Market Structures & Price Determination

MARKET STRUCTURES
AND
PRICING POLICIES
WHAT IS A MARKET?
Market is defined as a place or point at
which buyers and sellers negotiate their
exchange of well-defined products or
services.
Market is a place where buyer and seller

meet, goods and services are offered for
the sale and transfer of ownership
occurs
DEFINITION OF MARKET
Market is any area over which buyers and sellers
are in close touch with one another, either
directly or through dealers, that the price
obtainable in one part of the market affects the
prices paid in other parts.
- Benham
COMPONENTS AND MARKET STRUCTURE
As seen from the definition of market, the components of a

market are:
1. Sellers (Producer)
2. Buyers (Customers)
3. Nature of product (Types of Product)
4. Conditions of entry and exit
5. Negotiation (Price)
6. Transfer of Ownership and Product

7. Transfer of Money or Equal Value
CLASSIFICATION OF MARKETS
ON THE BASIS OF :
• Area or Region
• Time
• Functions
• Nature of Commodity
• Legality
ON THE BASIS OF AREA OR REGION
If buyers and sellers of a If buyers and sellers of a

commodity are limited to commodity are confined to
certain area or region, it is certain region as province, it
known as local market. is known as provincial
Perishable goods and low market. Region area is
price goods. greater than that of local
market.
ON THE BASIS OF AREA OR
REGION
When buyers and sellers are When buyers and sellers are
not confined to state spread across the geographical
boundary, but are spread boundary of a nation and the
throughout the country. They demand for such commodity is
are demanded throughout world wide or demand is
the nation. universal.
ON THE BASIS OF TIME
• Very short period market: It can be classified into
Daily(perishable products) or weekly market(on any specific
day of week). It is which takes part in transaction for a short
period of time as for few hours or a day. In this supply of
product can not be increased.
• Short period market: In this supply of product can be
increased but we can not make any change in production

plant according to changed demand.
ON THE BASIS OF
TIME
• Long period market: It is in which we can make
necessary changes in plant and machinery as well increase

supply of product according to its demand.
• Very long period market: There can be large
change in supply of the product. And demand also increases

because of change in population, habits, taste, customs etc.
ON THE BASIS OF
FUNCTIONS
When different types of products
are transacted at the same time in
a market.
General Market
When only one product or any

special product is transacted in
market. In this, a particular thing
is traded with its different brand
names.
Specialized Market
ON THE BASIS OF
FUNCTIONS
In this the firms need not show
whole of their product as they
only send samples through their
agents.
Ex.- in case of wool, paints etc.
Marketing by Samples
In this, the product is first graded

according to its quality and then
put forth for selling.
Ex.- Agricultural product market.
Marketing by Grading
ON THE BASIS OF NATURE OF
COMMODITY
Product Market Stock Market

(production goods are (stock and shares, bonds
exchanged) are bought and sold)
Bullion Market
(metal trading exists)
ON THE BASIS OF LEGALITY
Legal Market: When goods are transacted
in market under certain rules and norms.
Also known as Fair Market.
Illegal Market: Transaction of

goods taking place in more than
or less than quantity prescribed
by legal authorities.
Ex.- Hong Kong Market (illegal
market at international market)
COMPETITION BASED MARKET STRUCTURE
The less the power an individual firm has

to influence the market in which it operates,
the more competitive that market is.
Types of Competition
I. Perfect Competition Markets
II. Imperfect Competition Markets
http://www.bized.co.uk
MARKET STRUCTURE
Perfect Pure
Competition Monopoly
More competitive (fewer imperfections)
Copyright 2006 – Biz/ed

MARKET STRUCTURE
Perfect Pure
Competition Monopoly
Less competitive (greater degree

of imperfection)

MARKET STRUCTURE
Pure
Perfect
Monopoly
Competition
Monopolistic Competition Oligopoly Duopoly Monopoly
The further right on the scale, the greater the degree

of monopoly power exercised by the firm.

MARKET STRUCTURES BASED ON COMPETITION
PERFECT COMPETITION MARKET
A market structure in which all firms in an

industry are price takers and in which
there is freedom of entry into and exit
from the industry is called Perfect
Competition.
FEATURES OF
PERFECT COMPETITON MARKET
• A Large Number of Buyers and Sellers

• Price Taker (market price)
• Homogeneous Products (same product)

