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COURSE : POST GRADUATE DIPLOMA


IN MANAGEMENT 2010-11.
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MARKET STRUCTURE

PRICE
Market
Structure Competitive
OUTPUT Environment
PRODUCTS
Current &
PERFECT, Prospective BUYE SELLE
IMPERFECT Buyers & RS RS
COMPETITION Sellers
MONOPOLY X PERFECT Nature of products
COMPETITION etc.
COMPETITION IN MARKET
Market
Perfect Imperfect
Competition Competition
MONOPOLY
DUOPOLY
OLIGOPOLY
MONOPOLISTIC
COMPETITION
COMPETITION IN GLOBAL
ECONOMY
VDomestic firms in most industries face a great deal of
competition from abroad.

VMost India-made goods today compete with similar goods


from abroad and in turn compete with foreign made goods
in foreign markets, steel, textiles, cameras, wines,
automobiles, television sets, computers and are but a few of
the domestic products that compete with foreign products
for consumer¶s rupee in Indian economy.

VInternational competition therefore affects the price and the


quantity of commodities sold by domestic firms.

VFirm will divert resources to produce other goods where it


is more efficient and have competitive advantage
PRICE DETERMINATION IN PERFECT
COMPETITION/MARKET
VIntersection of Market Demand Curve and the Market Supply
Curve of product determine Market Price.
VMarket Demand Curve is simply the horizontal summation of the
demand curves of all the consumers in the market.
VA perfectly competitive firm is a å
 
. It takes the price
of the product as given and has no perceptible effect on that price
by varying its own level of output and sales of the product.
VSince product is homogeneous a firm cannot sell at a price
higher than the market price of the product otherwise it will loose
all the customers.
VThere is no reason for the firm to sell below the market price.
VWhen the product price is constant the change in the total
revenue per unit change in output or marginal revenue (MR) is
also constant and is equal to the product price.
Hence P = MR
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MONOPOLY

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BEFORE E; MR>MC; OUTPUT WILL
EXPAND SINCE IT WILL IMPROVE PROFIT
AFTER E; MR< MC; OUTPUT WILL
—  DECLINE IMPROVE PROFIT

MC
ATC
u
u u

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MR=MC V
D

MR

u 

WHY MONOPOLY ? 4 FACTORS
Firm may control the entire supply of raw materials required to
produce the product. Viz. up to World War II the Aluminium
company of America (Alcoa) controlled almost every source of
bauxite.

The firm may own a patent or copyright that precludes other firms
from using a particular production process or producing the same
product. For example, when cellophane was introduced, Du Pont had
monopoly power in its production based on patents. Xexox had
monopoly on copying machine. Patents are granted for 17 years to
incentivise invention.

In some industries economies of scale may operate. (i.e. the long


run average cost curve may fall) over a sufficiently large range of
outputs as to leave only one firm supplying the entire market. Such a
firm is called natural monopoly. (Examples ± Public Utilities, Gas and
local transport companies.)

A monopoly may be established by a Government franchise.


Firm is set up as sole producer or distributor of a product but
subject to government regulations. Best example : Post
Offices.
MONOPOLISTIC COMPETITION

V A form of market organization in which there are many


sellers of a heterogeneous or differentiated products.

VEntry into and exist from the industry is a regular theme.

Examples:
VNumerous Brands of Breakfast cereals, Toothpastes,
Cigarettes, detergents , Cold medicines.

VThe differentiation may be real (for example the various


breakfast cereals may have greatly differentiated
nutritional and sugar contents) or imaginary (for example
all brands of aspiring contain the same basic ingredients).
Product differentiation may also be based on a more
convenient location or more courteous service.
MONOPOLISTIC COMPETITION

VMost common in the retail and service sector of our


economy.

VClothing, Cotton Textiles and food processors are the


industries that come close to Monopolistic Competition at
the national level.

VAt the local level the best examples of monopolistic


competition are fast food outlets, shoe stores, petrol
stations, beauty salons, Drugstores, video rental stores
and pizza parlors.
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Highly Elastic Demand Curve due to
large no. of close substitute P>ATCX
Edward
Chamberlin:
MC Profit
All firms
—  P=ATCXB
selling similar
u ATC products face
reakeven
identical
P<ATC
demand and
u u
XLoss
cost curve

 á D
MR>MC
MC> MR
MR=MC
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MR

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CONNAUGHT
PLACE DELHI

#  "  —  )-  Large no. of entries and exist
./0.,
 —      every year .
0/1     Many advertise their products,
    2  existence, locations, menu, usual
    ,   
  claim of superiority (which no one
  takes them seriously)
OLIGOPOLY: MEANING & SOURCES

A market in which there are few sellers.


Homogeneous or differentiated products.
Two Sellers ± Duopoly
Pure Oligopoly = Few sellers and
homogeneous products.
Differentiated Oligopoly- Few Sellers and
Differentiated Products.
Although entry in Oligopolistic market is
possible but difficult.
Greater degree of interdependence.
Most prevalent in manufacturing sector of
industrial nations including India.
OLIGOPOLY: MEANING & SOURCES
INDIAN SCENE (MANUFACTURING): Heterogeneous and
Homogeneous products: Automobiles, Steel, Electrical
Equipments, telecommunication, Durable equipments, Airlines,
two wheelers, Soaps detergents etc. (Homogeneous: Steel and
Aluminium)

DIFFERENTIATED PRODUCTS: Automobiles, Cigarettes, Soaps


and Detergents, TRANSPORTATION COSTS can also limit the
market and thus give rise to oligopoly. Though there are many
Cement Manufactures, Cement Manufacturers of a particular
area (Local producers) compete among them.

Due to a few sellers action of each firm affects the others.


Since price wars competition can be ruinous, oligopolistic
firms compete on the basis of product differentiation,
advertising and campaigns. Coca cola, Pepsi led competition
etc.

Distinguishing characteristics of Oligopoly thus is the


interdependence or rivalry among firms in the Industry. Each
Oligopolist takes a decision about prices based on possible
reactions, degree of product differentiations, advertisement,
amount of service to be provided etc.
SOURCES OF OLIGOPOLY: LIKE MONOPOLY
Economies of Scale may operate over sufficiently large range of output
as to leave only a few firms supplying the entire market.
Huge capital investments and specialised inputs are usually required to
enter an oligopolistic industry (Steel, Automobiles, Aluminium etc.). This
acts as a barrier to entry.

A few firms may own a patent for the exclusive right to produce a
commodity or to use a particular production process.
Established firms may have a loyal following of customers based on the
product quality and service (brands) that new firms would find very
difficult to match.

A few firms may own or control the entire supply of a raw


material required in the production of the product and
The Government may give a franchise to only a few firms to
operate in the market.

A further barrier to entry is provided by limit pricing


whereby existing firms charge a price low enough to
discourage entry into the industry by others.
By doing so they sacrifice voluntarily their long term
profits.
OLIGOPOLY MODELS

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OLIGOPOLY MODELS

VKinked Demand Curve Model introduced by Paul Sweezy


in 1939 was an attempt to explain the price rigidity in
Oligopolistic Model.
VIf an Oligopolist raised its price, it would lose most of its
customers because other firms in the industry would not
follow by raising their prices.
VIf on the other hand an oligopolist can not increase its
Market share by lowering its price because, competitors
would quickly match price cuts.
VThus oligopolists face a demand curve that has a kink at
the prevailing prices
VThe Demand curve is highly elastic for price increases
but less elastic for price cuts.
Possible Demand Curves for an Oligopolistic

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