MARKET STRUCTURES Amity Business

School

• PERFECT COMPETITION
• MONOPOLY
• MONOPOLISTIC COMPETITION
• OLIGOPOLY
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School

Perfect competition
 Amity Business
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Perfect competition
Characteristics of a perfectly competition marke

• many buyers and sellers

– so no individual believes that their
own action can affect market
price
• firms take price as given
– so face a horizontal demand curve
• the product is homogeneous
• perfect customer information
• free entry and exit of firms 3
 Amity Business
The supply curve under perfectSchool
competition (1)
• Above price P3
rs
(point C), the
SMC firm makes
profit above the
SATC
opportunity cost
P3
C of capital in the
P1 SAVC short run
A
• At price P3, (point
C), the firm
Q 1 Q 3 Output
makes NORMAL
PROFITS 4
 Amity Business
The supply curve under perfectSchool
competition (2)
• Between P1 and P3,
(A and C), the firm
SMC makes short-run
losses, but
SATC
remains in the
C market
P3
P1 SAVC • Below P1 (the SHUT-
A
DOWN PRICE), the
firm fails to cover
Q 1 Q 3 Output
SAVC, and exits
5
 Amity Business
The supply curve under perfectSchool
competition (3)
• So the SMC curve
RS above SAVC
SMC represents the
firm’s SHORT-
SATC RUN SUPPLY
C
P3 CURVE
P1 SAVC
A
– showing how
much the
firm would
Q 1 Q 3 Output
produce at
each price
6
level.
 Amity Business
The firm and the industry in School
the short run under perfect
Firm
competition (1)
INDUSTRY
SMC
RS
RS SRSS

SAC

P P
D = MR = AR

q Q Output
Output
rket price is set at industry level at the intersection of
mand and supply
the industry supply curve is the sum of the individual fir
supply curves .
 Amity Business
The firm and the industry in School

the short run under perfect

competition (2)
Firm INDUSTRY
SMC
RS
RS SRSS
SAC

P P
D = MR = AR

q Q Output
Output
The firm accepts price as given at P

– and chooses output at q where SMC = MR to maximize profits

 Amity Business
The firm and the industry in School
the short run under perfect
Firm
competition INDUSTRY
(3)
SMC
RS SRSS

SAC SRSS 1

P P
D = MR = AR P1
D

q Q Output
Output
At this price , profits are shown by the shaded area .
These profits attract new entrants into the industry .
As more firms join the market , the industry supply curve shif
to the right , and market price falls . 9
 Amity Business
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Long-run equilibrium
Firm INDUSTRY
SMC
RS RS
SAC SRSS

P* LRSS
P*
D = MR = AR
D

q* Output Q Output
The market settles in long - run equilibrium when the typical
firm just makes normal profit by setting LMC = MR at the minimu
point of LAC . Long - run industry supply is horizontal .
If the expansion of the industry pushes up input prices ( e . g . wages )
then the long - run supply curve will not be horizontal , but upward - slopi

10
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MONOPOLY

THE MARKET STRUCTURE

 DEFINITION Amity Business
School

• An absolute power to produce and

sell a product which has no close
substitute
•
• It is a market in which there is only
one seller of a product having no
close substitute
 Amity Business
School

FEATURES
• Single seller of a product which has no
close substitute
• A monopoly firm is a price maker, not a
price taker
• Barriers to entry
• The demand curve is downward sloping
• Can adjust the price by adjusting its
output level
• Monopolies do not last for long
 SOURCES AND KINDS Amity Business
School

• Control over Key Raw Materials (Raw

Material Monopoly)
•
• Efficiency (Natural Monopoly)
•
• Patent Rights (Patent Monopoly)
•
 Amity Business
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DEMAND CURVE
Higher output causes
a
Pric

lower market price

e

Quantit
y
 Amity Business
School

PROFIT MAXIMIZATION
REVENUE AND COST

P1 P
P2
M

O Q
QUANTITY
 Amity Business
School

MISCONCEPTIONS
• A monopoly firm necessarily makes
super normal profits
•
• Demand curve faced by a monopoly
firm is perfectly inelastic so that it
can charge any price it likes
 Amity Business
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ABSENCE OF SUPPLY CURVE

• The unique relationship between
market price and quantity supplied,
represented by supply curve, does
not exist under monopoly


• But it is possible to trace that

• given the MC, the same output is
supplied at different prices
• given the price, different quantities
are supplied if the two demand
 Amity Business
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PRICE DISCRIMINATION
• When the same product is sold at different
prices to different customers on the basis
of their incomes or purchasing powers,
geographical location, age, sex, quantity
they purchase, their association with the
seller, etc, is called Price Discrimination
•
• When a monopolist sells the same product
at different prices to different buyers, the
monopoly is called a Discriminatory
Monopoly
•
 MEASURES OF MONOPOLY
Amity Business

