Market Structure
By Rupal Jain
Wikipedia defines Market Structure (also known as Market Form)
as the state of a market with respect to competition.
The major forms of Market Structure wit its characteristics are as follows:
1. Monopoly: One Seller and many buyers. No close substitutes of products. Firms and Industry are same. Price and Quantity are changeable. Entry of new firm is restricted. Ownership of strategic raw materials, exclusive knowledge of production techniques with one firm, patent rights, economies of scale, government policies, high entry cost are the main causes of monopoly. A Monopolistic firm/Industry attains maximum profit when it meets two conditions: a) MR=MC, where MR is Marginal Revenue and MC is Marginal Cost. b) Slope of Marginal Revenue should be less than the slope of marginal cost curve. A monopolist can charge different Prices for the same goods known as Price Discrimination which is classified in 3 degrees: I. Charging the maximum Price possible for each unit of output. II. Pricing based on quantities of output purchased by individual consumer. III. Separating consumers or markets in terms of their price elasticity of demand.
2. Monopsony: Complementary form of Monopoly. One Buyer and Large number of competitive Sellers. Other Conditions same as Monopoly.
3. Bilateral Monopoly: One Buyer – One Seller. Single Buyer and single seller individually fixes the prices. A monopoly seller faces a monopsony buyer.
4. Monopolistic Competition: Concept introduced by Prof. Chamberlin in his famous book “The Theory of Monopolistic Competition.” Many Sellers selling differentiated products in the market. Products are close substitutes but not perfect substitutes for the product of competitive firm. Each firm satisfies a small share of market demand. Entry of new firm is possible. Products can be differentiated in the form of Product Quantity, Services, Location/Accessibility, Advertising and Packaging. Product Differentiation may be in the form of Features, Quantity or Quantity. The firm maximizes Profit when Marginal Revenue equals Marginal Cost.
5. Oligopoly: Few dominating Sellers and sellers are interdependent. Rival’s reaction when selecting prices, output goals, advertising budgets and other business policy is taken into consideration.
Products may be :
a) Homogenous (Pure Oligopoly)
b) Heterogeneous (Differentiated Oligopoly). Entry of new seller is difficult or impossible. Change in the prices of output by single firm affects the profit of all the firms. If members of the group compete with one another its called “Non Collusive Oligopoly”
If the members come to an understanding among themselves and form a general body to promote their common interest it is called “Collusive Oligopoly” Cartels refer to direct agreements among competing oligopolists with the aim of reducing uncertainty. The aim of the Cartel is the maximization of joint profits. The Theory of Games is an ideal method for analyzing choices and options when the participants in the market are independent
6. Oligopsony: Complementary form of Oligopoly. Few Buyers and Large number of Sellers. Other Conditions same as Oligopoly.
7. Duopoly: Two Sellers and Large number of Buyers. Products are Homogenous. Other Conditions same as Oligopoly.
8. Perfect Competition: Large number of Buyers and Sellers. No participants can influence Price’s. Free flow of information without any barriers to entry. Technical Characteristics, Services Associated with its Sales and Delivery of Products are Homogenous. Entry and Exit of Firms is free from the Industry. An Individual firm is a Price Taker.
For the firm Revenue: P=AR=MR, since Price is constant and the firm is Price Taker where AR is Average Revenue, P is Price and MR is Marginal Revenue. To maximize Profit the firm adjusts the level of output for which two conditions must be fulfilled: a) MR must be equal to Marginal Cost of Production. b) Marginal Cost of Production must be increasing, Thus, P=MR=AR=MC.
When market Price equals minimum possible average variable cost, losses at output for which price equals marginal cost are the same as fixed cost. If a price falls below minimum possible average variable cost, the firm shuts down because operating losses would then exceed fixed cost.
Allocative Efficiency is a condition achieved when resources are allocated in ways allowing the maximum possible net benefit from their use. Pareto Efficiency is a situation when one individual makes a better off by making another worse off.
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