Meaning of Market

Ordinarily, the term “market” refers to a particular place where goods are
purchased and sold. But, in economics, market is used in a wide perspective. In
economics, the term “market” does not mean a particular place but the whole
area where the buyers and sellers of a product are spread.
Market Structure:

Meaning:
Market structure refers to the nature and degree of competition in the market for
goods and services. The structures of market both for goods market and service
(factor) market are determined by the nature of competition prevailing in a
particular market.

Forms of Market Structure:

On the basis of competition, a market can be
classified in the following ways:
1. Perfect Competition

2. Monopoly

3. Duopoly

4. Oligopoly

5. Monopolistic Competition

1. Perfect Competition Market:

A perfectly competitive market is one in which the number
of buyers and sellers is very large, all engaged in buying
and selling a homogeneous product without any artificial
restrictions and possessing perfect knowledge of market
at a time. In the words of A. Koutsoyiannis, “Perfect
competition is a market structure characterised by a
complete absence of rivalry among the individual firms.”
According to R.G. Lipsey, “Perfect competition is a market
structure in which all firms in an industry are price- takers
and in which there is freedom of entry into, and exit from,
industry.”

Characteristics of Perfect Competition:

The following are the conditions for the existence of
perfect competition:
(1) Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers

must be so large that none of them individually is in a
position to influence the price and output of the industry
as a whole.Similarly, the individual seller is unable to
influence the price of the product by increasing or
decreasing its supply.

Rather, he adjusts his supply to the price of the product.

He is “output adjuster”. Thus no buyer or seller can alter
the price by his individual action. He has to accept the
price for the product as fixed for the whole industry. He is
a “price taker”.

(2) Freedom of Entry or Exit of Firms:

The next condition is that the firms should be free to enter
or leave the industry. It implies that whenever the industry
is earning excess profits, attracted by these profits some
new firms enter the industry. In case of loss being
sustained by the industry, some firms leave it.
(3) Homogeneous Product:
Each firm produces and sells a homogeneous product so
that no buyer has any preference for the product of any
individual seller over others. This is only possible if units
of the same product produced by different sellers are
perfect substitutes. In other words, the cross elasticity of
the products of sellers is infinite.

The above two conditions between themselves make the

average revenue curve of the individual seller or firm
perfectly elastic, horizontal to the X-axis. It means that a
firm can sell more or less at the ruling market price but
cannot influence the price as the product is homogeneous
and the number of sellers very large.

(4) Absence of Artificial Restrictions:

The next condition is that there is complete openness in
buying and selling of goods. Sellers are free to sell their
goods to any buyers and the buyers are free to buy from
any sellers. In other words, there is no discrimination on
the part of buyers or sellers.

(5) Profit Maximisation Goal:

Every firm has only one goal of maximising its profits.

(6) Perfect Mobility of Goods and Factors:

Another requirement of perfect competition is the perfect
mobility of goods and factors between industries. Goods
are free to move to those places where they can fetch the
highest price. Factors can also move from a low-paid to a
high-paid industry.

(7) Perfect Knowledge of Market Conditions:

This condition implies a close contact between buyers and
sellers. Buyers and sellers possess complete knowledge
about the prices at which goods are being bought and
sold, and of the prices at which others are prepared to buy
and sell. They have also perfect knowledge of the place
where the transactions are being carried on.

(8) Absence of Transport Costs:

Another condition is that there are no transport costs in
carrying of product from one place to another. This
condition is essential for the existence of perfect compe-
tition which requires that a commodity must have the
same price everywhere at any time.

(9) Absence of Selling Costs:

Under perfect competition, the costs of advertising, sales-
promotion, etc. do not arise because all firms produce a
homogeneous product.

Perfect Competition vs Pure Competition:

Perfect competition is often distinguished from pure
competition, but they differ only in degree. The first five
conditions relate to pure competition while the remaining
four conditions are also required for the existence of
perfect competition. According to Chamberlin, pure
competition means, competition unalloyed with monopoly
elements,” whereas perfect competition involves
perfection in many other respects than in the absence of
monopoly.” The practical importance of perfect
competition is not much in the present times for few
markets are perfectly competitive except those for staple
food products and raw materials. That is why, Chamberlin
says that perfect competition is a rare phenomenon.”

Though the real world does not fulfil the conditions of

perfect competition, yet perfect competition is studied for
the simple reason that it helps us in understanding the
working of an economy, where competitive behaviour
leads to the best allocation of resources and the most
efficient organisation of production. A hypothetical model
of a perfectly competitive industry provides the basis for
appraising the actual working of economic institutions and
organisations in any economy.

