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“IN CRITICAL MOMENTS EVEN THE VERY POWERFUL


HAVE NEED OF THE WEAKEST”

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MARKETS
• ………is a situation where buyers and
sellers come in contact with each other for
buying and selling goods and services at a
particular price at a point of time.
 Two Parties
 Commodity or Services
 Price
 Time
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Market as per competition
• Pure or Perfect competition
• Imperfect competition
(1) Monopolistic Competition
(2) Oligopoly—Duopoly

• Monopoly

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Market as per competition

Perfect Imperfect Monopoly


Competition Competition

Monopolistic Oligopoly Duopoly


Competition
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Perfect Competition
 Large number of buyers and sellers
 Homogeneous products
 Firm is a “price—taker”
 Free Entry and Exit
 Prefect Knowledge
 Prefect mobility of factors of production.
 No transport cost
 Examples: Vegetable market, Agricultural market

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Price Determination under PC
Price (Rs) Quantity DD Quantity SS Equilibrium
2 900 00 SS<DD
4 800 100 SS<DD
6 700 200 SS<DD
8 600 300 SS<DD
10 400 400 SS=DD
12 300 800 SS>DD
14 200 900 SS>DD7
Revenue Relationship under PC
Price (Rs.) Quantity TR MR
10 1 10 10
10 2 20 10
10 3 30 10
10 4 40 10
10 5 50 10
10 6 60 10
10 7 70 10
10 8 80 10
10 9 90 10
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10 10 100 10
Price-Output Determination under Perfect
Competition
Industry
Firm
DD SS

Ep=Infinity
E
DD=AR
10 10
=MR

0 0
400 Output
Quantity Demanded and
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Supplied
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SR- Price Output determination
Y under Perfect Competition

MC
Revenue & Costs

MR>MC
F E AR=MR=DD
P

o X
Qo Q1 Output
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SR- Price Determination under
Perfect Competition
AC
Y

MC
Revenue and Costs

s
R
Abnormal profits AR=MR=DD
P
E

o Q Output X
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SR- Price Determination under
Perfect Competition
Y Normal Profits
AC
Revenue and Costs

MC
Break-even point

AR=MR=DD
P
E

o Q output X
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SR- Price Determination under
Perfect Competition
Y
AC
Revenue and Cost

MC

E AR=MR=DD
P
Super normal Profits
R S

o Q X
output
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LR- Price Determination under
Perfect Competition
Y Normal profits
Revenue and Costs

LAC
LMC

AR=MR=DD
P
E

X
o Q output
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Monopoly Competition
One Seller many buyers
Single product
Firm is a “Price maker”
Barriers to Entry
Price Discrimination
Examples: Railways, Bajaj Autoricksaw

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SR- Price Determination in Monopoly
MC
Y AC

Supernormal
Profits
Revenue and Costs

s
P
R
T

AR=DD
X
o Q
output 17
MR
SR- Price Determination in AC
Monopoly
Y MC
Abnormal
Profits

T
R
Revenue and Costs

P
s

AR=DD
X
o Q Output 18
MR
Normal Profits
AC
Y

MC
Revenue and Costs

P s

AR=DD
X
o Q
output 19
MR
LR- Price Determination under
Monopoly
• Under Monopoly the firm
continues to earn Super-
normal profits during long-run
as there is “barrier to entry.”

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LR- Price Determination in Monopoly
LMC
Y LAC

Supernormal
Profits
Revenue and Costs

s
P
R
T

AR=DD
X
o Q
output 21
MR
Price discrimination
“…..it is charging different prices to
different customers for the same
product.”
Price discrimination is Possible:--
 Legal Sanction
 Nature of commodity
 Geographical Barriers
 Ignorance of Buyers
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Price discrimination is profitable:--

• If the elasticity is different in


different markets. The monopolist
will charge a higher price in an
inelastic market and low price in an
elastic market.

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Price Discrimination under Monopoly

Sub-Market -A Sub Market – B Total Market

N” Inelastic Elastic
N MC

Pa N’

Pb

Ea Eb E

AR=DDa AR=DD
AR=DDb
Qa Qb Q
AMR
MRb 24
MRa
Comparison of Price and output
in between Perfect Competition
and Monopoly
MC AC
Revenue and costs

S
P2
E1 AR=MR=DD
P1

E2

Q2 Q1 output
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MR
Dumping

….When a monopolist charges a higher


price in the home market and lower
price in the international market.

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Monopolistic Competition
Many buyers & Sellers
Heterogeneous products
Firm is a “price – maker”
Free Entry and Exit
High selling cost

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SR-Price Determination under
Monopolistic
• In short-run the situation of firm is
same as monopoly. It can earn –
• Normal Profits
• Supernormal Profits or
• Abnormal Profits or losses

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LR- Price Determination under
Monopolistic

• Under Monopolistic
competition the firm earns
normal profits during long –
run due to “free entry and
exit.”
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Normal Profits
LAC
Y

LMC
Revenue and Costs

P s

AR=DD
X
o Q
output 30
MR
Oligopoly Competition
 Few sellers and many buyers
 Homogenous – Pure oligopoly
 Heterogeneous—Imperfect oligopoly
 Firm is a “Price-Searcher”
 Barriers to entry
 Interdependency of sellers
 Price rigidity
 High selling– cost
 Example: Automobile, Mobiles, Communication
network, steel, cement etc 31
Duopoly Competition

……The Simplest form of


oligopoly.

