various model of marketing
TRANSCRIPT
Various model of marketing
Generally market structures are classified into four types:
• Monopoly - single producer of an unique good (e.g. cable TV, diamonds, particular drugs)
• Perfect competition – many producers of a single, unique good.
• Monopolistic competition – many producers of slightly differentiated goods (e.g. fast food)
• Oligopoly – few producers, with a single or only slightly differentiated good (e.g. cigarettes, cell
phones, BDL to ORD flights)
A. Monopoly :
A monopoly is a market structure in which a single supplier produces and sells a given product. In
a MONOPOLY, the “firm” and the “industry” are the same.
If there is a single seller in a certain industry and there are not any close substitutes for the product,
then the market structure is that of a "Pure Monopoly”
Characteristic of monopoly market:
1. Sellers are price makers – as there is only one seller in the market, it can influence the market
price by its own production decisions. If the market demand curve is downward sloping then the
monopoly firm faces the same demand curve, the price falls as the amount of output sold rises. So
the firm can increase the market price by selling less.
2. Buyers are price takers – each buyer is sufficiently small in relation to the overall market that
they can’t influence the market price by the amount they consume.
3. Sellers do not engage in strategic behavior – when a firm makes its own output decisions, it does
not take into consideration the response of other firms – because there aren’t any.
4. No new firms can enter the market – the monopoly firm faces no threat of entry from potential
rivals. When you have a market that has only one firm producing, but the firm is producing at a
lower price than you would expect it to, this could suggest that it is fearful of rivals entering and
so is trying to deter entry through keeping the price down. Sometimes you will have a situation
where there appears to be only one firm in the market, but it is not really a monopoly – the threat
of entry will erode its market power.
5. No Close Substitutes-All the units of a commodity are similar and there are no substitutes to
that commodity.
6. Profit in the Long Run: A monopolist can earn abnormal profit even in the long run because he
has no fear of a competitive seller. In other words, if a monopolist gets abnormal profits in the
long run, he cannot be dislodged from this position. However, this is not possible under perfect
Various model of marketing
competition. If abnormal profits are available to a competitive firm, other firms will enter the
competition with the result abnormal profits will be eliminated.
7. Losses in the Short Period-Generally, a common man thinks that a monopoly firm cannot incur
loss because it can fix any price it wants. However, this understanding is not correct. A monopoly
firm can sustain losses equal to fixed cost in the short period. A monopolist means that there is
only a single person or a firm to sell the commodity.
Therefore, anybody who would like to buy that commodity will buy it from the monopolist only.
However, if a firm has monopoly of such a commodity which people buy less or do not buy, it can
incur losses or it may have to stop production even. For example, if someone has the monopoly of
yellow hair dye, it is natural that the firm has the possibility of incurring losses because it is a
product which people generally don't buy.
8. Nature of Demand Curve-Under monopoly the demand for the commodity of the firm is less
than being perfectly elastic and, therefore, it slopes downwards to the right. The main reason of
the demand curve sloping downwards to the right is the complete control of the monopolist on the
supply of the commodity. Due to control on the supply a monopolist makes changes in the supply
which brings about changes in the price and because of this demand changes in the opposite
direction. In other words, if a monopolist increases the price of the commodity, the amount of
quantity sold decreases. Therefore, demand curve (AR) slopes downwards to the right. The nature
of demand curve has been shown in the diagram. DD is demand curve, which has a negative slope.
9. Price-discrimination-From the point of view of profit a monopolist can change different prices
from different consumers of his commodity. This policy is known as price discrimination. He
adopts the policy of price discrimination on various bases such as charging different prices from
different consumers or fixing different prices at different places etc.
10. . Average and Marginal Revenue Curves-Under monopoly, average revenue is greater than
marginal revenue. Under monopoly, if the firm wants to increase the sale it can do so only when
it reduces its price. This means AR would decline when sale increases. In that case MR would be
less than AR. (ii) AR slopes downwards to the right and is greater than MR.
Formation of monopoly:
Monopolies can form for a variety of reasons, including the following :
If a firm has exclusive ownership of a scarce resource. Example – Microsoft owning Windows OS
Governments may grant a firm monopoly status, also known as legal monopoly .Example –
K.S.E.B (Electricity)
Various model of marketing
Producers may have patents over designs, or copyright over ideas, characters, images, sounds or
names, giving them exclusive rights to sell a good or service Example - A song writer having a
monopoly over their own material.
A monopoly could be created following the merger of two or more firms.
Source of monopoly power:
Monopolies derive their market power from barriers to entry
3 types of barriers to entry:
a) Economic
b) Legal
c) Deliberate
a) Economic barrier :
Economies of scale: Reduce prices below a new entrant's operating costs and thereby prevent them
from continuing to compete
Capital requirements: Production processes that require large investments of capital, or large R&D
costs limit the number of companies in an industry
Technological superiority: Entrants do not have the size or finances to use the best available
technology
No substitute goods: There is no close substitute for a good.
Control of natural resources: Control of resources that are critical to the production of a final good.
Network externalities: There is a direct relationship between the proportion of people using a
product and the demand for that product. More people who are using a product the greater the
probability of any individual starting to use the product
Ex. MS
b) Legal barrier:
Legal rights can provide opportunity to monopolise the market of a good. Example :Patents and
Copyrights
c) Deliberate actions:
Deliberate actions to eliminate competitors. Such actions include collusion, lobbying
governmental authorities, and force.
Type of monopoly:
Various model of marketing
a)Natural monopoly:
Cost of production declines throughout the relevant range of product demand.
Cost curve below the demand curve.
Company with low production cost will dominate the market, naturally evolve into a monopoly.
Regulation is difficult.
b)Government-granted monopoly:
Government grants exclusive privilege to a private individual or company to be the sole provider
of a commodity; potential competitors are excluded from the market by law, regulation, or other
mechanisms of government enforcement.
Ex; Patents and Copyrights
c)Bilateral Monopoly
Both a monopoly (a single seller) and monopsony (a single buyer) in the same market
Market price and output will be determined by forces like bargaining power of both buyer and
seller.
Ex: Labor Union and Factory
d) Complementary Monopoly
Consent must be obtained from more than one agent in order to obtain the good.
This can be seen in private toll roads where more than one operator controls a different section of
the road
Anti-Monopoly law in India:
1.The Monopolies & Restrictive Trade Practices Act, 1969 -First enactment to deal with
competition issues .Came into effect on 1st June 1970.
Aims :-
Control of monopolies.
Probation of monopolistic, restrictive and unfair trade practice.
Protect consumer interest.
2. Competition Act, 2002
To shift focus of law from curbing monopolies to promoting competition. Enacted on 13th January
2003
Various model of marketing
Objectives of the Competition Act:-
a. To prevent anti-competitive practices.
b. Promote and sustain competition.
c. Protect the interests of the consumers
d. Ensure freedom of trade.
Advantage of monopoly :
1. Can benefit from economies of scale.
2. Earns export revenues for the country- dominant Domestic monopolies entering overseas market
3. Profits invested in new technology reduces costs via process innovation.
4. Lower price and higher output in the long run.
5. Generate dynamic efficiency (technological progressiveness):-
High profit levels boost investment in R&D.
Innovation -large enterprises - lower costs.
Firm needs dominant position to bear risks.
Establishing barriers to entry.
Disadvantage of monopoly to consumers:
1. Restricting output onto the market.
2. Charging higher price than in competitive market.
3. Reducing consumer surplus and economic welfare.
4. Restricting choice for consumers.
5. Reducing consumer sovereignty