______________________________________________

2. Monopoly Market:
Monopoly is a market situation in which there is only one
seller of a product with barriers to entry of others. The
product has no close substitutes. The cross elasticity of
demand with every other product is very low. This means
that no other firms produce a similar product..” Thus the
monopoly firm is itself an industry and the monopolist
faces the industry demand curve.
The demand curve for his product is, therefore, relatively
stable and slopes downward to the right, given the tastes,
and incomes of his customers.

However, it does not mean that he can set both price and
output. He can do either of the two things. His price is
determined by his demand curve, once he selects his
output level. Or, once he sets the price for his product, his
output is determined by what consumers will take at that
price. In any situation, the ultimate aim of the monopolist
is to have maximum profits.

Characteristics of Monopoly:
The main features of monopoly are as follows:
1. Under monopoly, there is one producer or seller of a
particular product and there is no difference between a
firm and an industry. Under monopoly a firm itself is an
industry.

2. A monopoly may be individual proprietorship or

partnership or joint stock company or a cooperative
society or a government company.

3. A monopolist has full control on the supply of a product.

Hence, the elasticity of demand for a monopolist’s product
is zero.

4. There is no close substitute of a monopolist’s product in

the market. Hence, under monopoly, the cross elasticity of
demand for a monopoly product with some other good is
very low.
5. There are restrictions on the entry of other firms in the
area of monopoly product.

6. A monopolist can influence the price of a product. He is

a price-maker, not a price-taker.

7. Pure monopoly is not found in the real world.

8. Monopolist cannot determine both the price and

quantity of a product simultaneously.

9. Monopolist’s demand curve slopes downwards to the

right. That is why, a monopolist can increase his sales only
by decreasing the price of his product and thereby
maximise his profit. The marginal revenue curve of a
monopolist is below the average revenue curve and it falls
faster than the average revenue curve. This is because a
monopolist has to cut down the price of his product to sell
an additional unit.

3. Duopoly:
Duopoly is a special case of the theory of oligopoly in
which there are only two sellers. Both the sellers are
completely independent and no agreement exists between
them. Even though they are independent, a change in the
price and output of one will affect the other, and may set a
chain of reactions. A seller may, however, assume that his
rival is unaffected by what he does, in that case he takes
only his own direct influence on the price.

_______________________________________-
 . Oligopoly:
Oligopoly is a market situation in which there are a few
firms selling homogeneous or differentiated products. It is
difficult to pinpoint the number of firms in ‘competition
among the few.’ With only a few firms in the market, the
action of one firm is likely to affect the others. An
oligopoly industry produces either a homogeneous product
or heterogeneous products.

The former is called pure or perfect oligopoly and the

latter is called imperfect or differentiated oligopoly. Pure
oligopoly is found primarily among producers of such
industrial products as aluminium, cement, copper, steel,
zinc, etc. Imperfect oligopoly is found among producers of
such consumer goods as automobiles, cigarettes, soaps
and detergents, TVs, rubber tyres, refrigerators,
typewriters, etc.

Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic
industries have several common characteristics
which are explained below:
(1) Interdependence:
There is recognised interdependence among the sellers in
the oligopolistic market. Each oligopolist firm knows that
changes in its price, advertising, product characteristics,
etc. may lead to counter-moves by rivals. When the sellers
are a few, each produces a considerable fraction of the
total output of the industry and can have a noticeable
effect on market conditions.
Thus there is complete interdependence among the sellers
with regard to their price-output policies. Each seller has
direct and ascertainable influences upon every other seller
in the industry. Thus, every move by one seller leads to
counter-moves by the others.

(2) Advertisement:
The main reason for this mutual interdependence in
decision making is that one producer’s fortunes are
dependent on the policies and fortunes of the other
producers in the industry. It is for this reason that
oligopolist firms spend much on advertisement and
customer services.

As pointed out by Prof. Baumol, “Under oligopoly

advertising can become a life-and-death matter.” For
example, if all oligopolists continue to spend a lot on
advertising their products and one seller does not match
up with them he will find his customers gradually going in
for his rival’s product. If, on the other hand, one
oligopolist advertises his product, others have to follow
him to keep up their sales.

