Market and Competition

Analysis

Market

In the words of Benham: “ Any area over which the buyers and

sellers are in close touch with one another, either directly or through

dealers, that the prices obtainable in one part of the market affects the

prices paid in other parts.”

Equilibrium of the Firm:

A firm is said to be in equilibrium when the following two conditions are satisfied:

when the marginal revenue is equal to its marginal cost (MR = MC).

MC curve cuts the MR curve from below at the point of equilibrium.

Equilibrium of a Firm:

MR

MC

Output

Cost & Revenue

Q

Equilibrium Point

P

Classification

On the basis of market structure

The Four Types of Market Structure

Monopoly

Oligopoly

Monopolistic

Competition

Perfect Competitio

n

Number of Firms?

Type of Products?Many firms

One firm Few

firmsDifferentiated products Identic

al products

Two

firms

Duopoly

Perfect Competition:

Perfect Competition prevails when the

demand for the output of a commodity

is perfectly elastic. This entails first

that the number of sellers is so large

and secondly that buyers are alike in

respect of their choice of rival sellers

so that the market is perfect.

Characteristics:

Large number of relatively small buyers and sellers

Homogeneous products Free entry and exit of firms No agreement between firms Perfect mobility of factors Perfect knowledge of market Both buyers and sellers are price

takers

Equilibrium of a Perfectly Competitive Market:

Short run case - In case of profit

PRICE & COST

OUTPUT

MARKET FIRM

MR/ARE

CA

P

D

S

PROFIT

MC

AC

Equilibrium of a Perfectly Competitive Market:

- In case of loss

PRICE &

COST

OUTPUT

MARKET FIRM

MR/ARP

D

S

MC

AC

E

CALOSS

Long run case

Price & Cost

Output

MC AC

Q

E

P AR=MR

Output(Q)

Price TR MR TC MC ATC

1 10 10 10 30 - 30

2 10 20 10 45 15 22.5

3 10 30 10 55 10 18.33

4 10 40 10 62 7 15.5

5 10 50 10 75 13 15

6 10 60 10 110 35 18.33

7 10 70 10 155 45 22.14

Imperfect Competition:

Imperfect competition is a wide

term, covers all the market situations except perfect competition

It is further divided into: Monopolistic competition Oligopoly Duopoly Monopoly

Monopoly:

When a specific individual or enterprise has

sufficient control over a particular product or service .

Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.

Characteristics of Monopoly:

Single Seller or producer

No Close Substitutes

Firm is Price Maker

Totally Blocked Entry

Monopolies may or may not advertise

Cross elasticity is zero or very small

Full control over the supply

Firm and industry are same

Sources or reasons of monopoly power:

Patent or copyright Control over essential raw

material Grant of franchise by the

government Natural monopoly (economies of

scale) Advertising and brand loyalties

of the established firms

Output(Q)

Price TR MR TC MC ATC

1 9 9 - 8 - 8

2 8 16 9 13 5 6.5

3 7 21 5 17 4 5.6

4 6 24 3 20 3 5

5 5 25 1 25 55

6 3 18 -7 42 177

7 2 14 4 56 148

Output(Q)

Price TR MR TC MC ATC

1 9 9 - 8 - 8

2 8 16 9 13 5 6.5

3 7 21 5 17 4 5.6

4 6 24 3 20 3 5

5 5 25 1 25 55

6 3 18 -7 42 177

7 2 14 4 56 148

Monopoly Output and Price Determination :

Loss occurs when ATC exceeds demand curve :

Output(Q)

Price TR MR TC MC ATC

1 15 15

2 14 28

3 13 39

4 12 48

5 11 55

Monopolistic Competition:

It refers to the market condition in which there is keen competition,

among a group of a large number of small producers or suppliers having

some degree of monopoly power because of their differential products.

Features:

Large number of firms Product differentiation Some influence over the price Non-price competition Product variation Freedom of entry and exit

OLIGOPOLY

The form of market structure in which there are few sellers of a homogeneous or differentiated product.

• Types of oligopoly-

Duopoly – When only 2 sellers exist

Pure oligopoly- When the products are homogeneous.

Differentiated oligopoly-When the products are differentiated or heterogeneous in nature.

Non price competition- When firms compete on factors like –advertising, service but not on price.

COLLUSIVE OLIGOPOLY

In order to avoid uncertainty arising out of interdependence and to

avoid price wars , the firms enter into agreement regarding a

uniform price-output policy.

• They can be formal(open) or tacit (secret). These agreements

lead to collusive oligopoly. These collusions can be of two

types-

Cartels

Price Leadership

a) Market Sharing cartel- It is of two types -

a) a) Market sharing by non price competition-

Only a uniform price is set and the firms are free to produce and sell the amounts of output which will maximize their individual profit.

b) Market sharing by output quota- firms fix the output and sell it at agreed price.

• Price leadership -It is of four types-

Price leadership by low cost firm

Price leadership by dominant firm

Barometric price

Exploitative or aggressive price leadership

KINKED DEMAND CURVE THEORY OF OLIGOPOLY

PRICE K

Quantity