restricted entry constricts competition and the monopolist exhibits full control over
the market conditions. The absence of competition allows the monopoly firm the opportunity to charge the
product as per his advantage,. Thus, a monopolist is a 'price maker' and not a 'price taker', wherein he
decides the price and the buyers have to accept it. Nevertheless, to evade the entry from new market
participants, the company needs to regulate the set product or service price.

5. PRICE DISCRIMINATION
Price discrimination can be defined as the 'practice by a seller of charging different
prices from different buyers for the same good or service'. A monopolist has the
leverage to carry out price discrimination as he is the market and acts as per his suitability.
When the same product is sold at different prices to different buyers Markets are sub –
divided into different demand elasticities and there is no interaction between different
buyers For eg. Electricity charges are different for domestic users and commercial users.

PRICE ELATICITY The demand for product sold by the monopoly firm or individual, is less price
elastic because of non availability of substitute. A monopolist can sell more if reduces price but
his demand curve will be less elastic. Dd curve would be steep and falling downwards .

Comparison between perfect competition and monopoly

Basis Perfect competition Monopoly

Meaning

Number of sellers Very large but no seller plays a Single seller has control over price
significant role and supply

Nature of product Homogeneous product Single product with no close

substitutes

Entry and exit Free and entry and exit Barriers to entry

price Price taker firm Price maker firm

Knowledge level Buyers and sellers have perfect Sellers and buyers do not have
knowledge perfect knowledge

Demand curve Parallel to X axis and perfectly Downward sloping and less elastic
elastic

MONOPOLISTIC COMPETITION
Important features of monopolistic competition
1. Existence of large number of firms:

The first important feature of monopolistic competition is that there is a large number of firms
satisfying the market demand for the product. As there are a large number of firms under
monopolistic competition, there exists stiff competition between them. These firms do not produce
perfect substitutes. But the products are close substitute for each other. For example lux soap, soft
drinks etc.
(2) Product differentiations:

By differentiation we mean the goods are made to appear somewhat different and superior to
those produced by other firms. The various firms under monopolistic competition bring out
differentiated products which are relatively close substitutes for each other. So their prices cannot
be very much different from each other. Various firms under monopolistic competitors compete with
each other as the products are similar and close substitutes of each other. Differentiation of the
product may be real or not. Real or physical differentiation is done through differences in materials
used, design, color etc. Difference is maintained in some physical or chemical composition of a
product or in the taste and appearance of that product Further differentiation of a particular product
may be linked with the conditions of his sale, courteous behaviour and fair dealing etc.
This is easily done with the help of attractive packaging; or some extra services are rendered. A
product can also be marketed as superior using local advantage. When products are differentiated
more buyers are likely to be attracted. Thereby the firm gains extra control over demand and
market conditions

This feature makes the market different from others. This feature gives monopoly feature to the
market .because of product differentiation ( difference in colour, size, brand name) no other firm
can make a product in same name.
(3) partial control over price

As the products are close substitutes of others any reduction of price of a commodity by a seller
will attract some customers of other products. Thus with a fall in price quantity demanded
increases. It therefore, implies that the demand curve of a firm under monopolistic competition
slopes downward and is more elastic and marginal revenue curve lies below it.

Thus under monopolistic competition a firm cannot fix up price but has influence over price. A firm
can sell a smaller quantity by increasing price and can sell more by reducing price. Thus under
monopolistic competition a firm has to choose a price-output combination that will maximize price.
(4) Freedom of entry and exit:

In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave the
industry. Lured by the profit of the existing firms new firms enter the industry which leads to the
expansion of output. But there exists a difference.Under perfect competition the new firms produce
identical products, but under monopolistic competition, the new firms produce only new brands of
product with certain product variation. In such a law the initial product faces competition from the
existing well- established brands of product.
AR CURVE

AR CURVE IS DEMAND CURVE OF MC MARKET if falls downward from left to right. It is more
than unit elastic, because demand responds more to change of price because of availability of
substitutes.

(5) Absence of firm's interdependence:

Under monopolistic competition each firm acts more or less independently. Each firm formulates
its own price-output policy upon its own demand cost.
(5) Non-price competition:

Firms under monopolistic competition incur a considerable expenditure on advertisement and

selling costs so as to win over customers. In order to promote sale firms follow definite -methods of
competing rivals other than price. They offer various schemes , free gift et to buyers.
Advertisement is a prominent example of non-price competition.