(3) Competition:
This leads to another feature of the oligopolistic market,
the presence of competition. Since under oligopoly, there
are a few sellers, a move by one seller immediately affects
the rivals. So each seller is always on the alert and keeps a
close watch over the moves of its rivals in order to have a
counter-move. This is true competition.
(4) Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry,
there are no barriers to entry into or exit from it.
However, in the long run, there are some types of barriers
to entry which tend to restraint new firms from entering
the industry.

They may be:

(a) Economies of scale enjoyed by a few large firms; (b)
control over essential and specialised inputs; (c) high
capital requirements due to plant costs, advertising costs,
etc. (d) exclusive patents and licenses; and (e) the
existence of unused capacity which makes the industry
unattractive. When entry is restricted or blocked by such
natural and artificial barriers, the oligopolistic industry
can earn long-run super normal profits.

(5) Lack of Uniformity:

Another feature of oligopoly market is the lack of
uniformity in the size of firms. Finns differ considerably in
size. Some may be small, others very large. Such a
situation is asymmetrical. This is very common in the
American economy. A symmetrical situation with firms of a
uniform size is rare.

(6) Demand Curve:

It is not easy to trace the demand curve for the product of
an oligopolist. Since under oligopoly the exact behaviour
pattern of a producer cannot be ascertained with
certainty, his demand curve cannot be drawn accurately,
and with definiteness. How does an individual seller s de-
mand curve look like in oligopoly is most uncertain
because a seller’s price or output moves lead to
unpredictable reactions on price-output policies of his
rivals, which may have further repercussions on his price
and output.

The chain of action reaction as a result of an initial change

in price or output, is all a guess-work. Thus a complex
system of crossed conjectures emerges as a result of the
interdependence among the rival oligopolists which is the
main cause of the indeterminateness of the demand curve.

If the oligopolist seller does not have a definite demand

curve for his product, then how does he affect his sales.
Presumably, his sales depend upon his current price and
those of his rivals. However, a number of conjectural
demand curves can be imagined.

For example, in differentiated oligopoly where each seller

fixes a separate price for his product, a reduction in price
by one seller may lead to an equivalent, more, less or no
price reduction by rival sellers. In each case, a demand
curve can be drawn by the seller within the range of
competitive and monopoly demand curves.

Leaving aside retaliatory price movements, the individual

seller’s demand curve under oligopoly for both price cuts
and increases is neither more elastic than under perfect or
monopolistic competition nor less elastic than under mo-
nopoly. It may still be indefinite and indeterminate.

This situation is shown in Figure 1 where KD1 is the elastic

demand curve and MD is the less elastic demand curve.
The oligopolies’ demand curve is the dotted kinked KPD.
The reason is quite simple. If a seller reduces the price of
his product, his rivals also lower the prices of their
products so that he is not able to increase his sales.

So the demand curve for the individual seller’s product

will be less elastic just below the present price P (where
KD1and MD curves are shown to intersect). On the other
hand, when he raises the price of his product, the other
sellers will not follow him in order to earn larger profits at
the old price. So this individual seller will experience a
sharp fall in the demand for his product.
Thus his demand curve above the price P in the segment
KP will be highly elastic. Thus the imagined demand curve
of an oligopolist has a comer or kink at the current price
P. Such a demand curve is much more elastic for price
increases than for price decreases.

(7) No Unique Pattern of Pricing Behaviour:

The rivalry arising from interdependence among the
oligopolists leads to two conflicting motives. Each wants to
remain independent and to get the maximum possible
profit. Towards this end, they act and react on the price-
output movements of one another in a continuous element
of uncertainty.

On the other hand, again motivated by profit maximisation

each seller wishes to cooperate with his rivals to reduce or
eliminate the element of uncertainty. All rivals enter into a
tacit or formal agreement with regard to price-output
changes. It leads to a sort of monopoly within oligopoly.

They may even recognise one seller as a leader at whose

initiative all the other sellers raise or lower the price. In
this case, the individual seller’s demand curve is a part of
the industry demand curve, having the elasticity of the
latter. Given these conflicting attitudes, it is not possible
to predict any unique pattern of pricing behaviour in
oligopoly markets.

5. Monopolistic Competition:
Monopolistic competition refers to a market situation
where there are many firms selling a differentiated
product. “There is competition which is keen, though not
perfect, among many firms making very similar products.”
No firm can have any perceptible influence on the price-
output policies of the other sellers nor can it be influenced
much by their actions. Thus monopolistic competition
refers to competition among a large number of sellers
producing close but not perfect substitutes for each other.

