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Market Structure: Umang Ghildyal

This document discusses different market structures: perfect competition, monopoly, oligopoly, and collusion. It defines each structure and provides examples. Perfect competition is characterized by many small firms and homogeneous products. A monopoly has a single seller. Oligopoly involves a few large firms where the actions of one impact others. Collusion is a non-competitive agreement between rivals to influence prices or supply.

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Shiv Shankar
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28 views

Market Structure: Umang Ghildyal

This document discusses different market structures: perfect competition, monopoly, oligopoly, and collusion. It defines each structure and provides examples. Perfect competition is characterized by many small firms and homogeneous products. A monopoly has a single seller. Oligopoly involves a few large firms where the actions of one impact others. Collusion is a non-competitive agreement between rivals to influence prices or supply.

Uploaded by

Shiv Shankar
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Market Structure

UMANG GHILDYAL
Introduction

 Perfect competition is a starting point for the understanding of competition and


there is no presence of competitive interests in it amongst the firms in an industry.
 It is an equilibrium situation in which price becomes a parameter from the
standpoint of the individual firm and no market activity is possible.
 Monopoly is a market situation identifying firm itself as an industry in which intra
industry comparison is not possible.
Perfect Competition

 Perfect competition as a market structure is characterised by:


 a large number of buyers and sellers
 with the freedom of entry and exit,
 producing homogenous product and
 a zero advertising cost.
 It is assumed that the consumers have the perfect knowledge of the market and the factors of
production are perfectly mobile between the firms.
 Each firm is a price taker where, market demand is equal to market supply.
 Perfect competition is a benchmark with which other market systems are understood and their
price and output decisions are measured.
 But the disadvantage of the Perfect Competition market is that it does not give incentive for
progress and innovation as against its possibility in the other market forms, especially Monopoly.
Monopoly

 A pure monopoly is a situation of a single producer or seller in a market.


 The degree of monopoly power depends on the elasticity of demand for the
commodity in question and the capacity of the monopolist to divide the
different markets so that price discrimination is possible.
 There is no consumer choice.
 For the purposes of regulation, monopoly power exists when a single firm
controls 25% or more of a particular market.
Formation of monopolies:

 Exclusive ownership of a scarce resource: It may be a commodity, service or a


resource.
 For example, A specialist in Cardiology in a given town.
 Monopoly of Government to certain essential services , such as Post Office
 Monopoly in the Intellectual property.
 A monopoly created following the merger of two or more firms.
Oligopoly

 Oligopoly is a competitive market structure with a few large firms engaged in


the production or the supply/sale of a commodity.
 Each firm operating is a price maker but any decision making with regard to
price or output is followed by other firms operating in the market setting at
naught the purpose and expectation from such decision making.
 There are barriers to entry and exit and firms may produce either
differentiated or homogenous products.
 Oligopolists may end up in collusions affecting consumer welfare and small
competing firms.
 Its distinctive feature is its interdependence.
Collusion

 It is a non-competitive agreement between rivals to disrupt the market


equilibrium.
 The firms may collectively choose to influence the supply of a good, and/or agree
to alter its price with a profit maximizing advantage.
 They may also collude by sharing private information with insider knowledge.
Cartels

 A group of companies or countries collectively attempt to affect market prices by


control over production and selling.
 OPEC, is a cartel made up of sovereign states, not companies.
 Cartels are also called “trusts”.
Factors facilitating collusion

 The ideal cartel will seek to restrict quantity to raise the price of the good.
 By restricting quantity and increasing price, the firms attempt to increase the
industries profits and therefore their own individual profits.
 The cartel will behave like a monopoly and will try to earn monopoly profits.
Market Power

 Market power is the ability of a firm to remain above the competitive level using
price advantage.
 It may be looked at from the duration and durability of dominant position of a
firm in the relevant market.
 Barrier to entry explains the market power.
 Market share is the cause and effect of market power and a firm is assessed with
dominance or abuse of dominance with the help of the market power it holds at a
given point of time.
Market Power

 Market power is the ability of a firm to remain above the competitive level using
price advantage.
 It may be looked at from the duration and durability of dominant position of a
firm in the relevant market.
 Barrier to entry explains the market power.
 Market share is the cause and effect of market power and a firm is assessed with
dominance or abuse of dominance with the help of the market power it holds at a
given point of time.
The Herfindahl-Hirschman Index (HHI)

 This is a measure of market concentration.


 The index is calculated by squaring the % market share of each firm in the market
and summing these numbers.
 For example in a market consisting of only four firms with shares of 30%, 30%,
20% and 20% the Herfindahl Index would be 2600 (900 + 900+ 400+ 400).
 The index can be as high as 10,000 if the market is a pure monopoly (100*)
 The lower the index the more competitive the market is and can reach almost zero
for perfect competition
 If an industry has 1000 companies each with 0.1% market share then the index
would only be 10 (1000 x 0.1*).

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