Market Structure and Competition: BITS Pilani

Market Structure and
Competition
Rahul Pratap Singh Kaurav
BITS Pilani +91.9826569573
rsinghkaurav@gmail.com
Work Integrated Learning
Programmes Division
My expectations
• Replay prerecorded digital content before class
• Attend all “live” classes else replay recordings
• Review the relevant chapters from textbook before and after class
• Do the homework and assignments in a timely manner
• Make sure you have access to laptop/ computer with Excel; we will need it
for experiential learning components in subsequent classes. (Excel 2010 or
later versions preferred.)
Thursday, October 3, 2019 Dr. Rahul Pratap Singh Kaurav, PIMG 2 BITS Pilani, WILPD
BITS Pilani
Programmes Division
Todays Agenda…
Agenda
Module 8: Market Structures and Competition

– Session 8:
• Perfect Competition
• Monopoly and its setting
• The perfect competition versus pure monopoly
Chapter 7, 8, and 9 of your text book
Typologies of Market Structure
Number of buyers
One A few Many
Number suppliers
One Bilateral Monopoly

Monopoly
A few oligopoly
Monopolistic/
Many monopsony
Perfect
5
Competition
Market Structure and Pricing
Market Morphology
 Markets may be characterized on the basis of:

 Number, size and distribution of sellers in any market
 Whether the product is homogeneous or differentiated
 Number and size of buyers:
 large number of buyers but small size of individual buyer, the market will be evenly balanced between buyers
and sellers.
 small number of buyers but their size is large, the market is driven by buyers’ preferences.
 Absence or presence of financial, legal and technological

constraints
 Thus we have:
 Perfect Competition
 Monopoly  Monopolistic competition
 Oligopoly
Morphology Cont…
Type of market Number Nature of Number Freedom of Examples
of firms product of buyers entry and exit
Perfect Very Large Homogeneous Very Unrestricted Agricultural

competition (undifferentiated) Large commodities,
unskilled labour
Monopolistic Many Differentiated Many Unrestricted Retail stores,
competition FMCG
Oligopoly Few Undifferentiated Many Restricted Automobiles,
or differentiated computers,
universities
Monopoly Single Unique Many Restricted Indian Railways,
Microsoft, Intel
Monopsony Many Undifferentiated Single Not applicable Arms
or differentiated manufacturers
and Defense
industry
“Everything is worth what its purchaser will pay for it”
You can make even a parrot into a learned political

economist -- all it must learn are the two words “supply”
and “demand.”
A cynic is a man who knows the price of everything and

the value of nothing.
- Oscar Wilde
Market Structure forms: Competitiveness
Perfect Competition
More Competitive
Less Competitive
Monopolistic
Competition
Oligopoly
Monopoly
Let us Case: Betting the Planet
Industry Supply and Demand
Total Industry demand

SURPLUS
Price of the product ($)

ΣSi
 Total Industry supply
 Equilibrium Point Pe
 Surplus SHORTAGE ΣDi
Qe
 Shortage Quantity sold or bought (units)
The Basic of Supply and Demand
Demand curve
Supply curve
Equilibrium price
Shift in supply and demand
The intersection of supply and

demand determines the equilibrium Qd = 13-0.2P
price ($25) and quantity (8000 pairs)
Qs = 0.4P-2
Perfect competition
Large number of buyers and sellers

Homogeneity in the products
Free enterprise
Perfect knowledge
Free entry and exit
Example: Stock market
Normal profit is that necessary for the firm to be willing to
produce its product over the long run, and is considered a
cost of production
The features of Perfect Competition
Perfect competition may be defined as that market where infinite