It’s Features:
The following are the main features of monopolistic
competition:
(1) Large Number of Sellers:
In monopolistic competition the number of sellers is large.
They are “many and small enough” but none controls a
major portion of the total output. No seller by changing its
price-output policy can have any perceptible effect on the
sales of others and in turn be influenced by them. Thus
there is no recognised interdependence of the price-output
policies of the sellers and each seller pursues an
independent course of action.

(2) Product Differentiation:

One of the most important features of the monopolistic
competition is differentiation. Product differentiation
implies that products are different in some ways from each
other. They are heterogeneous rather than homogeneous
so that each firm has an absolute monopoly in the
production and sale of a differentiated product. There is,
however, slight difference between one product and other
in the same category.

Products are close substitutes with a high cross-elasticity

and not perfect substitutes. Product “differentiation may
be based upon certain characteristics of the products
itself, such as exclusive patented features; trade-marks;
trade names; peculiarities of package or container, if any;
or singularity in quality, design, colour, or style. It may
also exist with respect to the conditions surrounding its
sales.”

(3) Freedom of Entry and Exit of Firms:

Another feature of monopolistic competition is the
freedom of entry and exit of firms. As firms are of small
size and are capable of producing close substitutes, they
can leave or enter the industry or group in the long run.

(4) Nature of Demand Curve:

Under monopolistic competition no single firm controls
more than a small portion of the total output of a product.
No doubt there is an element of differentiation neverthe-
less the products are close substitutes. As a result, a
reduction in its price will increase the sales of the firm but
it will have little effect on the price-output conditions of
other firms, each will lose only a few of its customers.

Likewise, an increase in its price will reduce its demand

substantially but each of its rivals will attract only a few of
its customers. Therefore, the demand curve (average
revenue curve) of a firm under monopolistic competition
slopes downward to the right. It is elastic but not perfectly
elastic within a relevant range of prices of which he can
sell any amount.

(5) Independent Behaviour:

In monopolistic competition, every firm has independent
policy. Since the number of sellers is large, none controls
a major portion of the total output. No seller by changing
its price-output policy can have any perceptible effect on
the sales of others and in turn be influenced by them.

(6) Product Groups:

There is no any ‘industry’ under monopolistic competition
but a ‘group’ of firms producing similar products. Each
firm produces a distinct product and is itself an industry.
Chamberlin lumps together firms producing very closely
related products and calls them product groups, such as
cars, cigarettes, etc.

(7) Selling Costs:

Under monopolistic competition where the product is
differentiated, selling costs are essential to push up the
sales. Besides, advertisement, it includes expenses on
salesman, allowances to sellers for window displays, free
service, free sampling, premium coupons and gifts, etc.

(8) Non-price Competition:

Under monopolistic competition, a firm increases sales
and profits of his product without a cut in the price. The
monopolistic competitor can change his product either by
varying its quality, packing, etc. or by changing
promotional programmes.

_____________________________________________
Price Determination and Equilibrium
of the Firm under perfect
competition in the Short Run.

The price and output determination is done by the industry as a

whole and the individual firm accepts it. There are three
situations during a short period under this market structure as given
under:
1. Profit Making Situation
2. Loss Incurring Situation
3. Normal Profit

Profit Making Situation

Under perfect competition during short period some firms earn profit
as shown in the following diagram:
The industry is shown on the left side wherein SS is the total supply
and DD is the total demand for the product. The point of E is the
equilibrium of industry where the supply curve intersects the
demand curve. The price is OP and the quantity of output is OQ. The
right side diagram is of an individual firm where AR and MR are
average revenue and marginal revenue and they are equal to price
(P=AR=MR).

AC and MC are average cost and marginal cost curves of the firm.
The point of equilibrium of the firm is at the point where MC cuts the
MR curve from below. The average and marginal revenue curves are
above the AC and MC curves. The price and output of the firm are
OP and OQ respectively. The average profit earned by the firm is
(AR-AC)ST and the total profit is PLTS.

Loss Incurring Situation

During a short period, some firms may incur losses when their AC
and MC curves are above their AR and MR curves at equilibrium
points as shown in diagram 2.
The point of equilibrium of industry is at the E point which indicates
the price determined by the total demand (DD) and total supply (SS)
where OP is price and OQ is output. The right side of the diagram
depicts the P=AR=MR and AC and MC cost curves of the firm. Cost
curves are above the revenue curves (AR & MR) which shows the
firm is incurring a loss, OP is price, OQ is output, average loss (AC–
AR) is ST and total loss is RPTS

Normal Profit
During short period under perfect competition some firms may earn
normal profit which is the situation of neither profit nor loss as
shown in diagrams 3.
 The point of equilibrium of industry is at E, price is OP and output is
OQ, the same price is accepted by the firm. Price, revenue and costs
are shown on OY-axis while output is on OX-axis. The price is OP
and output is OQ and the point of equilibrium of the firm is at point E
where P=AR=AC=MR=MC. This firm is called optimum firm during
short period under perfect competition because it has optimum
utilisation of its resources.

