Unit IV

Introduction to Markets
Meaning:
Market refers to a place or point at which buyers and sellers negotiate their exchange of well-
defined products or services.
Definition:
According to Prof R. Chapman, “the term market refers not necessarily to a place but
always to a commodity and the buyers and sellers who are in direct competition with one
another”.
Feature of Market
1. Area: it is an area where buyers and sellers of the commodity must reside i.e., local,
national, international.
2. Commodity: commodity is soul of market. Every market must have commodity to be
purchased and sold.
3. Buyers and sellers: Buyers and sellers directly or indirectly in the market is essential
for conducting business transactions.
4. Free competition: Free competition among Buyers and sellers in the market.
5. Price
6. Close contact between buyers and sellers.
Types of Markets:

What is Perfect Competition?

Perfect competition refers to a market structure where competition among the sellers and
buyers is very large, all engaged buying and selling a homogeneous product, free entry/exit
conditions and perfect knowledge of market at a time.

E.g.: fruit and vegetable market

Features of perfect competition:
(i) Large Number of buyers and sellers
(ii) Homogeneous Products or services
(iii) Freedom to enter or exit the market
(iv) Perfect information available to the buyers and sellers
(v) Perfect mobility of factors of production
(VI) Uniform price (Each firm is a price taker)
What is Imperfect Competition?
A competition is said to be imperfect when it is not perfect. In other words, when any or most
of the above conditions do not exist in a given market it is referred to as an imperfect
competition
Based on the number of buyers and sellers, the structure of market varies as below:
‘Poly’ refers to seller and ‘Psony’ refers to buyer.
Imperfect competition markets are classified as:
(a) Monopoly
(b) Monopolistic Competition
(c) Duopoly
(d) Oligopoly
(e) Monopsony
(f) Duopsony
(g) Oligopsony
What is Monopoly?
The term monopoly is derived from Greek words 'mono' which means single and 'poly' which
means seller. So, monopoly is a market structure, where there only a single seller producing a
product having no close substitutes.
Examples:
1. Indian Railways has monopoly in Railroad transportation.
2. State Electricity board has monopoly over generation and distribution of electricity in
many of the states.
3. Hindustan Aeronautics Limited has monopoly over production of aircraft.
4. There is Government monopoly over production of nuclear power.
Characteristics / Features of Monopoly:
1. A single seller has complete control over the supply of the commodity.
2. There are no close substitutes for the product.
3. There is no free entry and exit because of some restrictions.
4. Large no of buyers
5. Monopolist is a price maker.
6. Since there is a single firm, the firm and industry are one and same i.e. firm coincides
the industry.
7. Monopoly firm faces downward sloping demand curve. It means he can sell more at
lower price and vice versa. Therefore, elasticity of demand factor is very important
for him.
8. Can decide either the price or quantity, not both
9. Monopoly may be created through statutory grant of special privileges such as
licenses, permit, patent rights, and so on
Classification / Kinds / Types of Monopoly:
1. Perfect Monopoly: It is also called as absolute monopoly. In this case, there is only a
single seller of product having no close substitute; not even remote one. There is absolutely
zero level of competition. Such monopoly is practically very rare.
2. Imperfect Monopoly: It is also called as relative monopoly or simple or limited
monopoly. It refers to a single seller market having no close substitute. It means in this
market, a product may have a remote substitute. So, there is fear of competition to some
extent e.g. Mobile (Cell phone) telecom industry (e.g. Vodafone) is having competition from
fixed landline phone service industry (e.g. BSNL).
3. Private Monopoly: When production is owned, controlled and managed by the individual,
or private body or private organization, it is called private monopoly. E.g. Tata, Reliance,
Bajaj, etc. groups in India. Such type of monopoly is profit oriented.
4. Public Monopoly: When production is owned, controlled and managed by government, it
is called public monopoly. It is welfare and service oriented. So, it is also called as 'Welfare
Monopoly' e.g. Railways, Defence, etc.
5. Simple Monopoly: Simple monopoly firm charges a uniform price or single price to all
the customers. He operates in a single market.
6. Discriminating Monopoly: Such a monopoly firm charges different price to different
customers for the same product. It prevails in more than one market.
7. Legal Monopoly: When monopoly exists on account of trademarks, patents, copy rights,
statutory regulation of government etc., it is called legal monopoly. Music industry is an
example of legal monopoly.
8. Natural Monopoly: It emerges as a result of natural advantages like good location,
abundant mineral resources, etc. e.g. Gulf countries are having monopoly in crude oil