POWER School

• The degree of monopoly power matters

a great deal in pricing and output
decisions of a monopolist
•
• Monopoly power varies from industry to
industry
•
• Measures of monopoly power is
required in connection with control
and regulation of monopolies
 MEASURES OF MONOPOLY
Amity Business

POWER School

 The various measures of monopoly

power are:-


• Number-of-firms Criterion
•
• Concentration Ratio
•
• Excess Profitability Criteria
•
• Triffin’s Cross-Elasticity Criterion
 Amity Business
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MONOPOLISTIC
COMPETITION
 WHAT IS MONOPOLISTIC
Amity Business
COMPETITION? School

ü MONOPOLISTIC COMPETITION refers to a

market structure where there are many
firms selling differentiated products which
are close substitutes and there is
existence of free entry and exit of firms.


ü Certain industries in the Indian market

falling under the category of Monopolistic
Competition are fast foods, textile trade,
garments, plastics, retail trade, hosiery,
pickles, steel utensils, household cleaning
 Amity Business
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CHARACTERISTICS
• Exhibits Features of both Perfect
Competition and Monopoly
• Product Differentiation
• Large Number of Sellers
• Free Entry and Exit of the Firms
• Higher Elasticity of Demand
• Selling Efforts
 Amity Business
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CHARACTERISTICS
• Some Additional Characteristic of
Monopolistic Competition (which
are same as under perfect
competition)
• Goal of profit maximization
• Perfect knowledge
• The prices of factors of production
and technology are given
• Decision taken in one period do not
affect future periods and are not
affected by past decisions
 EXAMPLE Amity Business
School

•
• SOAP INDUSTRY
 CONCEPT OF PRODUCT Amity
GROUP Business
School

• In case of PERFECT COMPETITION, all the

firms that were producing the homogeneous
product constituted the industry.


• In case of MONOPOLY, the firm itself was the

industry.


• In case of MONOPOLISTIC COMPETITION, the

concept of industry cannot be applied
because of its most distinguishing feature-
product differentiation.
 Thus, Chamberlin introduced the concept of
“Product Group”.
 Amity Business
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• “PRODUCT GROUP” includes all

firms whose products are closely
related i.e. the group consists of
many firms whose products are
very much similar to one another
and have closely interwoven
markets.
 FIRM’S DEMAND CURVE Amity Business
School

• PERCEIVED DEMAND CURVE:

üIt shows the demand for the product
of one firm within a product group
on the assumption that all other
firms in the group keep the prices
of their products constant.
üIt is the demand curve obtained if we
CONSIDER the symmetry
assumption.

 Amity Business
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• PROPORTIONAL DEMAND CURVE:

üIt shows the demand of the product
of the firm when all firms in the
product group change their prices
simultaneously, in the same
direction and by the same amount.
üIt is the demand curve obtained if we
DROP the symmetry assumption.
Amity Business
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 Amity Business
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EQUILIBRIUM OF THE FIRM
• HEROIC assumption: Each firm has identical
demand and cost cures throughout the
group


• SYMMETRY assumption


• Large number of buyers and sellers



• Free entry and exit- possible only in the long

run
 EQUILIBRIUM OF THE FIRM Amity Business
School

• Producers are producing differentiated

products, which are close substitutes
in the product group


• The firm behave as if they know their

demand and cost curves with
certainty. The demand curves are
linear and cost curves are U shaped


• Goal of the firm is profit maximization

 Amity Business
SHORT - RUN School

EQUILIBRIUM
 SHORT- RUN EQUILIBRIUM Amity Business
School

• The firm earns a supernormal

profit of CPeB calculated as:


Total profits= Total Revenue-Total

Costs
=(OP*OQ) – (BQ*OQ)

=OPeQ-OCBQ

=CPeB


 Amity Business
LONG – RUN School

EQUILIBRIUM

J
 Amity Business
School

LONG-RUN EQUILIBRIUM
• The firm earns just normal profits,
as total revenue is equal to total
cost.


Total profits= Total Revenue-Total costs

=(OP*OQ)-(OP*OQ)

=OPJQ-OPJQ

=NIL

=Zero economic profit

 Amity
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OLIGOPOLY
Oligopoly is defined as a market
organisation in which there are a few
sellers of a homogeneous or
differentiated products.
If there are two sellers in the
economy then it is duopoly.
 Examples Amity Business
School

• Duopoly:
• The most popular example of duopoly is
between Visa and Mastercardwho
exercise a major control over the
electronic payment processing market
in the world.
• Airbus and Boeing are duopolies in
the commercial jet aircraft market.
•
 Examples Amity Business
School

• Oligopoly:
• Aviation industry
• Soft drink industry

 Types of oligopoly Amity Business
School

• Pure oligopoly – Industries

producing cement,steel and
chemicals.
• Diffrerential oligopoly –
Automobiles , refrigerators.

