Module 5 Market Structure Analysis

Market

Market is a place where seller sells goods to buyer for some consideration.

Types of market Structure

1.Perfect Competition market

2. Monopoly market

3. Monopolistic Market

4. Oligopoly market

Perfect Competition Market

Perfect competition market is a market where there are large number of sellers and buyers
selling homogenous goods.

Features of Perfect Competition Market

1. Large number of sellers and buyers: In Perfect Competition market, there are large
number of sellers and buyers.
2. Homogenous Products: In perfect competition, a buyer cannot distinguish between the
products of two firms. There are no distinctive features associated with the product of a
specific firm. In fact, the product is homogeneous and undifferentiated.
3. Free Entry and Exit: Another important feature of perfect competition is free entry and
exit. It means that any firm can close down and the leave the industry or any new firm can
enter at any time.
4. Price Taker: In Perfect Competition Market, sellers are the price taker because the price is
fixed by the Industry with the help of Market forces.
5. No transaction Cost: In perfect competition, the buyers and sellers do not incur any
transaction costs. The buyer pays the price that is exactly equal to the price that the seller
receives. There are no additional transaction costs.
6. Full knowledge of market: In perfect competition, it is assumed that all buyers and sellers
have the complete knowledge of the prevailing price of the product. Further, they are also
aware of the prices that the sellers want and the buyers offer. This knowledge helps
buyers and sellers to use any opportunity to strike a good bargain.

Price Output Determination Under Monopoly market

In Perfect Competition Market the price and Output is determined By both Firm and
Industry.

Price Output determination under perfect competition market by the Industry

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In Perfect Competition market, the Industry determines the price and output by using
market forces (Demand and Supply). The point at which the demand and supply
Curve intersect is the point which determines the price and output under perfect
competition market by Industry.

Price Output determination under perfect competition market by firm

Conditions for the equilibrium of a firm

To attain an equilibrium position, a firm must satisfy the following two conditions:

1. They must ensure that the marginal revenue is equal to the marginal cost (MR = MC).

2. The MC curve must have a positive slope and cut the MR curve from below.

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 Module 5 Market Structure Analysis

Monopoly Market

A monopoly market is a market structure where a single seller or producer controls the
supply of a product or service, and has a dominant position in the industry.

Features of monopoly market

1. Single Seller of the Product

In a monopoly market, usually, there is a single firm which produces and/or supplies a particular
product/ commodity. It is fair to say that such a firm constitutes the entire industry. Also, there is
no distinction between the firm and the industry.

2. Entry Restrictions

Another feature of a monopoly market is restrictions of entry. These restrictions can be of any
form like economical, legal, institutional, artificial, etc.

3. No Close Substitutes

Usually, a monopolist sells a product which does not have any close substitutes. Therefore, the
cross elasticity of demand for such a product is either zero or very small.

4. Price Maker

Since there is only one firm selling the product, it becomes the price maker for the
whole industry. The consumers have to accept the price set by the firm as there are no other
sellers or close substitutes.

Price output determination under monopoly market

According to this approach , a monopolist will be in equilibrium when two conditions

fulfilled , i.e. , ( i ) MC = MR and ( ii ) MC must cut MR from below , i.e. , slope of MC >
slope of MR Once the profit maximizing output level is determined , the monopolist finds out
the price which this quantity can be sold.

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 Module 5 Market Structure Analysis

Monopolistic Market
Monopolistic market is a market where there are large number of sellers and buyers selling
differentiated products.

Features of Monopolistic Competition

1. Large number of sellers: In a market with monopolistic competition, there are a large
number of sellers who have a small share of the market.

2. Product differentiation: In monopolistic competition, all brands try to

create product differentiation to add an element of monopoly over the competing
products. This ensures that the product offered by the brand does not have a perfect
substitute. Therefore, the manufacturer can raise the price of the product without having
to worry about losing all its customers to other brands. However, in such a market, while
all brands are not perfect substitutes, they are close substitutes for each other. Hence, the
seller might lose at least some customers to his competitors.

3. Freedom of entry or exit: Like in perfect competition, firms can enter and exit the market
freely.

4. Non-price competition: In monopolistic competition, sellers compete on factors other than

price. These factors include aggressive advertising, product development,
better distribution, after sale services, etc. Sellers don’t cut the price of their products but
incur high costs for the promotion of their goods. If the firms indulge in price-wars,
which is the possibility under perfect competition, some firms might get thrown out of the
market.

Price output Determination under Monopolistic Market

According to this approach , a monopolistic market will be in equilibrium when two

conditions fulfilled , i.e. , ( i ) MC = MR and ( ii ) MC must cut MR from below , i.e. , slope
of MC > slope of MR Once the profit maximizing output level is determined , the
monopolistic market finds out the price which this quantity can be sold

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Oligopoly market

Oligopoly market is a market where there are few sellers and large number of buyers selling
both differentiated and homogenous products.

Characteristics of Oligopoly

Few firms

Under Oligopoly, there are a few large firms although the exact number of firms is undefined.
Also, there is severe competition since each firm produces a significant portion of the total
output.

Barriers to Entry

Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to
entry like patents, licenses, control over crucial raw materials, etc. These barriers prevent the
entry of new firms into the industry.

Non-Price Competition

Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence depend
on non-price methods like advertising, after sales services, warranties, etc. This ensures that
firms can influence demand and build brand recognition.

Interdependence

Under Oligopoly, since a few firms hold a significant share in the total output of the industry,
each firm is affected by the price and output decisions of rival firms. Therefore, there is a lot of
interdependence among firms in an oligopoly. Hence, a firm takes into account the action and
reaction of its competing firms while determining its price and output levels.

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