exploration activities because of plenty of natural oil resources.
9. Technological Monopoly: It emerges as a result of economies of large scale production,
use of capital goods, new production methods, etc. E.g. engineering goods industry,
automobile industry, software industry, etc.
10. Joint Monopoly: A number of business firms acquire monopoly position through
amalgamation, cartels, syndicates, etc., it becomes joint monopoly. E.g. actually, pizza
making firm and burger making firm are competitors of each other in fast food industry. But
when they combine their business that leads to reduction in competition. So they can enjoy
monopoly power in market.
Monopolistic competition:
It is market characterized by an admixture of the features of both monopoly and perfect
competition. So it is defined as market setting in which a large no of sellers sell differentiated
products.
Monopolistic competition has been introduced by American economist Professor. Edward
Chamberlin, in his book 'Theory of Monopolistic Competition' published in 1933.
Features of monopolistic competition:
1. Large Number of Sellers: There are large numbers of sellers producing differentiated
products. So, competition among them is very keen. Since number of sellers is large, each
seller produces a very small part of market supply. So no seller is in a position to control
price of product. Every firm is limited in its size.
2. Product Differentiation: It is one of the most important features of monopolistic
competition. In perfect competition, products are homogeneous in nature. On the contrary,
here, every producer tries to keep his product dissimilar than his rival's product in order to
maintain his separate identity. This boosts up the competition in market. So, every firm
acquires some monopoly power.
3. Products offered are close substitutes
4. Freedom of Entry and Exit: This feature leads to stiff competition in market. Free entry
into the market enables new firms to come with close substitutes. Free entry or exit maintains
normal profit in the market for a longer span of time.
5. Selling Cost: It is a unique feature of monopolistic competition. In such type of market,
due to product differentiation, every firm has to incur some additional expenditure in the
form of selling cost. This cost includes sales promotion expenses, advertisement expenses,
salaries of marketing staff, etc.
6. Absence of Interdependence: Large numbers of firms are different in their size. Each
firm has its own production and marketing policy. So no firm is influenced by other firm. All
are independent.
7. Two Dimensional Competition: Monopolistic competition has two types of competition
aspects viz.
Price competition i.e. firms compete with each other on the basis of price.
Non price competition i.e. firms compete on the basis of brand, product quality
advertisement.
8. Concept of Group: In place of Marshallian concept of industry, Chamberlin introduced
the concept of Group under monopolistic competition. An industry means a number of firms
producing identical product. A group means a number of firms producing differentiated
products which are closely related.
9. Falling Demand Curve: In monopolistic competition, a firm is facing downward sloping
demand curve i.e. elastic demand curve. It means one can sell more at lower price and vice
versa.
What is Duopoly?
Duo means two; Poly means sellers.
If there are two sellers, duopoly is said to exist.
Sell homogeneous or heterogeneous product.
For example; let’s assume that we have only two soft drink manufacturing companies like
Pepsi and Coke this market is said called Duopoly.
Basic facilities for satellite communication are presently provided by Mahanagar Telephone
Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL).
Features of duopoly:
. Two firms in the industry
· Strong control over price.
· Uses Non price competition to compete
· Very strong Barriers to entry
What is Oligopoly?
The term oligopoly is derived from two Greek words: ‘oligos’ means few and ‘pollen’ means
to sell. 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.
The examples are the car manufacturing companies such as (Maruti-Suzuki, Hindustan
Motors, Daewoo, Toyota and so on. )Newspapers such as (The Hindu, Indian Express etc.)
telecom such as (Airtel, Idea, BSNL, Reliance)
Features of oligopoly:
1. Few firms: there only few firms in the industry either homogeneous or differentiated
products.
2. Homogeneous or heterogeneous product: sell the homogeneous or heterogeneous
product.
3. Interdependent: as all forms are interdependent in their business policies about
fixing the price and determination of output.
4. Important role on advertising and selling costs: advertising and selling costs have
strategic importance to oligopoly firms.
5. In determine demand curve: due to interdependence, an oligopoly firm cannot make
an accurate estimate of its sales because when one firm reduces price, the other firm
also will make a cut in their prices. Therefore the demand curve of the firm is
indeterminate.
6. Price rigidity and price war: in the oligopoly market and price war are common
features. So the price of each firm unchanged.
7. It is not easy to enter the industry.