Understanding Market Structure and Competition Models

1. Factors Determining Market Structure: • No. of independent sellers (large, few, two, one) • Seller Concentration (Non-existent, low, medium, high) • Product Differentiation (Homogeneous and perfect substitutes), close substitutes, slightly differentiated, having no substitutes) • Condition of Entry (Free, Difficult but not impossible, impossible or prohibited by law)

2. Models of Market Structure • 1.Perfect Competition • 2.Imperfect Competition • -Monopolistic Competition • -Oligopoly • -Duopoly • 3.Monopoly

3. The Limiting Cases of Market Structure: • Perfect Competition and Monopoly

4. Perfect Competition: Ideal Form of Market Structure Characteristic Features: • Many sellers and buyers • Seller concentration is non- existent • Products are homogeneous/ are perfect substitutes • Entry and exit is free • Buyers- sellers are fully informed • Perfect factor mobility between firms and industries • There is no scope for uncertainties in the future as the buyers and the sellers have perfect foresight about the future changes in prices and output

5. Under perfect competition, every individual seller and buyer is a price taker and not a price maker. • AR and MR are constant and equal at all levels of output and AR=MR • Position of individual firms horizontal demand or AR curve is determined by the market equilibrium price • Market equilibrium price is the price at which total market demand = total market supply

6. In most free market economies, PC is an exception and not the rule. Majority firms operate under conditions of oligopoly or monopolistic competition PC shows what the ideal market structure can be It serves as a reference point or benchmark We come to know how imperfect markets in the real word are !

7. Monopoly • Monopoly means a market where a single firm controls the entire supply of a product which has no close substitutes. • Distinction between firm and industry is irrelevant in the case of monopoly • It has power to control price of its products • If demand is the same, firm can rise the price as much as it wishes by reducing out put • Monopolist is price maker

8. What gives monopoly power ? • Being the only producer • + • 2. Unavailability of close substitutes

9. Learner Index It is used to measure monopoly power Monopoly power of a firm = (P-MC)/ P Where P = Price MC = Marginal Cost Under PC, Monopoly power of a firm is zero because P = MC

10. Criteria for determining existence of monopoly: • Largest producers controls at least 75 % • of total output • Large Number of firms contribute to the remaining 25 % output • Whether any of the minor firms supply around 10 % of output

11. Monopolistic Competition: The Chamberlin Model M C is a form of market structure in which many firms supply products that are slightly differentiated from the point of view of buyers. Products are close but not perfect substitutes because buyers do not regard them as identical

12. Each firm is sole producer of a brand/product It is a monopolist in this sense But as various brands are close substitutes, these producers are involved in keen competition Product differentiation is real or imaginary Real differentiation Eg. Differences in quality such as shape, colour, flavour, packing, after sale service etc.

13. Imaginary differences Eg. Buyers are made to imagine that such differences exist and are important for ex., a detergent with lemon, toothpaste with salt, AC with bio-filter etc. Due to product differentiation each firm has some degree of control over price Buyers develop brand loyalty

14. Basic characteristics of Mon Comp. • Large no of buyers and sellers • Seller concentration is insignificant • Entry and exit are free • There is P D

15. Supernormal profits attract new firms. • No. of firms goes up • No. of brands goes up • Market share of each firm decline

16. Cartels When oligopoly firms find it advantageous to co-ordinate their behaviour through explicit agreement, cartels are formed Cartels become possible as number of firms is small Cartels decide on common price policy to avoid rivalry For successful cartels cost conditions of firms have to be similar

17. Welcome