Price and Output Determination

During Long Period Under Perfect
Competition
There is free entry and exit of the firms in an industry. If existing
firms are earning an abnormal profit, more firms will be attracted to
the industry, production will increase and the price of the product
will fall and profit will be evaporated. On the other hand, if firms are
incurring loss no firm would like to stay in the industry for the long
period and they will leave the industry.

The number of firms will decrease, the output will decrease and the
price of the product will increase thereby the loss incurring situation
will be converted into normal profit. Thus there will be neither profit
nor loss simply normal profit will be earned by the firms in the
industry and normal profit is part of the cost. Price and output during
long period under perfect competition are shown in the following
diagram:

The price and output in the industry are OP and OQ

respectively. They are determined by the total demand (DD)
and total supply (SS) and the point of equilibrium of industry
is at point E. While the point of equilibrium of firm is at Point
E1. Price is OP and output is OQ. At point E long-run average
cost (AC) is equal to long-run average revenue (AR), long-
run marginal cost is equal to long run marginal revenue and
price (P=AR=AC=MR=MC). This is a situation of normal
profit during long period and the firm is called the ‘optimum
firm’

AVERAGE AND MARGINAL REVENUE CURVES

UNDER PERFECT COMPETITION

Average and Marginal Revenue Curves Under Perfect Competition

In Prefect competition every firm sells its output at a given price, and can sell as much as it
likes at this price. Hence the firm’s average and marginal revenue become constant and equal.
The corresponding AR and MR curve is one and the same and horizontal to the X-axis. Thus
in perfect competition MR = AR (or P) . This is illustrated in the foregoing example and
diagram.

Unit of a TR AR MR
Commodity (Rs.) (Rs.) (Rs).
Revenue

1 20 20 20

2 40 20 20

3 60 20 20

4 80 20 20

5 100 20 20

6 120 20 20

This is because under pure or perfect competition the number of firms selling an
identical product is very large. The market forces supply demand so that only one
price tends to prevail for the whole industry determines the price. It is OP shown
in figure each firm can sell as much as it wishes at the ruling market price OP.
Thus the demand for the firm’s product becomes infinitely elastic. Since the
demand curve is the firm’s average revenue curve, the shape of the AR curve is
horizontal to the X-axis at price OP as shown in panel of fig and the MR curve
coincide with it. This is also shown in the table where AR and MR remain
constant at Rs. 20 at every level of output. Any change in the demand and supply
 conditions will change the Market price of the product and consequently the

horizontal AR curve of the firm.

Price and Output Determination under Monopolistic

Competition

The firm under monopolistic competition achieves its equilibrium when it’s MC = MR, and
when its MC curve cuts its MR curve from below. If MC is less than MR, the sellers will find
it profitable to expand their output.

Under monopolistic competition

1. The demand curve is downwards sloping.

2. There are close substitutes.

3. The demand curve (the average revenue curve) is fairly elastic.

Under monopolistic competition, different firms produce different varieties of the product
and sell them at different prices. Each firm under monopolistic competition seeks to achieve
equilibrium as regards

1. Price and output, 2. Product adjustment and 3. selling cost adjustment.

Short-run equilibrium:

How does a monopolistically competitive firm achieve price-output level equilibrium? The
profit maximisation is achieved when MC=MR.

OM’ is the equilibrium output. ‘OP’ is the equilibrium price. The total revenue is ‘OMQP’.
And the total cost is ‘OMRS’. Therefore, total profit is ‘PQRS’. This is super normal profit
under short-run.

But under differing revenue and cost conditions, the monopolistically competitive firms many
incur loss.
As shown in the diagram, the AR and MR curves are fairly elastic. The equilibrium situation
occurs at point ‘E’, where MC = MR and MC cuts MR from below.

The equilibrium output is OM and the equilibrium price is OP.

The total revenue of the firm is ‘OMQP’ and the total cost of the firm is ‘OMLK’ and thus
the total loss is ‘PQLK’. This firm incurs loss in the short run.

