Market Structure

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Market Structure

• Md. Hasan Tarik
• Chief Instructor, NAPD

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Concept of Market

• Generally Market is known to be a specific place
  where products are bought and sold.
• But in Economics market does not refer to a
  specific place
• Market is meant by where there is an existence of
  the buyer and seller of a product and transaction
  of the product by a price which is fixed by joint
  bargaining of the seller and the buyer
• Transaction can occur in any place of through
  correspondence

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Market Structure

• Setting the price of the firms product is one of
  the important decisions made by the managers
• If price is set too high, the firm will be unable
  to compete with other suppliers
• If the price is too low, the firm may not be able
  to earn a normal rate of profit

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Market Structure

• A firm in a competitive market may have little or
  no control over price
• In that case managerial attention must be focused
  on the rate of output to be produced
• A firm that is the only seller of a product may
  have considerable freedom in setting price

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Market Structure

• Market Structures can be characterized on the
  basis of four characteristics
• Number and size distribution of sellers
• Number and size distribution of buyers
• Product differentiation
• Conditions of entry and Exit

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Number and size distribution of sellers

• If there are numerous sellers of nearly equal
  size, the influence of any one firm is likely to
  be small over price and total supply. Conversely
  it is also true
• A dominant firm or few large firms that provide a
  substantial proportion of total business, exert
  considerable impact over price and product
  attribute. Such as Microsoft

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Number and size distribution of buyers

• Where there are many small purchaser of a
  product, all buyers are likely to pay about the
  same price
• If there is only one purchaser, that buyer in a
  position to demand lower prices from sellers
• If a market consists of many small buyers and one
  or a few firms making volume purchases, the
  larger firms may be able to buy at lower prices.
  For example IBM and ATT buy at lower prices

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Product Differentiation

• Product differentiation refers to the degree that
  the output of one firm differs from that of other
  firms in a market
• When products are undifferentiated, decisions to
  buy are made strictly on the basis of price
• Product differentiation indicates a firms
  ability to affect price

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Conditions of Entry and Exit

• When it is extremely difficult for new firms to
  enter, existing firms will have much greater
  freedom in making pricing and output decisions
• In case of exit if the resources used to produce
  the product can easily be transferred from one
  use to another they can earn a higher rate of
  return

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Classification of Market

• The classification of market can be presented in
  the following diagram

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Classification of Imperfect Market

• Imperfect market can be classified as follows

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Characteristics of Perfect Market

1. Large number of small buyers and sellers
2. Homogeneous product which is standardized and can
   be easily graded
3. Perfect information (Price, quality of product,
   mode of payment)
4. Easy entry and exit
5. Perfect mobility of factors of production (land,
   labour, capital, organization)
6. Product undifferentiated. Decisions to buy are
   made on the basis of price

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Price is fixed is perfect market through the
interaction between buyers and sellers
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AR and MR under Perfect Market

• In perfect market there are many buyers and
  sellers. So it is not possible for a buyer to
  shift the market demand curve.
• Again a seller or firm produce a little amount of
  total supply. So it is not possible for him to
  influence the market supply curve of the product
• Price of the product is fixed by the market
  supply and demand curve

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AR and MR under Perfect Market

• As the product is homogeneous in Perfect Market,
  the price which is fixed in the market has to
  taken by buyer and seller both
• This price can not be changed by buyer and seller
• A seller under Perfect Market is a price taker
• For this reason in Perfect Market PARMR

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AR and MR under Perfect Market
Q P TR MR
1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10
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AR and MR under Perfect Market

• From Table we see that fixed market price of
  product Q is P10 Taka
• The value of total income TR increases with the
  same rate as the value of Q
• So it is obvious to be PARMR10
• The firm will charge the same price for each Q
  amount

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TR
TR
P
30
ARMR10
Pe
20
10
0
Q1
Q
Q
Q2
2
0
1
3
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Limitations of Perfect Market

• Unrealistic
• External Effects
• Economies of large scale
• Non-Homogeneous product
• Ignorance of buyer and seller
• Non-perfect Mobility of factors
• Transport Cost
• Freedom of Consumers and producers limited

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Imperfect market

• In imperfect market individual sellers have some
  measure of control over the price of output in
  that industry. Economies of scale or decreasing
  average costs, are the major sources of imperfect
  competition.

