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MARKET STRUCTURE

MARKET STRUCTURE
Perfect Competition
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
There are many buyers and sellers in the
market place, none of whom are large
enough to influence the price.
Sellers are described as being price
takers.
There is freedom of entry and exit into the
market, i.e., barriers to entry are low.
Firms must be able to establish
themselves quickly in the marketplace.
Contd
Buyers and sellers have perfect
knowledge, economic agents are
fully informed of prices and
output in the industry.
All firms produce a homogeneous
(identical) product.
AR = MR
Contd

MONOPOLY
Monopoly is a market structure in
which there is a single seller, there
are no close substitutes for the
commodity it produces and there are
barriers to entry
The distinction between the firm and
industry disappear under conditions
of monopoly

characteristics of monopoly

There is only one firm in the
industry, the monopolist.
There are substantial barriers to
entry.
The monopolist is a short run profit
maximiser.
AR > MR
Heterogenous products
Causes of Monopoly

Ownership of strategic raw materials
or exclusive knowledge of production
techniques
- Patent rights for the product or
production process
- Government licensing
- Size of the market
- Pricing policy of existing firms

Average and Marginal Revenue
Quantity
AR
&
MR
0
AR (D)
MR
P
The slope of MR Curve is double the slope
of demand curve
Price Discrimination
When a monopolists charges different prices
form different buyers for the same good, he
is known as a discriminating monopolist
Price discrimination is not possible under
perfect competition because every one knows
the price at which the good is being bought
and sold
Two conditions must be fulfilled for price
discrimination to be possible (1) Markets
must be divided into submarkets with
different price elasticities (2) there must be
effective separation of the submarkets so that
no reselling can take place from a low priced
market to a high price market
OLIGOPOLY
A market dominated by a few large producers of
a homogeneous or differentiated product.
A market where there are few or small number
of firms and they produce the major share of the
market.
The two firms Oligopoly is called Duopoly.
If the firms are producing homogenous products
It is called Pure Oligopoly, in case of different
products they are termed as Differentiated
Oligopoly.
CHARACTERISTICS OF OLIGOPOLY
A Few Large Producers
Homogeneous or Differentiated Products
Control over Price, but Mutual Interdependence
Entry Barriers
Mergers
OLIGOPOLY MODELS
The Oligopoly models are studied to determine
the price and output behavior.

We study the following Oligopoly Models
Kinked-Demand Theory
Collusive Pricing
Price Leadership
Oligopoly Models Collusive Pricing
Collusive pricing model reveals that firms in the market
agree on production limits and set a common price to
maximize the joint profit.

When firms collude and agree on common price so
mostly they earn Economic profit.

It is assumed here that firms have identical cost data
and same demand and thus Marginal revenue data.
Collusion and Cartels
Collusion
Agreement among firms to
Divide the market
Fix the price
Cartel
Group of firms that agree to collude
Act as monopoly
Increase economic profit
Illegal in many countries
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0
5
10
15
20
25
30
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$ per barrel
Actual price
Cost in 1973 prices
Yom Kippur
War: Arab oil
embargo
First oil from
North Sea
Revolution
in Iran
Iraq invades
Iran
OPECs first
quotas
Cease-fire in
Iran-Iraq war
Recession
in Far East
Iraq invades
Kuwait
New OPEC
quotas
World-wide
recovery
World-wide
slowdown
Impending
war
with Iraq
Oil prices
Price Leadership
Informal, tacit collusion
Price leader
Sets the price for the industry
Initiate price changes
Followed by the other firms
The firms in the Oligopolistic industry without
any formal agreement accept the price set by
the leading firm in the industry
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Monopolistic Competition
Characteristics
Many producers
Low barriers to entry
Slightly different products
A firm that raises prices: lose some
customers to rivals
Some control over price Price makers
Downward sloping D curve
Act independently

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Monopolistic Competition
Product differentiation
Physical differences
Appearance; quality
Location
Spatial differentiation
Services
Product image
Promotion; advertising
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