Long-Run Equilibrium of the Firm and the Group Equilibrium

In the short run a firm under monopolistic competition may earn super normal profit or incur
loss.

But in the long run, the entry of the new firms in the industry will wipe out the super normal
profit earned by the existing firms. The entry of new firms and exit of loss making firms will
result in normal profit for the firms in the industry.
In the long run AR curve is more elastic or flatter, because plenty of substitutes are available.
Hence, the firms will earn only normal profit.

The only one condition for equilibrium in the short run : MC = MR.

The two conditions for equilibrium in the long run : MC = MR and AC = AR.

In the diagram equilibrium is achieved at point ‘E’. The equilibrium output is ‘OM’ and the
equilibrium price is ‘OP’. The average revenue at the equilibrium output is ‘MQ’ and the
average cost is also ‘MQ’. Thus, in the long run under monopolistic competition, there is
equilibrium when AR=AC and MC=MR. It means that a firm earns a normal profit. AR is
tangent to the Long Run Average Cost (LAC) curve at point ‘Q’.

Demand, AR, and MR curves under monopoly

Monopoly refers to a market structure in which there is
a single producer or seller that has a control on the
entire market.
Demand and Revenue under Monopoly:

Table-1 shows the numerical calculation of AR and

MR under monopoly:

As shown in Table-1, AR is equal to price. MR is less

than AR and falls twice the rate than AR. For instance,
when two units of

Output are sold, MR falls by Rs. 2, whereas AR falls by

Re. 1.
The negative AR and MR curve depicts the
following facts:

i. When MR is greater than AR, the AR rises

ii. When MR is equal to AR, then AR remains constant

iii. When MR is lesser than AR, then AR falls

Here, AR is the price of a product, As we know, AR falls

under monopoly; thus, MR is less than AR. This can be
explained with the help of the following figure.

It can be seen that more quantity (OQ 2) can only be sold

at lower price (OP 2). Under monopoly, the slope of AR
curve is downward, which implies that if the high prices
are set by the monopolist, the demand will fall. In
addition, in monopoly, AR curve and Marginal Revenue
(MR) curve are different from each other. However, both
of them slope downward.

Price and Output Determination

Under Monopoly During Short-Run
The monopoly-owned firm achieves price and output determination under
monopoly and equilibrium in the short run at the point when profits are the
highest and losses are minimal.
1. Super-Normal Profit
In the short-run, SAC and SMC are the marginal and short-run average
revenue curves, while AVC represents the mean variable cost curve for the
company. For a variety of reasons, it is the case the AVC curve is not
available in figure 6.14. The price and output determination under monopoly.
The curve of demand D=AR whose marginal revenue curve can describe as
MR. At the point the point. The short-run equilibrium at which the SMC curve
cuts into the MR curve below. The monopoly price and output determination is
must. The Monopolist can sell OM output at the MP Price. This price is MP. is
higher than the cost of short-run MA. The Monopolist makes AP Profit per Unit
of Output. So total profits from monopolies include:

APXCA= The area CAPB.

2. Normal Profit
When monopolists earn just average profits, it can be in their short-run
equilibrium shown in figure 6.15. OM output determines by equalization
between the SMC curve and MR curve at point E. Its sale is at the MP Price.
At this point in production, the company’s owner makes average profits as
there is no loss as the SAC curve is tangent with the AR curve. The
Monopolist knows that any output beyond OM could result in losses as the
SAC curve is greater than the AR curve.
3. Minimum Loss
The Monopolist suffers losses in a short-run scenario, as illustrated in figure
6.16. The equilibrium level E is calculated through the formula SMC=MR.
However, the price for monopoly MP, determined by the demand conditions,
doesn’t provide the cost of short-run production associated with production
PA. The price and output determination under monopoly (with diagram) is as
follows. The price only covers variable costs that are average MP. The
tangency is the ratio between both the curve of demand D and the AVC curve
at point P.

Therefore, the PA is responsible per unit loss for the Monopolist. We can help
in price and output determination under monopoly. Total losses equal
BPXPA=BPAC BPAC In this illustration, 6.16. P is the point of closure for this
company. If the price at the point MP decreases downwards due to market
conditions, production must temporarily stop by the Monopolist. The firm is
shut down.

