DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW.

SUBJECT: - ECONOMICS
PROJECT ON - FORMS OF MARKET

SUBMITTED TO: SUBMITTED BY:

DR.MITALI TIWARI MOHIT KUMAR SINGH

ASST. PROF (ECONOMICS) SECTION- A , ROLL NO - 83

DR. R.M.L. NLU , LUCKNOW SEMESTER -- 1

 TABLE OF CONTENTS

 INTRODUCTION……………………………………………………………………………
 CHARACTERISTICS OF MARKET…………………………………………………….
 MARKET STRUCTURE……………………………………………………………………
 FORMS OF MARKET……………………………………………………………………..
 CONCLUSION……………………………………………………………………………….
 BIBLIOGRAPHY……………………………………………………………………………..
 INTRODUCTION
Market structure refers to the nature and degree of competition in the market for goods and
services. The structures of market both for goods market and service (factor) market are
determined by the nature of competition prevailing in a particular market.

Market structure is defined by economists as the characteristics of the market. It can be

organizational characteristics or competitive characteristics or any other features that can best
describe a goods and services market. The major characteristics that economist have focused on
in describing the market structures are the nature of competition and the mode of pricing in that
market. Market structures can also be described as the number of firms in the market that
produce identical goods and services. The market structure has great influence on the behavior of
individuals firms in the market. The market structure will affect how firm price their product in
the industry .For example in a competitive market the firms are price takers while the industry
has the sole duty of price setting. The market structure will affect the supply of different
commodity in the market. When the competition is high there is a high supply of commodity as
different companies tries to dominate the markets. A market structure will affect the barrier to
entry for the companies that intend to join that market
Characteristics of Market:

The essential features of a market are:

(1) An Area:

In economics, a market does not mean a particular place but the whole region where sellers and
buyers of a product are spread. Modern modes of communication and transport have made the
market area for a product very wide.

(2) One Commodity:

In economics, a market is not related to a place but to a particular product.

Hence, there are separate markets for various commodities. For example, there are separate
markets for clothes, grains, jewellery, etc.

(3) Buyers and Sellers:

The presence of buyers and sellers is necessary for the sale and purchase of a product in the
market. In the modem age, the presence of buyers and sellers is not necessary in the market
because they can do transactions of goods through letters, telephones, business representatives,
internet, etc.

(4) Free Competition:

There should be free competition among buyers and sellers in the market. This competition is in
relation to the price determination of a product among buyers and sellers.

(5) One Price:

The price of a product is the same in the market because of free competition among buyers and
sellers.

Market Structure:

Meaning:

Market structure refers to the nature and degree of competition in the market for goods and
services. The structures of market both for goods market and service (factor) market are
determined by the nature of competition prevailing in a particular market.

Determinants:

There are a number of determinants of market structure for a particular good.

They are:

(1) The number and nature of sellers.

(2) The number and nature of buyers.

(3) The nature of the product.

(4) The conditions of entry into and exit from the market.

(5) Economies of scale.

Forms of market

On the basis of competition, a market can be classified in the following ways:

1. Perfect Competition
2. Monopoly

3. Oligopoly

4. Monopolistic Competition

. Perfect Competition Market:

Perfect competition is a market structure where many firms offer a homogeneous product.
Because there is freedom of entry and exit and perfect information, firms will make normal
profits and prices will be kept low by competitive pressures.

Features of perfect competition

1. Many firms.
2. Freedom of entry and exit; this will require low sunk costs.
3. All firms produce an identical or homogeneous product.
4. All firms are price takers, therefore the firm’s demand curve is perfectly elastic.
5. There is perfect information and knowledge.
Diagram for perfect competition

 The industry price is determined by the interaction of Supply and Demand, leading to a price of
Pe.
 The individual firm will maximise output where MR = MC at Q1
 In the long run firms will make normal profits.

What happens if supernormal profits are made?

If supernormal profits are made new firms will be attracted into the industry causing prices to
fall. If firms are making a loss then firms will leave the industry causing price to rise

The features of perfect competition are very rare in the real world. However perfect competition
is as important economic model to compare other models. It is often argued that competitive
markets have many benefits which stem from this theoretical model.

Changes in long run equilibrium

1. The effect of an increase in demand for the industry.

If there is an increase in demand there will be an increase in price Therefore the Demand curve
and hence AR will shift upwards. This will cause firms to make supernormal profits.

