business economics market structures

04/07/23Sameer Gunjal – Business

Economics (MGBEN 10101)

Business Economics – Market

Structures23rd Oct 2009Sameer Gunjal



Perfect Competition



Assumptions

• Perfect competition is a market structure where no participant can influence the prices.

Some of the basic assumptions of this market structure are:• Large number of buyers and sellers present in the market and

so no individual buyer or seller has the liberty to define the prices, thus making all the individual participants insignificant in the overall market place.

• All the firms produce homogeneous product. All the firs produce similar products and offer similar services and he buyer cannot differentiate between any two product and the allied services available with the same.

• No barrier for entry or exit in this type of market structure.



Demand Curve



Price & Output determination•From the equilibrium curve of the market we can see

that the market forces determine the price of the goods.

•The output gets fixed and neither the entry of new customers nor the entry of new producers changes the picture.

•The demand for the output of the competitive firms remains fixed at the price levels defined by the market.

•Even if additional quantities are produced there are no buyers for the excess quantity.



Supply Side

• The supply curve shows the amount of output the firm will supply at different prices. In a competitive environment the supply side is more or less defined and the price levels are fixed. No firm in a competitive market place can continuously have above average profits. The movement of curves is further clarified in the figure below:



Profit Determination

•Economic Profit•Break Even•Possibility of Loss•Shut Down Point



Efficiency in competitive marketsAn efficient condition in the market would be termed

when resources are allocated in ways allowing the maximum possible net benefit from their use.

This will include:•Efficient allocation of resources among the firms•Efficient distribution of goods produced between

consumers •Efficient combinations of products.



ExampleMarket demand equation for a perfectly competitive market is as givenQD = 2000 – 100PThe market supply equation is Qs=1200 + 150P What does the demand equation say?

1. Quantity demanded increases by 100 every 1 unit rise in the price2. Quantity demanded decreases by 100 every 1 unit rise in the price3. Quantity demanded remains fixed to 2000 every 1 unit rise in the price4. None of the above

What does the supply equation say?

1. Quantity supplied increases by 150 every 1 unit rise in the price2. Quantity supplied decreases by 150 every 1 unit rise in the price3. Quantity supplied remains fixed to 1200 every 1 unit rise in the price4. None of the above



Example contd…

What is the equilibrium price for the above scenario?

1. 32. 3.13. 3.24. 3.3

What is the equilibrium quantity for the above scenario?

1. 16602. 16803. 17004. 1720



MONOPOLY



Types of Markets



Imperfect competition

•A market is imperfectly competitive if some individual sellers have some degree of control over the price of the output.

•Any market can be classified based on▫Number of sellers and buyers ▫Nature of the product being sold



Source of market imperfections

•Barriers to entry▫Eg High capital requirements - metal refining

• Legal Restrictions▫Eg. Heavy govt license - Telecom

•High Cost Industry▫Eg. High Intangible investments – Qualcom (Patent

based)•Advertising and Product Differentiation

▫Eg. Heavy advertising expenses - Coca Cola or Pepsi



Revenues under a Monopoly

•The total Revenue Curve•AR and MR curves



Price and Output determination in a Monopoly



Comparison – Monopoly & Perfect Competition



Price Discrimination

•Price discrimination occurs when a monopolist charges different prices to different buyers.

•Discrimination occurs due to ▫consumers’ peculiarities or ▫the nature of the goods or ▫the distance and frontier barriers.

•Another type of market imperfection.



Assignment

•Select a company or sector which exhibits a Monopoly

•Discuss your findings on the following points:▫Which company is in monopoly?▫Which product is in monopoly?▫Reason for the product monopoly▫Strategies adopted for monopoly▫Competitors and reasons for their failure to break

monopoly.▫Your comments or suggestions to the competitors to

break through the monopoly.



Monopolistic Competition



Assumptions

•Monopolistic competitive markets are similar in nature to the perfect competition except the product which is not homogeneous.

• Large number of firms capturing small market share •Products are similar but not identical products•Relative freedom of entry and exit is present in this

market structure•No opportunity or incentive exits for the rivals to

team up in this market structure.



Product Differentiation

•Product Quality•Services• Location•Advertising and Packaging



Price and Output determination in a Monopolistic Competition



Effect of advertising & product development•Product development remains the hallmark of a

monopolistically competitive market structure. •Advertising and allied expenditures add on to the

total cost of the product. •These push the ATC curve in the upward direction

and reduce the economic profit generated in the equilibrium state.

•Firms use advertising as another differentiator while they are in this type of market structure.



Oligopoly



Assumptions

•Oligopoly is a market structure in which a few sellers dominate the sales of a product and the entry of new sellers is either difficult or impossible.

•The products can be similar or differentiated. In case the products are differentiated then it will be termed as a differentiated oligopoly.

•Some firms in this market structure have a larger market share.

•Firms in an oligopoly are aware of their interdependence and consider rival reactions while fixing prices.



Types of Oligopoly

Oligopoly



Kinked Demand Curve



Kinked demand curve

• In an oligopoly the competitors don’t have price as a major differentiating factor.

• Increase in price results in drastic fall of demand.•So the rise in profits due to a price increase would be

overshadowed by the fall in quantity sold, so a competitor cannot increase the price.

•Decrease in price drastically creates nominal increase in demand.



Impact of price leadership in oligopoly•Price leadership is another form of collusive market.• In this form one sets the price and the other firs

follow it as the price setting firm is at an advantage to the others.

•The most common forms of price leadership are ▫price leadership by a low cost firm, ▫price leadership by a dominant firm.



Thank You

business economics market structures

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