The advertisement and other selling costs by a firm change the demand for his product. The rival
firms compete with each other through advertisement by which they change the consumer's wants
for their products and attract more customers.
(6) Selling (Advertising) Cost:
Selling Cost (SC) is another outstanding feature of a monopolistic competitive market. This in the
form of advertisement expenditure. Selling Cost and Product Differentiation together enable the
producer to maintain some control over market conditions and influence the shape of the demand
curve, Whenever a product is differentiated it is necessary to inform buyers; and advertisement is
the only medium through which buyers can be told about superiority of that product.. So whenever
products are differentiated and advertised, the market becomes a monopolistic competition.

OLIGOPOLY
Oligopoly refers to a market situation in which there are a few firms selling homogenous of
differentiated products. For example automobile , cement, steel aluminium industry etc.
Features:
1. Few firms: under oligopoly, there are few large firms. The exact number of firms is not
known it may be 8 to 10. Each produces a significant portion of total output. For eg.
Market in automobiles in India is an oligopolistic market because there are a few producers.
There exists a severe competition among different firms and each firm try to manipulate
both prices and volume of production to outsmart each other.

2. Interdependence: interdependence means that action of one firm affect the

actions of other firms. A firm considers the actions and reactions of rival firms while
determining its price and output levels. A change by one firm in output or price evokes
reaction from other firms operating is the market. Therefore an individual firm must take into
account the probable reactions of its rivals before setting his price and output. This makes
the firm mutually dependent on each other for taking price and output decisions. Behavior
of oligopolistic is like behavior or chess players.
3. Barriers to entry: the main cause of a limited number of firms in oligopoly is the barriers
to entry of firms. For eg. A firm may require huge capital to enter the industry. It may be
extremely difficult for the new firms to arrange the funds. Patent right is another barrier.
The patent holder may give license only to few firms to produce the product. Availability of
crucial raw material is another barrier. Only those who are able to cross these barriers are
able to enter. as a result firms can earn abnormal profits in the long run.
4. Non price competition: when there are a few firms they are normally afraid of
competing with each other by lowering the price. It may start price war and the firms who
start the price war may ultimately loose. Avoiding price war the firms use other ways of
competition like advertising, customer care, free gifts, etc. such a competition is called
non price competition. There exists price rigidity it means price tends to stay fixed
irrespective of changes in demand and supply conditions.

5. Selling costs: due to severe competition and interdependence of the firms, various
sales promotion techniques are used. Oligopoly firm spends much on advertisement
and customer services in order to promote sales of its product,
6. Group behavior: under oligopoly, there is complete interdependence among different
firms. So price and output decision of particular firms directly influence the
competing firms. Instead of independent price and output strategy, oligopoly firms prefer
group decisions that will the interests of all the firms.

7. Nature of product: under oligopoly a firm may produce homogenous of

differentiated product. If they produce homogeneous products it is called perfect
oligopoly or pure oligopoly. For eg. Cement industry, steel industry
If the firms produce differentiated products it is called imperfect or differentiated
oligopoly. Eg. Automobile industry.

Demand curve of an oligopolistic: demand curve of an oligopolistic is not

defined or has a kink , reflecting the following behavior: if a firms reduced its price it
expects that the rival firms will also follow the suit, matching the price cut, so demand in the
market increases the share of the firm remains the same. Hence the demand curve will be
less elastic. On the other hand if firm decides to raise the price, the rival firm will not follow
the suit, resulting into considerate loss of sale and demand curve will be more elastic.
Firms demand curve show different elasticities that is why it is said that in this type of
market demand curve of the firms is not defined.
Difference between collusive and non collusive oligopoly:
Collusive:
 a few firms in the market take price and ouptput decisions collectively collusive
oligopoly occurs.
 The firms form a cartel.
 The cartel decides the price at which all the firms have to sell the product.
 Like wise the output each firm is expected to produce is decided by the cartel.
 The cooperation may or may not be written agreement.
Non collusive:
 When the oligopolistic firms competes with each other, it is called non-collusive
oligopoly.
 It is also called non co-operative oligopoly, because the firms independently
determine the price and output of their products.

Duopoly: when there are only two firms it is called duopoly. It is an extreme
case of oligopoly. Eg aircraft producer’s airbus and Boeing