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ntroduction to Market
Structures & Price
Discrimination

#evenue Analysis
T# P* Q
A# T#Q P
Demand curve of the consumer is the A# curve
from the seller's point of view since price paid by
the consumer is the revenue of the seller.
M# T#
n
- T#
n-1 divided by change in Output
Shape of T# A# and M# curves change
according to market situation

#evenue Analysis
T# P* Q
A# T#Q P
Demand curve of the consumer is the A# curve
from the seller's point of view since price paid by
the consumer is the revenue of the seller.
M# T#
n
- T#
n-1
Shape of T# A# and M# curves change
according to market situation

Market Features - Perfect

competition
Large no of buyers and sellers buying and
selling homogeneous products
Uniform prices
Producer can sell any quantity of output at
the market price.
Perfect resource Mobility
Ease of entry & exit

#evenue Structure under Perfect

competition
Quantity Price
(#s)
T# A# M#
1 100 100 100 100
100 00 100 100
100 00 100 100
100 00 100 100
100 00 100 100

#evenue Structure under Perfect

competition
PA#M#
Quantity
P
r
i
c
e

#
e
v
e
n
u
e
T#

#evenue Structure under Perfect

competition
Demand curve is perfectly elastic
Price does not fall if one more unit is sold
Therefore P(A#) remains the same when
one more unit is sold and so A#M#- so
M# and A# curves coincide
Horizontal line parallel to axis indicates
that P or A# is constant irrespective of
quantity sold

Perfect Competition
Large no of undifferentiated buyers and sellers-
each one is so small as to be insignificant to
influence the market--price takers
Homogeneous products- each competitor offers
or seeks exactly a similar thing as others
The seller is a price-taker
No barriers to entry and exit- survival of the
fittest: Firm will shut down where AVCA#. At
any price lower than the AVC firm will have to
shut down

Perfect Competition
Markets must be well organised and continuous
and everyone has information (knowledge) on
market condition product and price
Market prices must be flexible to keep
responding to changing conditions of supply and
demand
No transport cost
Perfect mobility of factors of production (raw
materials labour and capital)-this results in
factor price equalisation.
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Perfect Competition
No Government interference: No rationing
administered prices subsidies etc.- Underlying
presumption that free market operates in social
interest- "invisible hand and self-regulatory
mechanism- it provides an effective check on the
power of the sellers safeguards consumer
against exploitation and makes it unnecessary
for the State to intervene by regulating prices
and production in order to protect the consumer
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Perfect Competition
Key Iessons of perfect competition for
managers
mportant to enter the market as far ahead of the
competitors as possible-when supply is low and
price is high- this requires entrepreneurial skill
A firm earning an economic profit (as
distinguished from normal profits) cant afford to
be complacent because economic profit will
attract new entrants
Only way for a firm to survive is to keep costs as
low as possible
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Perfect Competition
With growing globalisation new
competitive cost pressures are being felt
by firms around the world- ndian
companies have the advantage of low
cost labour but disadvantage of
technology lag
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#evenue under mperfect
competition
Quantity T# A# M#
1 1 1 1
0 1 1
1 1
1 10
0 1
11
0 10

0

1
#evenue Structure under mperfect
competition
Under imperfect competition producer
faces a downward sloping demand curve-
He needs to lower the price to attain higher
sales
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#evenue Structure under mperfect
competition
M# is positive as long as T# is increasing
M# becomes negative when T# declines
When quantity sold is increased from to
10 units T# declines from #s. to #s.
0 and M# turns negative
A# declines as additional units of product
are sold
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#evenue Structure under imperfect
competition
M#
A#
T#