• The firms are Free to Entry or Exit
• No Individual Preferences (buyer/seller)
• Each buyer and seller operates under the conditions of
certainty
• Mobility of Factors of Production – move freely from
industry to industry and firm to firm
IMPERFECT COMPETITION
1. Monopoly Market
2. Monopolistic Market
3. Duopoly Market
4. Oligopoly Market
5. Monopsony Market
6. Duopsony Market
7. Oligopsony Market
MONOPOLY
A pure monopoly exists if one and only one firm

produces and sells a particular commodity in the
market.
The single firm producing the product is itself both

the firm and the industry.
E.g.: Railways, APSRTC

FEATURES OF MONOPOLY
• Only one firm sells the commodity having no rivals

or direct competition
• Price Maker
• Indirect rivalry may exist in the form of Existence
of substitute products
• No other seller can enter the market, else monopoly
would cease to exist.
• The product is distinct i.e., inelastic demand
CAUSES OF MONOPOLY
 Patent Rights give legal monopoly
 Govt. policies such as granting licenses
 Ownership and control of some strategic raw

materials.
 Exclusive knowledge of technology by the firm.
 Size of the market may accommodate only a
single firm
 Limit pricing policy adopted to prevent new
entrants.
Monopolistic
Markets
“which represents a more realistic picture of the
actual market structure and the nature of competition
which is existing right now in the market”
MONOPOLISTIC COMPETITION
Monopolistic Competition refers to a
situation where there are many sellers of a
differentiated product.
There is competition which is not perfect,

between many firms making very similar
products which are close but not perfect
substitutes.
Monopolistic market exhibits characteristic

of both perfect competition and monopoly
FEATURES OF MONOPOLISTIC COMPETITION
1. Large number of sellers/producers

2. Large number of buyers
3. Product Differentiation (Tooth paste)

4. Higher selling cost (Promotion cost)
5. Imperfect knowledge (Buyers)
6. Freedom of entry and exist

7. Higher elasticity of demand. (Price
sensitivity market)
DUOPOLY
If there are two sellers, duopoly is said to
exist.
OLIGOPOLY
If there is a competition among a few sellers,
oligopoly is said to exist
MONOPSONY
If there is only one buyer, monopsony
market is said to exist.
DUOPSONY
If there are two buyers, duopsony is said
to exist.
OLIGOPSONY
If there are few buyers, oligopsony is said
to exist.
S.NO. TYPES OF SIZE OF SIZE OF EXAMPLES
MARKETS SELLERS BUYERS
1 Monopoly Single Large Ex: Indian
Seller Buyers Railways, DRDO
2 Duopoly Two Sellers Large Ex: Soft drinks:
Buyers Pepsi & Coke
3 Oligopoly Few Sellers Large Ex: LPG Gas,
Buyers Cement Market,
Pizza Market
4 Monopsony Large Single Ex: Government
Sellers Buyer Contractors
5 Duopsony Large Two Buyers Ex: Petrol Buyers
Sellers in India: HPCL and
BPCL
6 Oligopsony Large Few Buyers Ex.: International
Sellers Airways
COMPETITION AND MARKET TYPES IN ECONOMIC ANALYSIS
Copyright ©2014 Pearson Education, Inc. All rights reserved. 8-31

EQUILIBRIUM POINT
Equilibrium point refers to the position

where the firm enjoys maximum profits and
it has no incentive either to reduce or
increase its output level.
PRICE
AND
OUTPUT DECISIONS
IN
PERFECT COMPETITION
Pure Competition
Q AR (P) TR MR
1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10
6 10 60 10
7 10 70 10
TR, AR and MR
Total Revenue is the revenue earned by

producing and selling ‘n’ units TR = P * Q
Average Revenue is the revenue earned per

unit sold AR = TR / Q (nothing but Price)
Marginal Revenue is the change in revenue by

producing and selling one more unit MR = P

Perfect Competition – Pricing and Output decision
Given
The the
MC is assumption
the cost of of profit
maximisation,
producing additional
the firm produces
Cost/Revenue The average cost curve is the
standard ‘U’ – shaped curve. MC at an
(marginal)
(Q1).
output units
fallsThis
where
at firstoutput
of output.
MC = ItMR
(due tolevel
the lawisof a
MC cuts the AC curve at its fraction
diminishing
of the returns)
total then
industry
rises
lowest point because of the supply.
as output rises.
mathematical relationship
between marginal and average ATC
values.
P = MR = AR = C
The industry price is
determined by the demand
and supply of the industry
as a whole. The firm is a
very small supplier within
the industry and has no
control over price. They will
sell each extra unit for the
Q1 Output/Sales
At this output the firm same price. Price therefore
= MR and AR
is making normal profit. This is a long
run equilibrium position.
PRICING AND OUTPUT DECISIONS IN PERFECThttp://www.bized.co.uk
COMPETITION
• Case A: economic profit
The point where

P=MR=MC
is the optimal output
(Q*)
 profit = TR – TC
Q* (P - C)

PRICING AND OUTPUT DECISIONS IN
PERFECT COMPETITION
• Shutdown point: the lowest price at which the

firm would still produce
– At the shutdown point, the price is equal to the minimum

point on the AVC
– If the price falls below the shutdown point, revenues fail to

cover the fixed costs and the variable costs. The firm
would be better off if it shut down and just paid its fixed
costs.
PRICE
AND
OUTPUT DECISIONS
IN
MONOPOLY