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Difference between perfect and imperfect
competition

• Figure shows that a perfect competitor faces a
  horizontal demand curve, indicating that it can
  sell all it wants at the going market price. A
  seller under perfect competition is a price taker
• An imperfect competitor faces a downward sloping
  demand curve showing that if it increases its
  sales, it definitely depress the market price of
  its output.

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Monopoly

• The word monopoly originates from two Greek
  words monos means single and polis means
  dealer or seller/producer
• Monopoly is that type of market in which a single
  seller has control over the market and monopoly
  product has no close substitute
• Monopoly is a price maker basically due to three
  reasons single producer, single seller, no close
  substitute, restriction or prohibition on entry

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Causes of the Rise of Monopoly

• Demand for product is low
• Personal goodwill
• No mobility of items
• Control over supply
• Ignorance of the probable competitors
• Unhealthy competition

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Characteristics of Monopoly

• Single seller/producer
• Absence of competition
• No close substitute of monopoly product
• Control over supply
• Restriction/prohibition on entry into market
• No distinction between firm and industry
• Monopoly is a price maker

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Marginal Revenue and Monopoly

• Marginal revenue (MR) is the increment in total
  revenue that comes when output increases by 1
  unit. MR can be either positive or negative
• Marginal revenue is positive when demand is
  elastic and negative when demand is inelastic

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Total, average and marginal revenue under Monopoly
Q ARP TRPQ MR Cum. MR
1 10 10 10 10
2 9 18 8 18
3 8 24 6 24
4 7 28 4 28
5 6 30 2 30
6 5 30 0 30
7 4 28 -2 28
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TR, AR and MR under monopoly

• Monopoly market can control the price or the
  supply of the product
• But can not control both
• If it wants to sell more product it has to take
  less price for every extra unit
• Because it has to compete with the others
  products of the which is included in the
  consumers budget
• In monopoly market total income increases in the
  descending order
• MR decreases more than AR

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Some important comments about Monopoly

• Does Monopolist make profit always?
• Does Monopolist always earns excess profit?

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Duopoly

• The word Duo means two and Poly means seller.
• A market system where there are only two sellers
• Duopoly is a special type of Oligopoly market
  system
• Fierce competition is prevalent

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Oligopoly

• Greek word Oligos means a few and Latin word
  Polis means seller
• Industry is dominated by few firms
• Action on the part of any one firm may bring on a
  reaction by other firm or firms having
  significant effects on the original firm
• OPEC is an example
• Products may be homogeneous or different

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Characteristics of Oligopoly market

• Interdependence
• Nature of the product homogeneous or different
• Homogeneous product Pure Oligopoly
• Different products Differentiated Oligopoly
• Demand curve is undefined
• Importance of advertisement and selling cost
• Group nature

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Collusive Oligopoly

• When firms cooperate completely, they engage in
  collusion.
• This term denotes a situation in which two or
  more firms jointly set their prices or outputs
• Divide the market among them or make their
  business decision jointly
• Firms are tempted to collude when they recognize
  that their profits depend on their joint actions

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Monopolistic Competition

• Large number of firms
• Produce slightly differentiated product
• Entry and exit easy
• Firms take other firms price as give
• Product differentiation leads to a downward slope
  in each sellers demand curve
• Change in price of one firm can create little
  effect on other firms product

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Characteristics of Monopolistic Competition

• Many sellers
• Product differentiation
• Easy entry and exit
• Advertisement and selling expense
• Nature of Demand
• Group equilibrium
• Similar cost and demand
• Alternate activities of firm
• Similarity and resemblance

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