Factors Causing oligopoly Amity Business
School

• Huge capital investment

• Absolute cost advantage to the
existing firms
• Product differentiation
• Economies of large scale
production
• Mergers
 Features of oligopoly Amity Business
School

• Few sellers and many buyers

• Mutual interdependence
• Lack of uniformity
• Elements of monopoly
• Some barriers to entry
• Existence of price rigidity
• Homogeneous and
differentiated products

Is price and output
Amity Business

indeterminate. School

• Different behaviour patterns

• Mutual interdependence
between the economic well
being and behaviour of the
firm.
 Models of Non-Collusive
Amity Business

Oligopoly School

• Cournot’s model
• Stackelberg’s model
• Sweezy’s ‘kinked-
demandcurve’ model

Cournot’s Model Amity Business
School

• Assumptions
• There are two firms
selling
homogeneous
product.
• They sell their
goods in the
market with
straight line
demand curves
• Each firm in order
to maximise total
Cournot’s Model
Amity Business
School
 Stackelberg’s Model Amity Business
School

– Assumptions
• There are two firms
selling
homogeneous
product under
zero cost of
production.
• They sell their
goods in the
market with
straight line
demand curves.
• One firm sets the
Stackelberg’s Model
Amity Business
School
Sweezy’s ‘kinked-demand’
Amity Business

Model School

– Assumptions
• Oligopolist
recognise their
mutual
dependence but
act without
collusion.
• Oligopolist will
match price
decrease and not
price increase.
Sweezy’s ‘kinked-demand’
Amity Business

Model School
 CARTEL Amity Business
School

 A cartel is a formal organization of

producers and manufacturers who
agree to fix prices, marketing, and
production.


 Cartels usually occur in an

oligopolistic industry, where there is
a small number of sellers and usually
involve homogeneous products.
 Amity Business
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C a rte lm e m b e rs m a y a g re e o n su ch
m a tte rs a s p rice fixin g , to ta lin d u stry
o u tp u t , m a rke t sh a re s, a llo ca tio n o f
cu sto m e rs, a llo ca tio n o f te rrito rie s,
e sta b lish m e n t o f co m m o n sa le s
a g e n cie s, a n d th e d ivisio n o f p ro fits o r
co m b in a tio n o f th e se .
T h e a im o f su ch co llu sio n ( a lso ca lle d
th e ca rte l a g re e m e n t) is to in cre a se
in d ivid u a lm e m b e r’ s p ro fits b y
re d u cin g co m p e titio n .
 Amity Business
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MARKET ALLOCATION UNDER CARTEL
FIRM A
FIRM B
INDUSTRY
AC1 MC

MC1
AC2 P
MC2
COST & REVENUE

C1 C2
C

AR=D

MR

O Q1 O Q2 O Q
 OPEC (A CARTEL) Amity Business
School

•


•
 The Organization of the
Petroleum Exporting Countries
(OPEC) is a cartel of twelve countries
made up of Algeria , Angola,
Ecuador, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and
Venezuela.
 Amity Business
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O P E C p u rsu e s w a ys a n d m e a n s o f
e n su rin g th e sta b iliza tio n o f p rice s in
in te rn a tio n a lo ilm a rke t w ith a vie w
to e lim in a tin g h a rm fu la n d
u n n e ce ssa ry flu ctu a tio n s.
 Amity Business
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PRISONERS’ DILEMMA
B’s OPTIONS
CONFESS DENY

CONFES A A
S B B
5 2
A’s 5 10
OPTIONS
DENY A A
B B
10 2 0
0
 Amity Business
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R E LE V A N C E IN
•OThe
LIGprisoners’
O P O LYdilemma illustrates
the nature of problems oligopoly
firms are confronted with in the
formulation of their business
strategy with respect to such
problems as strategic advertising ,
price cutting, etc.
•
• To find a reasonable answer ,the firm
 PRICE LEADERSHIP MODELS Amity Business
School

 A price leadership may emerge

spontaneously due to technical
reasons or out of a tacit or explicit
agreement between the firms to
assign a leadership role to one of
them.
 Amity Business
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CONDITIONS
• The number of firms is small.
•
• Entry to the industry is restricted.
•
• Products are, by and large
,homogeneous.
•
• Demand for firm is inelastic.

 Amity Business
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PRICE LEADERSHIP(BY LOW COST FIRM)

MC2

H AC2
P3

P2 L MC1

AC1

P1 J

AR
COST & REV

MR

Q1 Q2 OUTPUT
 Amity Business
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PRICE LEADERSHIP (BY DOMINANT
FIRM)
a) b)
D S
COST
PRICE &
PRICE
E
P3 MC
P3
A B P’
P’ P

C F P2
P2
P1
P1 D
D

O OUTPUT Q MR
O OUTPUT
 Amity Business
School

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