PRICING AND OUTPUT DECISIONS IN MONOPOLY MARKETS
• A monopoly market consists of one firm (the firm is the
market)
– The firm has the power to set the price which maximizes
profit.
– The profit maximizing price is limited by the demand
curve for the product, and in particular, the price elasticity
of demand.
MR AND AR IN MONOPOLY
EQUILIBRIUM POINT – MONOPOLY
MR = MC
MC curve should cut the MR curve from below
MONOPOLY
Costs / Revenue
This(D)
AR
Given isthe
both
curve
barriers
the
forshort
a to
monopolist
entry,
run and
MC likely
the
long monopolist
run
to be
equilibrium
relatively
will be
position
price
able to
inelastic.
exploit
for a monopoly
abnormal
Output assumed
profits in the
to
£7.00
be atrun
long profit
as maximising
entry to the output
(note caution
market is restricted.
here – not all
AC monopolists may aim
Monopoly for profit maximisation!)
Profit
£3.00
MR AR
Output / Sales
Q1

PRICE OUTPUT DETERMINATION
UNDER MONOPOLY
IS MONOLPOLY SOCIALLY DESIRABLE?
NO, the reasons are:

 Restrict the output
 Exploitation of consumers
 Wide gap between rich and poor
 Unfair trade practices
 Restricted scope to R&D
IMPLICATIONS OF PERFECT COMPETITION
AND
MONOPOLY
FOR DECISION MAKING
• Lessons on perfectly competitive markets
– It is extremely difficult to make money over the

long run.
– The firm must be as cost efficient as possible to

survive.
– It might pay for a firm to move into a market

before others start to enter, but that is a
risk--demand may not materialize.
• Monopoly market lessons
– The most important lesson is not to be arrogant

or complacent and assume the firm’s ability to
earn economic profit can never be diminished.
– Changes in the business environment eventually

break down a dominating company’s
monopolistic power

EQUILIBRIUM POINT – MONOPOLISTIC
MR = MC
MC curve should cut the MR curve from below
AR = AC
PRICE OUTPUT DETERMINATION
UNDER MONOPOLISTIC
PRICE DISCRIMINATION
When a firm sells its products to its customers

of different profile at different prices with no
corresponding change in cost, price
discrimination is said to exist.
1. Purchasing power
2. Quantity bought
3. Customers from different market conditions
ADVANTAGES OF PRICE DISCRIMINATION
• Helps to meet the competition
• Surplus production can be disposed off

• Customer base increases
• Production costs decreases as volume increases
• Long run profits

Market Structures & Price Determination

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MARKET STRUCTURES

Market is a place where buyer and seller

are in close touch with one another, either

directly or through dealers, that the price

obtainable in one part of the market affects the

prices paid in other parts.

As seen from the definition of market, the components of a

6. Transfer of Ownership and Product

If buyers and sellers of a If buyers and sellers of a

• Short period market: In this supply of product can be

increased but we can not make any change in production

necessary changes in plant and machinery as well increase

• Very long period market: There can be large

change in supply of the product. And demand also increases

When only one product or any

In this, the product is first graded

Product Market Stock Market

Illegal Market: Transaction of

The less the power an individual firm has

More competitive (fewer imperfections)

Copyright 2006 – Biz/ed

Less competitive (greater degree

Copyright 2006 – Biz/ed

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degree

Copyright 2006 – Biz/ed

A market structure in which all firms in an

• A Large Number of Buyers and Sellers

• Homogeneous Products (same product)

A pure monopoly exists if one and only one firm

The single firm producing the product is itself both

E.g.: Railways, APSRTC

• Only one firm sells the commodity having no rivals

 Ownership and control of some strategic raw

There is competition which is not perfect,

Monopolistic market exhibits characteristic

1. Large number of sellers/producers

3. Product Differentiation (Tooth paste)

6. Freedom of entry and exist

Copyright ©2014 Pearson Education, Inc. All rights reserved. 8-31

Equilibrium point refers to the position

Total Revenue is the revenue earned by

Average Revenue is the revenue earned per

Marginal Revenue is the change in revenue by

Copyright 2006 – Biz/ed

• Case A: economic profit

The point where

Copyright 2006 – Biz/ed

• Shutdown point: the lowest price at which the

– At the shutdown point, the price is equal to the minimum

– If the price falls below the shutdown point, revenues fail to

Copyright ©2014 Pearson Education, Inc. All rights reserved. 8-40

• A monopoly market consists of one firm (the firm is the

– The profit maximizing price is limited by the demand

curve for the product, and in particular, the price elasticity

Copyright 2006 – Biz/ed

NO, the reasons are:

• Lessons on perfectly competitive markets

– It is extremely difficult to make money over the

– The firm must be as cost efficient as possible to

– It might pay for a firm to move into a market

– The most important lesson is not to be arrogant

– Changes in the business environment eventually