MARKET STRUCTURES

PERFECT COMPETITION
A perfect competition market is that type of
market in which the number of buyers and sellers is
very large, all are engaged in buying and selling a
homogenous product without any artificial
restrictions and possessing perfect knowledge of
the market at a time.
 CHARACTERISTICS OF A PERFECT
 COMPETITION
Large number of sellers and buyers
-the first condition is that the number of buyers and sellers must be so large that none of them
individually is in a position to influence the price and output of the industry as a whole.
 Homogeneity of the product
-each firm should produce and sell a homogenous product so that no buyer has any preference for
the product of any individual seller over other.
 Free entry and exit of firms
-the firm should be free to enter or leave the firm.
 Perfect knowledge of the market
-buyers and sellers must possess complete knowledge about the prices at which goods are being
bought and sold and of the prices at which others are prepared to buy and sell.
 Perfect mobility of the factors
-there should be perfect mobility of goods and factors between industries. Goods should be free to
move to those places where they can fetch the highest price.
 Absence of price control
-there should be complete openness in buying and selling of goods. Here prices are liable to change
freely in response to demand and supply conditions.
 Perfect Competition among buyers and sellers
-in this purchasers and sellers have got complete freedom for bargaining, no restrictions in charging
more or demanding less, competition feeling must be present there.
 Absence of transport cost
-there must be absence of transport cost. In having less or negligible transport cost will help complete
market in maintaining uniformity in price
 One price of the commodity
--there is always one price of the commodity available in the market.
 Independent Relationship between buyers and sellers
-there should not be any attachment between sellers and purchasers in the market. Here, the seller
should not show prick and choose method in accepting the price of the commodity.
 ADVANTAGES OF PERFECT COMPETITION
1.They allocate resources in the most efficient way – both
productive (P=MC) and allocatively efficient (P>MC) in the
long run.
2.There is no information failure as all knowledge is spread out
evenly.
3.Only normal profits may just cover their opportunity cost.
4.Maximum consumer surplus and economic welfare.
 DISADVANTAGES OF PERFECT COMPETITION
1.No scope for economies of scale because of the high number of
firms in there.
2.Undifferentiated products – all homogenous. Important in
industries like clothes and cars.
3.Lack of supernormal profits may mean the investment of
Research and Development (RnD) is unlikely. Important for
industries like pharmaceuticals.
4.With perfect knowledge there is no incentive to develop new
technology because of the ability to share information.
 IMPERFECT COMPETITION

MONOPOLY
In this type of imperfect monopoly the seller
has absolute control over a good or product and
for this reason can make decisions about prices
and the ways of sale.
 CHARACTERISTICS OF A MONOPOLY

 Single supplier
 Unique product
 Barriers to entry and exit
 ADVANTAGES OF A MONOPOLY
Economies of scale
-in an industry with high fixed costs, a single firm can gain lower long run
average costs – through exploiting economies of scale.
Innovation
-without patents and monopoly power, drug companies would be unwilling
to invest so much in drug research.
Firms with monopoly power may be the most efficient and dynamic
-firms may gain monopoly power by being better than the rivals.
 DISADVANTAGES OF A MONOPOLY
Higher prices than in competitive markets
-monopolies face inelastic demand and so can increase
prices – giving consumers no alternative.
A decline in consumers surplus
-consumers pay higher prices and fewer consumers can
afford to buy.
Monopolies have fewer incentives to be efficient
-with no competition, a monopoly can make profit without much effort,
therefore it can encourage x-efficiency
Possible diseconomies of scale
-a big firm may become inefficient because it is harder to coordinate and
communicate in a big firm.
Monopolies often have monopsony power in paying a
lower price to suppliers
OLIGOPOLY
-few sellers and each of them can influence
the market. The products satisfy the same need
and are perfect substitutes. Companies depend
on each other because the decisions that one of
them makes can affect the others.
 CHARACTERISTICS OF AN OLIGOPOLY
Small number of large firms
-this characteristic gives each of the relatively large firms
substantial market control. While each firm does not have as much
market control as monopoly, it definitely has more than a
monopolistically competitive firm.
Identical products oligopoly
- this type of oligopoly tends to process raw materials or
produce intermediate goods that are used as inputs by other
industries.
Differentiate product oligopoly
-this type of oligopoly tends to focus on goods sold for personal
consumption.
Barriers to Entry
- the most notes entry barriers are :
1.exclusive resource ownership
2.Patents and copyrights
3.Other government restrictions
4.High start-up cost
 ADVANTAGES OF AN OLIGOPOLY
It simplifies the market for consumers
-an oligopoly reduces competition, which means simpler choices for finding the best possible product.
It creates higher profits
-pricing provides higher profits, which can then filter down to become higher wages for employees.
It puts resources into refinement
-existing can be made better. New efficiencies can be discovered. There is less of a need to directly
compete with new and unknown firms, so there are fewer expenses to worry about.
It can still offer competitive pricing
-firms must balance the need for profits with a need to remain attractive to consumers and this
formatting can still generate competitive pricing.
 DISADVANTAGES OF AN OLIGOPOLY
Fewer choices isn’t always a good thing
-if no products meet the needs of a consumer, then there are no other options available.
The consumer either goes with something that only partially meets their needs while paying
full cost, or they go without.
Trickle – down economics requires perfect ethics
-profits can trickle down to employees and entry – level positions, but only if those
receiving the large subsidies allow them to do so.
Innovation becomes non-existent
-firms have no need to innovate because there aren’t new ideas being introduced to the
market.
Price fixing is common
-Pricing can be artificially inflated to generate excessive products and because there is
little competition, consumers have no real alternative available to them.
Market success usually translates into political success
-the leaders of the firms within an oligopoly fin themselves wielding high levels of
business power.
People become a commodity
-profits become king. If someone cannot contribute to the greater profits of the firms
involved, then they are cast aside for someone who can contribute.
MONOPOLISITC COMPETITION
-this type of competition occurs when
there are a large number of sellers who
produce different goods at different
prices, but none of them has a
significant share of the market.
 CHARACTERISTICS OF A MONOPOLISTIC
COMPETITION
Large number of buyers and sellers
-that means each firm can control its price – output policy to some extent.

Free Entry and Exit of Firms

-the firms will enter when the existing firms are making supernormal profits.

Product differentiation
-refers to a situation when the buyers of the product differentiate the product with other.

Selling cost
-advertisement is the most constituent of the selling cost which affects demand as well as cost of the
product.
Lack of perfect knowledge
- the buyers do not know about all these products, their qualities and
prices. The seller does not know the exact preference of buyers and is,
therefore, unable to get advantage out of the situation.
Less mobility
-under monopolistic competition both the factors of production as well as
goods and services are not perfectly mobile.
More elastic demand
-under monopolistic competition, demand curve is more elastic. In order
to sell more, the firms must reduce its price.
ADVANTAGES OF MONOPOLISTIC COMPETITION
More competition
-monopolistic competition allows new businesses to venture into most industries
without any systematic opposition or challenge.
Better for consumers
-monopolistic competition allows more companies to coexist and offer similar
products or maybe different products serving the same need and purpose.
Better products/services
-every company will try to secure a formidable market share and would want to hold
on to it.
 DISADVANTAGES OF MONOPOLISTIC
COMPETITION
Battle of perception
-in a fight to establish a particular product or service as superior,
companies resort to advertising and various types of marketing or
promotions.
Predatory pricing & other strategies
-monopolistic competition doesn’t exactly do anything against such
practices, although there are fair trading rules in most countries.