Price and Output Determination

Under Monopoly During Long-Run
At that point in production, the marginal cost is more significant than the
marginal revenue, and the long-term equilibrium of the firm in the monopoly
model is achievable. Due to the inability of new companies into markets, the
income of the monopoly company is not as high in the long term. For price
output determination under monopoly it is important to know about the
monopoly firm. Despite this the fact that there is no loss for the monopoly firm
since, over time, everything is reversible and is recoupable. Supposing that, in
the end, the monopoly firm can’t cover the variable cost, the firm should cease
production and exit the market.

In diagram, M is the point at which the firm is at equilibrium when LMC for the
company merges with MR. OQ output generates the firm in the price of
equilibrium OK that is acceptable. The profit PR per unit reaches the
production level, OQ, when the company’s average revenue is more
significant than it’s cost of production, and the shading area KLRP is the same
as the profit total. For this, price determination under monopoly is important.

Price Discrimination
Price discrimination refers to the practice of a seller of
selling the same product at different prices to different
buyers. Prof. Stigler defines price discrimination as “the
sales of technically similar products at prices which are
not proportional to marginal costs.”

Three types of price discrimination may be noted.

Price discrimination may be:
(a) Personal,

(b) Local, or

(c) According to use or trade.

Price discrimination is personal when a seller charges

different prices from different persons. Price
discrimination is local when the seller charges different
prices from people of different localities or places. For
instance, producer may sell a commodity at one price at
he me and at another price abroad. Discrimination is
according to use when different prices of a commodity are
charged according to the uses to which the commodity is
put. For example, the electricity is usually sold at a
cheaper rate for domestic uses than for commercial
purposes.
Degrees of Price Discrimination:
Prof. A.C. Pigou has distinguished between the
following three types of price discrimination o
another ground:
(i) Price discrimination of the first degree;

(ii) Price discrimination of the second degree; and

(iii) Price discrimination of the third degree.

i. First-degree Price Discrimination:

Refers to a price discrimination in which a monopolist

charges the maximum price that each buyer is willing to
pay. This is also known as perfect price discrimination as
it involves maximum exploitation of consumers. In this,
consumers fail to enjoy any consumer surplus. First
degree is practiced by lawyers and doctors.

ii. Second-degree Price Discrimination:

Refers to a price discrimination in which buyers are

divided into different groups and different prices are
charged from these groups depending upon what they
are willing to pay. Railways and airlines practice this
type of price discrimination.

iii. Third-degree Price Discrimination:

Refers to a price discrimination in which the monopolist

divides the entire market into submarkets and different
prices are charged in each submarket. Therefore, third-
degree price discrimination is also termed as market
segmentation.

In this type of price discrimination, the monopolist is

required to segment market in a manner, so that
products sold in one market cannot be resold in another
market. Moreover, he/she should identify the price
elasticity of demand of different submarkets. The groups
are divided according to age, sex, and location. For
instance, railways charge lower fares from senior
citizens. Students get discount in cinemas, museums,
and historical monuments.

Advantages and Disadvantages of Price

Discrimination:
ADVERTISEMENTS:

A monopolist practices price discrimination to gain

profits. However, it acts as a loss for the consumers.
Following are some of the advantages of price
discrimination:

i. Helps organizations to earn revenue and stabilize the

business

ii. Facilitates the expansion plans of organizations as

more revenue is generated

iii. Benefits customers, such as senior citizens and

students, by providing them discounts

In spite of advantages, there are certain disadvantages

of price discrimination.

Some of the disadvantages of price discrimination

as follows:

i. Leads to losses as some consumers end up paying

higher prices

ii. Involves administration costs for separating markets.

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The Oligopoly Market

Oligopoly is a market structure in which there are only a

few sellers (but more than two) of the homogeneous or
differentiated products. So, oligopoly lies in between
monopolistic competition and monopoly. Oligopoly refers
to a market situation in which there are a few firms selling
homogeneous or differentiated products. Oligopoly is,
sometimes, also known as ‘competition among the few’ as
there are few sellers in the market and every seller
influences and is influenced by the behaviour of other
firms.

Example of Oligopoly:
In India, markets for automobiles, cement, steel,
aluminium, etc, are the examples of oligopolistic market.
In all these markets, there are few firms for each
particular product.

DUOPOLY is a special case of oligopoly, in which there are

exactly two sellers. Under duopoly, it is assumed that the
product sold by the two firms is homogeneous and there is
no substitute for it. Examples where two companies
control a large proportion of a market are: (i) Pepsi and
Coca-Cola in the soft drink market; (ii) Airbus and Boeing
in the commercial large jet aircraft market; (iii) Intel and
AMD in the consumer desktop computer microprocessor
market.