number of sellers sell homogeneous good to infinite number of buyers
while buyers and sellers have perfect knowledge of market conditions
 Features
 Presence of large number of buyers and sellers
 Homogeneous product
 Freedom of entry and exit
 Perfect knowledge
 Perfectly elastic demand curve
 No governmental intervention
 Price determined by market and firm is a price taker.
Perfect Competition: Stock market
The market for stocks traded on the stock exchanges
The price of a particular stock is determined by the market forces
Individual buyers and sellers of the stock have an insignificant effect
All stocks within each category are more less homogeneous
Information on prices and quantities traded is readily available
Price of a stock-reflects all the publically known information about the present and
expected future profitability of the stock
Equilibrium Price and demand level
faced by a perfectly competitive firm
Perfect Competition: Price
Determination
QD  625  5 P QD  QS QS  175  5 P
625  5P  175  5P
450  10P
P  $45
QD  625  5 P  625  5(45)  400
QS  175  5P  175  5(45)  400
Lets Play 1
Demand is given by QD = 100 – P and supply by QS = .5P – 20. Equilibrium

price and output under perfect competition are
a) P = $60 and Q = 10 units.
b) P = $80 and Q = 20 units.
c) P = $70 and Q = 30 units.
d) P = $100 and Q = 30 units.
Lets Play 1
Demand is given by QD = 100 – P and supply by QS = .5P – 20. Equilibrium

price and output under perfect competition are
a) P = $60 and Q = 10 units.
b) P = $80 and Q = 20 units.
c) P = $70 and Q = 30 units.
d) P = $100 and Q = 30 units.
Monopoly
The earnings of many in the hands of one.
~Eugene Debs
Monopoly
Single seller and many buyers

No close substitutes for product
Significant barriers to resource mobility
– Control of an essential input
– Patents or copyrights
– Economies of scale: Natural monopoly
– Government franchise: Post office
Features of monopoly
 Single seller
 The entire market is under control of a single firm.
 Single product
 A monopoly exists when a single seller sells a product which has no
substitute or, at least, no close substitute in the market.
 No difference between firm and industry
 There is a single firm in the industry
 Independent decision making
 Firm is regarded as a price maker
 Restricted entry
 Existence of barriers leads to the emergence and/or survival of a
monopoly
Barriers to Entry
Economies of Scale
Capital requirements (Chemical, Pharma, electronics, automobiles, defence, oil
refining, deep-sea drilling)
Pure quality and cost advantages (Intel, Wall-mart)  Coca-Cola
Product differentiation (Software industry – Switching cost)
Control of resources (DeBeers – Diamond)
Patents, copyrights, and other legal barriers (Publishing, Toool designing)
Strategic barriers (Reliance Jio, Android)
Types of Monopoly
 Legal Monopoly
 Created by the laws of a country in the greater public interest.
 Economic Monopoly
 Created due to superior efficiency of a particular player.
 Natural Monopoly
 Formed when the size of the market is so small that it can
accommodate only one player.
 Regional Monopoly
 Geographical or territorial aspects also help in creation of monopolies.
The Social Costs of Monopoly
MC reflects the marginal
cost of the resources
needed.
The triangle ABC roughly

measures the net social
gain of moving from 2,000
units to 4,000 units (or the
loss that results when
monopoly decreases output
from 4,000 units to 2,000
units). Inefficiency and Consumer Loss
Price and Output Decisions in Short Run
Price, AR>AC
Revenue, MC
 In order to maximize profit a Cost
monopoly firm follows the rule of PE B AC
MR=MC when MC is rising.
 A monopoly firm may earn A
supernormal profit or normal E AR
profit or even subnormal profit in MR
the short run. O QE Quantity
 In the short run, the firm would
reap the benefits of supplying a
product which unique. Firm maximizes profit where
(i) MR=MC (ii) MC cuts MR from below, at
point E.
Supernormal profit= AEBPE,
Thursday, October 3, 2019
since price (AR) > AC
Dr. Rahul Pratap Singh Kaurav, PIMG 27 BITS Pilani, WILPD
Price and Output Decisions in Short
Run
Price,
Revenue, AR=AC Price, AR<AC
Cost Revenue,
MC Cost MC AC
AC
A B
PE B PE C
E
E AR
AR MR
MR
O QE O QE Quantity
Quantity
Firm makes normal profit. Firm makes loss.