O
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Monopoly
Only one seller of a particular good or service
#ivalry from producers of substitutes is so remote as to
be insignificant: cross elasticity of demand is zero
Monopolist is a price setter- strength of a monopolist's
power depends on how much he can raise the price
without losing all his customers- this depends on
elasticity of demand which in turn depends on
availability of substitutes
conditions are necessary to make a monopolist strong:
1) Gap in the chain of substitutes and ) possibility of
securing control over all the substitutes
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Causes and Forms of Monopoly
Barriers to entry-
Legal: Emerges as a result of statutory regulation by
government: Copy right trade marks government
regulation licence tariffs and non-tariff barriers against
import of goods
Technical; Arises when the technical know-how is
available with only one person
Natural: f a single firm acquires control over supply of
raw materials or natural resources such as minerals Oil
well in a particular area
High costs of capital investment or economies of scale
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Causes and Forms of Monopoly
Joint Monopoly: Through voluntary agreement
business companies jointly acquire monopoly
power. e.g. Trusts syndicates cartels
Public Monopoly: Created for the welfare of the
public- e.g. public utilities like water supply
electricity railways telephones
Private Monopoly: Owned an operated by
private individuals or organisations- objective is
profit maximisation
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Causes and Forms of Monopoly
Simple Monopoly: Charges uniform or
single price for a product to all the
consumers- no discrimination between
buyers or uses.
Discriminating Monopoly : Act of selling
the same commodity produced under
single control at different prices to
different buyers or different uses.
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Discriminating Monopoly Price
Discrimination
forms:
1
st Degree:
Different rate for every unit of
output. Monopolist forces every
consumer to part with his entire
consumer surplus- discrimination
between buyers is more common
than discrimination between units of a
homogeneous good

nd degree Discrimination

nd
Degree
:
Buyers are divided into
different groups and then different rates
charged for different blocks or groups:
here consumers enjoy a part of the
consumer surplus and monopolist is also
able to get a part of the surplus; eg.
electricity charges
Taxi fare a certain amount or the 1st km
then different for further units

rd
degree Discrimination

rd
degree: Most common type-Seller divides his
buyers into sub-markets and charges a different
price for each market- Dumping is an example:
High price in domestic market and low in
international market.
#easons: To dispose off surplus; to remove
rivals; to take advantage of increasing returns to
scale; to create new demand abroad; because
demand elastic in international market he has to
reduce price

onditions of Price
Discrimination
onditions of Price Discrimination ( When is
Price discrimination possibIe?)
1. Consumers are unaware of the difference in
prices charged
. Price difference so small that consumers don't
bother
. Price illusion irrationality
. Markets are situated far from one another and
so it is expensive to transfer goods from one
market to another

onditions of Price
Discrimination
) When elasticities of demand in the two
markets are different: higher price for low
elasticity market and lower price for high
elasticity market. Why?
) Direct personal services such as those of
doctors and lawyers where resale is not
possible
) Legal sanction provided by government:
e.g. lower prices in army canteen

Forms of Price discrimination

PersonaI Discrimination: Occurs when
different prices are charged to different
consumers doctors and lawyers may charge
different fees for the rich and the poor
LocaI Discrimination: Lower prices in one
locality and higher in another. e.g. dumping by
charging higher prices in domestic market and
lower prices in foreign markets
Trade Discrimination: Charging different rates
based on use e.g. electricity charges for
domestic industrialagricultural uses

orms of Price Discrimination

QuaIity Discrimination: Hard cover
editions being sold at higher prices than
paper back editions of books; business
class travel vs economy class in air travel
Time Discrimination: Different charges
for the same commodity at different points
of time- off-season air tickets; happy hours
in restaurants

Try Answering these Questions

What is the cross elasticity of demand for a monopolist's
product?
There is only one hospital in Mumbai with an advanced
equipment for diagnosis of a certain disease. This is an
example of ______________ monopoly.
BEST and ndian #ailways are examples of
_________monopoly.
Downloading music on internet is an example of violation
of -------------------------- monopoly.
powerful traders get together and control supply of
vegetables in Mumbai. This is ------------------------------
monopoly.

