Market Structures

Group 8
Sheyen
Anjum
Brendina
Nikhil
Rauf
Snehal

The Four Types of Market Structure

Number of Firms?
Many
firms
Type of Products?

One
firm

Monopoly
Tap water
Railway

Few
firms

Oligopoly
Tennis balls
Crude oil

Differentiated
products

Monopolistic
Competition
Novels
Movies

Identical
products

Perfect
Competition
Wheat
Milk

Monopoly
One producer
Considerable power over price
Unique product
Very high barriers to entry

WHY MONOPOLIES ARISE

The fundamental cause of monopoly is the

existence of barriers to entry.

Government-Created Monopolies
Governments may restrict entry by giving one

firm the exclusive right to sell a particular

good in certain markets.
Example: Patent and copyright laws are two

important examples of how governments create

monopoly to serve the public interest.

Natural Monopolies
An industry is a natural monopoly when one

firm can supply a good or service to an entire

market at a smaller cost than could two or
more firms.
Example: delivery of electricity, phone service,

tap water, etc.

HOW MONOPOLIES MAKE PRODUCTION

AND PRICING DECISIONS
Monopoly versus Competition
Monopoly
Is the sole producer
Faces a downward-sloping demand curve
Is a price maker
Can reduce its sales to increase price

oligopoly
It refers to a market situation where there are

few sellers selling homogeneous or

differentiated products.

Essentials of oligopoly
Price makers
Few number of dominant sellers
Long run supernormal profits
Strategic interdependence

Characteristics of
oligopoly
Few sellers
Interdependence
High cost elasticity's
Competition
Homogenous or differentiated products
Uncertainty
Price rigidity
Interdependent decision

Duopoly

Market structure where the industry is

dominated by two large producers

Collusion may be a possible feature

Price leadership by the larger of the two firms may

exist the smaller firm follows the price lead

of the larger one
Highly interdependent
High barriers to entry
In reality, local duopolies may exist

MONOPOLISTIC COMPETITION
Many firms sell similar but not
identical products.

Major Sectors
Monopolistic competition is commonly

found in many field in retail, service and

manufacturing industries.
Examples of retail:- clothe stores, electrical
appliances, etc.
Service Industry:- restaurants, beauty
saloons, health clubs, etc.
Manufacturing:- shoes, garments,
cosmetics, furniture manufacturing , etc.

26-13

Characteristics & Examples

of Monopolistic Competition
Characteristics:
Many sellers
Product differentiation
Free entry and exit
Large number of buyers

14

Monopolistic Competition
Many Sellers
There are many firms competing for the same
group of customers.

Product examples include books, CDs, movies,

computer games, restaurants, piano lessons,
cookies, furniture, etc.

Monopolistic Competition
Product Differentiation
Each firm produces a product that is at least
slightly different from those of other firms.
Rather than being a price taker, each firm faces
a downward-sloping demand curve.

Monopolistic Competition
Free Entry or Exit
Firms can enter or exit the market without

restriction.

Monopolistic Competition
Large number of buyers:

Unlike perfect competition, here buying is by choice

and not by chance

Special cases of competitive

markets

Constant Cost
Increasing Costs and Diminishing Returns
Fixed Supply and Economic Rent
Backward bending supply curve
Shifts in Supply

Efficiency and equity of competitive

markets
Concept of efficiency
Efficiency of competitive equilibrium
Equilibrium with many consumers and

markets
Central role of marginal cost pricing
Market failures:
Imperfect competition
Externalities
Imperfect information

Perfect competition
A market with many buyers and sellers
trading homogenous products so that each
buyer and seller is a price taker.

Perfect Competition
Characteristics:

Large number of firms

Products are homogenous (identical) consumer

has no reason to express a preference for any firm

Freedom of entry and exit
Firms are price takers have no control
over the price they charge for their product
Each producer supplies a very small proportion
of total industry output
Consumers and producers have perfect knowledge about
the market

EXAMPLE
The fish market
The vegetable or fruit vendors who sell at the

same place

OUTPUT DECISION IN
A PERFECT
COMPETITION
The goal of the firm is to maximize profits.
Profit = Total Revenue Total Cost

PROFIT MAXIMISATION
The firm has to decide whether to produce at

all, and if so what output to produce.

The firm will produce in the short run so long
as its variable costs can be covered.
Assuming the firm produces at all, the profit
maximizing output is where there is the
maximum excess of TR over TC or where MR
= MC.

TOTAL COST AND SHUTDOWN

CONDITION
SHUTDOWN POINT: It comes where revenues
just cover variable costs or where losses are equal to
fixed costs. When the price falls below average
variable costs, the firm will maximize profits by
shutting down.

A firm should continue to produce as long as

price is greater than average variable cost.
o If price falls below that point it makes sense
to shut down temporarily and save the
variable costs.
o

SR.
PERFECT
MONOPOLISTI
NO
COMPETITIO MONOPOLY
CHARACTERISTICS
C
.
N
1 Number of Firms

Many

Homogeneo
2 Types Of Products
us

One

Unique/
Single/
Limited

Many

OLIGOPOLY
Few

Differentiated Differentiated

3 Entry condition

Very easy

Impossible

Easy

Difficult

4 Pricing

Price Taker

Price Maker

Price Taker

Price maker

5 Examples

Agriculture,
Stock
Market,
Currency
Market,
Bond
market

Public
Activities.

Retail Trade

Steel, Oil,
Milk, Soft
Drinks,
Airlines