Centralized Cartels
• Assuming the case of a cartel with two

Price, firms facing same MR and AR
MCB ∑MC
Cost, • MCA = Firm A’s marginal cost
Revenue MCA
• MCB = Firm B’s marginal cost
• ∑MC = industry marginal cost
P • OQ = profit maximizing output because
(MR=∑MC).
• OQA = A’ output
• OQB = B’s output
AR=D
MR • OQ=OQA + OQB; OQA > OQ B
• OP = price at which both firms can sell their
O
QB QA Q Quantity output. Price will be determined by
summation of all firms’ costs and demand.
• In a cartel an individual firm is just a price
taker.
Market Sharing Cartels
• Firms decide to divide the market
share among them and fix the price
Price, independently.
Cost,
Revenue • All firms have the same cost functions
MC AC because they are producing a
homogenous product but have different
PA demand functions.
PB • Due to different demand functions, at
equilibrium total output = OQA+ OQB,
ARA where OQA> OQB.
MRA • The quantity of output produced and
ARB
sold would depend upon the terms of
MRB
agreement among the firms in the
O cartel.
QB QA Quantity
Factors Influencing Cartels
• Number of firms in the industry: Lower the number of firms in the

industry, the easier to monitor the behaviour of other members.
• Nature of product: Formed in markets with homogenous goods
rather than differentiated goods, to arrive at common price. But if
goods are homogeneous, an individual firm may gain larger market
share by cheating, i.e. by lowering the price.
• Cost structure: Similar cost structures make it easier to coordinate.
• Characteristics of sales: Low frequency of sales coupled with huge
amounts of output in each of these sales make cartels less
sustainable, because in such cases firms would like to undercut the
price in order to gain greater market share.
– with large number of firms and small size of the market some firms
may deviate from the cartel price and thus cheat other members.
Summary
Points of Comparison Perfect Competition Monopoly

Relationship between AR AR = MR AR > MR
and MR
Profit in the long run Normal profits Supernormal profits
Number of sellers Large Single
Barriers to entry and exit Free entry and exit Strong barriers
Control on Price The seller is only the price Monopolist is the price
taker maker
Nature of demand curve Perfectly elastic Inelastic
Relationship between firm Each firm is a part of the Firm and industry are one
and industry industry and the same
BITS Pilani
Programmes Division
Agenda… for our next Class

Agenda
– Session 9:
• What is monopolistic competition?

• How prices are determined?
• Oligopoly model
Chapter 7, 8, and 9 of your text book
BITS Pilani
Programmes Division
Thank you ! 
I can be reached at rsinghkaurav@gmail.com

Market Structure and Competition: BITS Pilani

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Market Structure and

• Replay prerecorded digital content before class

• Attend all “live” classes else replay recordings

• Do the homework and assignments in a timely manner

Module 8: Market Structures and Competition

Chapter 7, 8, and 9 of your text book

One Bilateral Monopoly

 Markets may be characterized on the basis of:

 Absence or presence of financial, legal and technological

Perfect Very Large Homogeneous Very Unrestricted Agricultural

You can make even a parrot into a learned political

A cynic is a man who knows the price of everything and

Total Industry demand

Price of the product ($)

Shift in supply and demand

The intersection of supply and

Large number of buyers and sellers

Perfect competition may be defined as that market where infinite

The market for stocks traded on the stock exchanges

The price of a particular stock is determined by the market forces

Individual buyers and sellers of the stock have an insignificant effect

All stocks within each category are more less homogeneous

Information on prices and quantities traded is readily available

Demand is given by QD = 100 – P and supply by QS = .5P – 20. Equilibrium

Demand is given by QD = 100 – P and supply by QS = .5P – 20. Equilibrium

The earnings of many in the hands of one.

Single seller and many buyers

The triangle ABC roughly

Firm makes normal profit. Firm makes loss.

• Assuming the case of a cartel with two

• Number of firms in the industry: Lower the number of firms in the

Points of Comparison Perfect Competition Monopoly

Agenda… for our next Class

• What is monopolistic competition?

Chapter 7, 8, and 9 of your text book

I can be reached at rsinghkaurav@gmail.com

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