Monopolistic Competition
'Most economic situations are composites of
both competition and monopoly'-
Chamberlin. n reality monopoly and
competition are not mutually exclusive but
markets have both elements in differing
degrees
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Characteristics of Monopolistic
Competition
Large no of firms/ seIIers -Consequently no
individual has any significant control over the
market
Absence of interdependence: Since the number
is large and size of each firm is small no firm
can influence or is influenced by others in the
market.
Example of FMCG product market
reedom of entry: No barriers to entry- this leads
to occurrence of only normal profits in the long
run
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Characteristics of Monopolistic
Competition
Product Differentiation: ore of
monopolistic competition- Different firms
produce similar but not homogeneous
products. t is because of product
differentiation that firms enjoy some
monopoly power i.e. power to control the
price in a narrow circle but in the wider
circle the firm faces competition from rival
producers. Firms in effect are competing
monopolies

Characteristics of Monopolistic
Competition
$eIIing osts: Expenditure incurred on
changing the demand and preference of the
consumers - penditure on advertising,
promotion, displays, salaries of salesmen, free
samples etc.-
No need or role for selling costs in monopoly of
perfect competition
. Under monopolistic competition firms compete
with each other mainly not on the basis of price
but on the basis of non price elements. Product
differentiation and selling costs are known as
non-price competition

Oligopoly: Definition and Features

Few sellers producing homogeneous or
differentiated products
Automobiles steel consumer electronics
ew seIIers: Naturally each seller has a
sizeable share of market-
Iose interdependence decision of a single
firm to expand or contract output affects entire
market- moves and counter moves- need to
predict and analyse every possible reaction of
rivals before a firm takes decisions

Oligopoly: Definition and Features

ndeterminate demand curve: because
of extreme interdependence
Price Rigidity Price remains stuck at a
certain level-No desire for a departure
from prevailing price in either direction-
price cutting will be followed by rival but
price hike may not be and hence "sticky
prices

Comparison of different Market

Structures
Feature Perfect
competition
Monopoly Monopolisti
c
competition
No of
sellers
Many One Large
Nature of
goods
Homogene
ous
Homogene
ous
Differentiat
ed
Entry Free Barriers Unrestricte
d
Degree of
monopoly
power
Zero Absolute Limited

Comparison of different Market

Structures
Feature Perfect
competition
Monopoly Monopolisti
c
competition
Cost
Elements
Production
cost
Production
cost
Production
cost+
Selling cost
Long run
Profits
Normal Super-
normal
Normal
Nature of
Demand
Elastic nelastic #elatively
inelastic

Feature Perfect
competition
Monopoly Monopolisti
c
competition
Pricing Price taking Price-
making:
i) Uniform
ii) Price
discriminati
on
Price-
making:
Uniform
price

Practice Questions mprove

Conceptual Clarity
Product differentiation is an important feature of
__________________ competition
(Perfectmonopolistic)
Duopoly is a market form with just ---------------
sellers (two few)
f market price is more than the equilibrium price
it indicates that --------------- is more than ----------
-(Supply demand)
Break-even point is a _________________
situation (No profit-no loss maximum profit)

Practice Questions - Practice

Questions
Price elasticity of demand under perfect
competition is ________
Under perfect competition __________ is equal
to A#M#. (Price Total #evenue)
n the __________ period both the fixed and
variable factors of production change. (Short
Long)
Mergers acquisitions and take-overs are
common under the _________________ market
structure. (oligopolistic monopolistic)
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Practice Questions - Practice
Questions
--------------- cost increases continuously with an increase
in production. (Fixed variable)
There is a dichotomy of costs into fixed and variable in
the _________ run. (short long)
--------------------Cost has to be incurred even if production
is nil. (Fixed variable)
The ____________ run cost curve is also known as
planning curve. (long short)
#ent is a _______________ cost (Fixed variable)
Self-owned resources used in business are called
___________________ costs. (imputed explicit)
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Another Classification of Cost-
Good to Know
Private cost: Costs incurred by the private
producer firm during the process of production.-
includes both implicit and explicit costs
Social cost: Costs incurred by society as a whole
as a result of the production process undertaken
of the private firm eg. water air noise pollution
congestion traffic jam development of slums