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Forms of Oligopoly

Non-Collusive Oligopoly Collusive Oligopoly

•Cournot’s Model Cartels


•Bertnard’s Model
•Stackelberg’s Model
•Chamberlin’s Model
•Sweezy’s “Kinked Demand Price Leadership
Model”

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Collusive Oligopoly

Cartels
Price Leadership

1. Cartels aiming at Profit 1. Low- Cost Firms


Maximization 2. Dominant Firm
3. Barometric
2. Market-Sharing Cartels

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Collusive Oligopoly

• One way of avoiding the uncertainty


arising from oligopolistic interdependence
is to enter into collusive agreements.
Cartels and Price Leadership are the two
types of Collusive Oligopoly. Both forms
generally imply tacit (secret) agreements,
since open collusive action is commonly
illegal in most countries at present.
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Collusive Oligopoly
• Although direct agreements among the
oligopolistic are the most obvious
examples of collusion, in the modern
business world trade associations,
professional organizations and similar
institutions usually perform many of the
activities and achieve in a legal or indirect
way the goals of direct collusive
agreements.
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Cartels
• Cartels imply direct (although secret)
agreements among the competing firms.
1. Cartels aiming at Joint-Profit Maximisation:
Here the firms are looking at maximisation
of the industry profit. The firms appoint a
central agency to which they delegate the
authority to decide not only the total quantity
and the price at which it must be sold so as to
attain maximum group profit, but the
allocation of production among the members
of the cartel... 37
Cartels conti….
…and the distribution of the maximum joint profit
among the participating members. In practice
cartels rarely achieve maximum joint profits on
account of various reasons like mistakes in
estimation of market demand, MC, slow
process of cartel negotiations, the bluffing
attitude of some member, free of Government
interference, they wish to have a good public
image, free of entry and keeping freedom
regarding design and selling activities.
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Cartel
2. Market Sharing Cartels:
This form of collusion is more common
in practice because it is more popular. The
firms agree to share the market, but a
considerable degree of freedom concerning
the style of their output, their selling activities
and other decisions.
There are two basic methods of
sharing the market:
a. Non-price Competition and
b. Determination of Quotas. 39
Cartels
a. Non-Price Competition Agreements:
In this form of ‘loose’ cartel the member
firms agree on a common price, at which each
of them can sell at any quantity demanded.
The price is set by bargaining must be such
as to allow some profits to all members. The
firms agree not to sell at a price below the
cartel price, but compete on a non-price
basis. They are free to vary the style of their
product and/or their selling activities such a
cartel is more unstable and may lead to a
price-war with only the fittest surviving. 40
Cartels
b. Sharing of market by Agreement and Quotas:
The second method for sharing the market is the
agreement on quotas i.e., agreement on the quantity
that each member may sell at the agreed price (or
prices). These quotas may be decided on the basis of
past levels of sales, and/or the basis of ‘productive
capacity’. A major factor here becomes the bargaining
power and skill. Another popular method of sharing
the market is the definition of the region in which each
firm is allowed to sell. In this case, of geographical
sharing of the market, the price as well as the style
may differ. However, even a regional split of the
market is inherently unstable as the low-cost firms
always have the incentive to reach out to adjacent
markets. 41
Price Leadership
• In this form of coordinated behaviour of
oligopolist one firm sets the price and others
follow it. Because it is advantageous to them or
because they prefer to avoid uncertainity about
their competitors reaction even if it implies
departure of the followers from their profit
maximising position. Price leadership is
widespread in the business world. It may be
practiced either by explicit agreement or
informally. In nearly all cases, price leadership
is tacit, open collusive agreement are illegal in
most countries. 42
Price Leadership
• Price leadership is more widespread than
cartels, because it allows the members
complete freedom regarding their product and
selling activities as compared to a complete
cartel. If the product is homogeneous and the
firms are highly concentrated in a location, the
price will be identical. However, if the product is
differentiated prices will differ, but the direction
of their change will be the same, while the
same price differentials will broadly be kept.
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Price Leadership
1. Price Leadership by a low-cost firm.
2. Price Leadership by a large (Dominant) Firm:
This refers to the firm having the
considerable share of the total market.
3. Barometric Price Leadership:
The firm chosen as the leader is considered
as a barometer, reflecting the changes in economic
environment. Usually it is a firm which from past
behaviour has established a reputation of a good
forecaster of economic changes. A firm belonging to
another industry may also be chosen as the barometric
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leader.
The March of Global Oligopolist

• No longer are corporations


satisfied to be the largest or the
next-to-the-largest national
company in their industry or
sector. They are looking at the
entire globe are mergers.

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Paul Sweezy’s Kinked Demand
Y Curve
E>1

P
P1
Price

E<1
dd

DD
X
o Q Output
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Difference between the Markets
Features Perfect Monopoly Monopolistic Oligopoly
Competition
Buyers &
Sellers
Product

Price

Entry &
Exit
Demand
Curve
Examples 47