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Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number &
relative size
of firms
Degree of
product
differentiation
Barriers to
entry & exit
Power of
sellers over
pricing
decisions
Degree of
non-price
competition
Market
Structure
Number of
Sellers
Degree of Product
Differentiation
Barriers to
Entry
Pricing Power
of Firm
Non-Price
Competition
Firms
Demand
Non-price
competition
Allocative/
productive
efficiency
Long-run
profits
Perfect
Competition
Many
Homogeneous/Stand
ardized
Very Low
None
None
Perfectly
elastic
None
Highly efficient
Elastic over
Advertising and some price
Product
ranges and
Differentiation inelastic over
others
Considerable
Monopolistic
Competition
Many
Differentiated
Low
Some
Few
Homogeneous/Stand
ardized
High
Some or
Considerable
Advertising and
Product
Differentiation
Kinked
demand
Considerable
for a
differentiated
oligopoly.
Oligopoly
Positive
Monopoly
One
Unique Product
Very High
Considerable
Advertising
Inelastic
Somewhat
Inefficient
High
Threat of
substitute
Threat of entry
Intensity of
competition
among
incumbents
Bargaining
power of
customers
Bargaining
power of
suppliers
3. PERFECT COMPETITION
Characteristics:
i) Free entry & exit to industry
ii) Homogenous Product
iii) Large number of buyers & sellers
iv) Sellers are price takers
v) No Price competition
Advantages:
i) High degree of competition helps in efficient
allocation of resources
ii) In the long run, firm can make only normal
profit
iii) Firms operate at maximum efficiency.
iv) Larger quantity of goods at the lowest price
MR = P (1
Elastic Demand
|ED|>1
Unit Elastic
|ED| = 1
Inelastic
Demand
|ED|<1
Determinants of Elasticity
Time Period
Longer the period
greater the
elasticity
Proportion of
income taken up by
the product
Larger the
proportion, more
elastic the demand
Luxury or necessity:
E
E
Income Elasticity of
Demand:
%
%
Normal Good:
IQ d
IQ d
EY > 0
Cross Elasticity:
%
%
Inferior Goods:
IQ d
IQ d
EY < 0
Complements:
ED < 0
PY Q X
PY Q X
Substitutes:
ED > 0
PY Q X
PY Q X
PQS
Characteristics:
i) Many Buyers & sellers
ii) Differentiated Products
iii) Low cost Entry & Exit
iv) Firm has some control over price
v) Use of advertising & other non-price strategies
Monopolistically Competitive Firm in the Short Run:
Profit is maximized where MR = MC
No well defined supply schedule
Output level is determined at a point
where MR = MC
5. OLIGOPOLY
Characteristics:
i) Few sellers
ii) Industry dominated by small number of large firms
iii) Product offered by each seller is close substitutes for the products offered by
other firms
iv) Independent firms
v) Barrier to entry & exit are high
vi) Firms have substantial control over price
vii) Products are differentiated through advertising & other non-price strategies.
Price Collusion: An agreement among firms
on the quantity produced and price to
charge.
Profit increases.
Uncertainty of cash flows reduces.
Provide opportunities to create barriers to
entry
Pricing Strategies
Price interdependence:
Firm pricing decisions depend on each other
Firms face two demand curves i.e. kinked
demand curve
Cournot Assumption:
Profit maximizing output by each firm is
determined by assuming no change in other
firms output.
Nash Equilibrium:
Game theory: Study of how people behave in strategic situations
Nash equilibrium occurs in a non-game situation when a participant is unwilling to deviate from its
strategy having considered their opponents strategies.
5.2 Supply Analysis in Oligopoly Market
Greater Capacity
First market
advantage
Greater customer
loyalty
6. MONOPOLY
Characteristics:
i) Single seller & product is highly differentiated
ii) Product offered by a firm has no close substitutes
iii) High barrier to entry
iv) Significant control over pricing (or output/supply)
v) Product is differentiated by the seller by using non-price strategies
Factors that allow Monopoly to exist:
i) Barrier to entry in the market in the form of patent or copyright
ii) Significant control over critical resources
iii) Natural monopolies exist in industries where the production is based on significant economies of scale & dealing with cost structures in the market
iv) Strong brand loyalty
v) Firm has greater market power due to increasing returns associated with network effects
6.1 Demand Analysis in Monopoly Markets
] =
First-degree Price
Discrimination:
Each consumer is
charged highest
price that he/she
is willing to pay.
Second-degree
Price
Discrimination:
Monopolist offers
a menu of
quantity-based
pricing options
and consumers
can select based
on high highly
they value the
product.
i) Concentration Ratio
CR = Sum of sales value of the largest x firms/ Total market sales.
0 CR < 100%
CR = 100% for monopoly
CR = 0% for perfectly competitive industry
ii) Herfindahl-Hirschman Index (HHI):
HHI = squared market share of the ith firm
HHI = 1 Perfectly competitive industry
For M firms in the market with equal market share:
HHI = (1/M)
Not direct measure of market power
less appropriate as a profitability measure as it ignores elasticity of
demand