Unit-IV : Forms of Market Structure
Concept
Market structure refers to the organizational characteristics and competitive environment of a market. It determines the behavior of firms and their ability to influence market prices and outcomes. The key features of market structure include the number of buyers and sellers, the nature of the product, and the degree of competition.
Features of Market Structure
Number of Firms: The count of sellers in the market.
Type of Product: Whether the products are homogeneous or differentiated.
Entry and Exit: The ease or difficulty of entering or exiting the market.
Control Over Price: The extent to which firms can influence the price.
Degree of Competition: The level of competition among firms.
Forms of Market
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Perfect Competition
Meaning
A market structure where a large number of small firms sell identical products, and no single firm can influence the market price.
Characteristics
Large Number of Buyers and Sellers: Many participants on both sides of the market.
Homogeneous Product: Products are identical and perfect substitutes.
Free Entry and Exit: No barriers to market entry or exit.
Perfect Knowledge: Buyers and sellers have full information about prices and products.
Price Taker: Firms accept the market price as given.
Price Determination
Short Run
Firms may earn supernormal profits, normal profits, or incur losses.
Price is determined by the intersection of market demand and supply.
Individual firm’s output is decided by equating marginal cost (MC) to marginal revenue (MR).
Long Run
Firms earn only normal profits as new firms enter or exit the market.
Price is determined at the point where long-run average cost (LRAC) equals the price.
Effects of Change in Demand and Supply on Equilibrium Price
Increase in Demand: Leads to higher equilibrium price and quantity.
Decrease in Demand: Leads to lower equilibrium price and quantity.
Increase in Supply: Leads to lower equilibrium price and higher quantity.
Decrease in Supply: Leads to higher equilibrium price and lower quantity.
Monopoly
Meaning
A market structure where a single firm controls the entire market, producing a unique product with no close substitutes.
Characteristics
Single Seller: One firm dominates the market.
Unique Product: No close substitutes.
Barriers to Entry: High barriers prevent new firms from entering.
Price Maker: The firm has control over the price.
Price Determination & Equilibrium
Short Run
Price and output are determined by equating MC to MR.
The firm may earn supernormal profits, normal profits, or incur losses.
Long Run
Due to high entry barriers, the firm can sustain supernormal profits.
Discriminating Monopoly
A monopoly where the seller charges different prices for the same product to different buyers without cost justification.
Dumping
A form of price discrimination where a firm sells its product at a lower price in foreign markets than in its domestic market.
Monopolistic Competition
Meaning
A market structure where many firms sell similar but not identical products, allowing for product differentiation.
Characteristics
Large Number of Sellers: Many firms in the market.
Product Differentiation: Products are similar but not identical.
Free Entry and Exit: Low barriers to market entry or exit.
Non-Price Competition: Firms compete through advertising, branding, etc.
Price Determination & Equilibrium
Short Run
Firms may earn supernormal profits, normal profits, or incur losses.
Price is determined by equating MC to MR.
Long Run
Firms earn only normal profits as new firms enter or exit the market, reducing excess profits.
Oligopoly
Meaning
A market structure characterized by a few large firms that dominate the market.
Characteristics
Few Sellers: A small number of large firms.
Interdependence: Firms’ decisions are influenced by the actions of competitors.
Barriers to Entry: High barriers limit new entrants.
Non-Price Competition: Firms focus on advertising, branding, etc.
Types
Collusive Oligopoly: Firms cooperate to set prices and output.
Non-Collusive Oligopoly: Firms compete independently.
Price and Output Determination
Determined through models like the kinked demand curve, price leadership, or collusion.
Prices are relatively stable due to interdependence.