Types of Oligopoly:
1. Pure or Perfect Oligopoly:
If the firms produce homogeneous products, then it is
called pure or perfect oligopoly. Though, it is rare to find
pure oligopoly situation, yet, cement, steel, aluminum and
chemicals producing industries approach pure oligopoly.

2. Imperfect or Differentiated Oligopoly:

If the firms produce differentiated products, then it is
called differentiated or imperfect oligopoly. For example,
passenger cars, cigarettes or soft drinks. The goods
produced by different firms have their own distinguishing
characteristics, yet all of them are close substitutes of
each other.

3. Collusive Oligopoly:
If the firms cooperate with each other in determining price
or output or both, it is called collusive oligopoly or
cooperative oligopoly.

4. Non-collusive Oligopoly:
If firms in an oligopoly market compete with each other, it
is called a non-collusive or non-cooperative oligopoly.

Features of Oligopoly:
The main features of oligopoly are elaborated as
follows:
1. Few firms:
Under oligopoly, there are few large firms. The exact
number of firms is not defined. Each firm produces a
significant portion of the total output. There exists severe
competition among different firms and each firm try to
manipulate both prices and volume of production to
outsmart each other. For example, the market for
automobiles in India is an oligopolist structure as there
are only few producers of automobiles.

The number of the firms is so small that an action by any

one firm is likely to affect the rival firms. So, every firm
keeps a close watch on the activities of rival firms.

2. Interdependence:
Firms under oligopoly are interdependent.
Interdependence means that actions of one firm affect the
actions of other firms. A firm considers the action and
reaction of the rival firms while determining its price and
output levels. A change in output or price by one firm
evokes reaction from other firms operating in the market.

For example, market for cars in India is dominated by few

firms (Maruti, Tata, Hyundai, Ford, Honda, etc.). A change
by any one firm (say, Tata) in any of its vehicle (say,
Indica) will induce other firms (say, Maruti, Hyundai, etc.)
to make changes in their respective vehicles.

3. Non-Price Competition:
Under oligopoly, firms are in a position to influence the
prices. However, they try to avoid price competition for
the fear of price war. They follow the policy of price
rigidity. Price rigidity refers to a situation in which price
tends to stay fixed irrespective of changes in demand and
supply conditions. Firms use other methods like
advertising, better services to customers, etc. to compete
with each other.

If a firm tries to reduce the price, the rivals will also react
by reducing their prices. However, if it tries to raise the
price, other firms might not do so. It will lead to loss of
customers for the firm, which intended to raise the price.
So, firms prefer non- price competition instead of price
competition.

4. Barriers to Entry of Firms:

The main reason for few firms under oligopoly is the
barriers, which prevent entry of new firms into the
industry. Patents, requirement of large capital, control
over crucial raw materials, etc, are some of the reasons,
which prevent new firms from entering into industry. Only
those firms enter into the industry which is able to cross
these barriers. As a result, firms can earn abnormal profits
in the long run.

5. Role of Selling Costs:

Due to severe competition ‘and interdependence of the
firms, various sales promotion techniques are used to
promote sales of the product. Advertisement is in full
swing under oligopoly, and many a times advertisement
can become a matter of life-and-death. A firm under
oligopoly relies more on non-price competition.

Selling costs are more important under oligopoly than

under monopolistic competition.

6. Group Behaviour:
Under oligopoly, there is complete interdependence
among different firms. So, price and output decisions of a
particular firm directly influence the competing firms.
Instead of independent price and output strategy,
oligopoly firms prefer group decisions that will protect the
interest of all the firms. Group Behaviour means that firms
tend to behave as if they were a single firm even though
individually they retain their independence.

7. Nature of the Product:

The firms under oligopoly may produce homogeneous or
differentiated product.
i. If the firms produce a homogeneous product, like
cement or steel, the industry is called a pure or perfect
oligopoly.

ii. If the firms produce a differentiated product, like

automobiles, the industry is called differentiated or
imperfect oligopoly.

8. Indeterminate Demand Curve:

Under oligopoly, the exact behaviour pattern of a producer
cannot be determined with certainty. So, demand curve
faced by an oligopolist is indeterminate (uncertain). As
firms are inter-dependent, a firm cannot ignore the
reaction of the rival firms. Any change in price by one firm
may lead to change in prices by the competing firms. So,
demand curve keeps on shifting and it is not definite,
rather it is indeterminate.

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