This will attract new firms into the market causing price to fall back to the equilibrium of Pe

2. An increase in firms costs

The AC curve will increase therefore AR< AC
Firms will now start making a loss and therefore firms will go out of business. This will cause
supply to fall causing prices to increase.

Efficiency of perfect competition

 Firms will be allocatively efficient P=MC

 Firms will be productively efficient. Lowest point on AC curve
 Firms have to remain efficient otherwise they will go out of business.
 Firms are unlikely to be dynamically efficient because they have no profits to invest in research
and development.
 If there are high fixed costs, firms will not benefit from efficiencies of scale
 see more: efficiency of perfect competition

Examples of perfect competition

In the real world it is hard to find examples of industries which fit all the criteria of ‘perfect
knowledge’ and ‘perfect information’. However, some industries are close.

1. Foreign exchange markets. Here currency is all homogeneous. Also traders will have access to
many different buyers and sellers. There will be good information about relative prices. When
buying currency it is easy to compare prices
2. Agricultural markets. In some cases, there are several farmers selling identical products to the
market, and many buyers. At the market, it is easy to compare prices. Therefore, agricultural
markets often get close to perfect competition.
3. Internet related industries. The internet has made many markets closer to perfect competition
because the internet has made it very easy to compare prices, quickly and efficiently (perfect
information). Also, the internet has made barriers to entry lower. For example, selling a popular
good on internet through a service like e-bay is close to perfect competition. It is easy to
compare the prices of books and buy from the cheapest. The internet has enable the price of
many books to fall in price, so that firms selling books on internet are only making normal
profits.

Monopoly
Definition of Monopoly:

 A pure monopoly is defined as a single seller of a product, i.e. 100% of market share.
 In the UK a firm is said to have monopoly power if it has more than 25% of the market share. For
example, Tesco @30% market share or Google 90% of search engine traffic.

Monopoly Diagram
A monopoly maximises profits where MR=MC. It sets a price of Pm and quantity Qm.

Problems of Monopoly

1. Higher Prices. Firms with monopoly power can set higher prices than in a competitive market.
(Green area is supernormal profit)

 
 2. Allocative Inefficiency. A monopoly is allocatively inefficient because in monopoly the
price is greater than MC. (P > MC). In a competitive market the price would be lower
and more consumers would benefit. A monopoly results in dead-weight welfare loss
indicated by the red triangle.
3. Productive Inefficiency A monopoly is productively inefficient because output does not
occur at the lowest point on the AC curve.
4. X – Inefficiency. – It is argued that a monopoly has less incentive to cut costs because it
doesn’t face competition from other firms. Therefore the AC curve is higher than it
should be.
5. Supernormal Profit. A Monopolist makes Supernormal Profit Qm * (AR – AC ) leading to
an unequal distribution of income.
6. Higher Prices to suppliers – A monopoly may use its market power and pay lower prices
to its suppliers. E.g. Supermarkets have been criticised for paying low prices to farmers.
7. Diseconomies of scale – It is possible that if a monopoly gets too big it may experience
dis-economies of scale. – higher average costs because it gets too big.
8. Lack of incentives. A monopoly faces a lack of competition and therefore, it may have
less incentive to work at product innovation and develop better products.
9. Charge higher prices to suppliers. Monopolies may use their supernormal profits to
charge higher prices to suppliers.

Advantages of Monopoly

1. Economies of scale
  If there are significant economies of scale, a monopoly can benefit from lower average
costs. This can lead to lower prices for consumers.
 In the above example If there were 3 firms producing 3,000 units at an average cost of
£17, average costs would be higher than a monopoly producing 10,000 units. Therefore,
for natural monopolies and industries with significant economies of scale, monopolies
can be more efficient.

2. Research & Development

Monopolies make supernormal profit which can be invested in Research & Development. This is
important for industries like medical drugs.

3. A firm may gain monopoly power because it is the most efficient.

Google gained monopoly power through offering innovative new products. It is hard to argue
Google has x-inefficiency because of its monopoly power.

4. Global competition

A domestic monopoly may face competition from abroad, and therefore what may appear as a
monopoly may still face competitive pressures. Also, a monopoly may face competition from
related industries, e.g. Eurotunnel has a monopoly on train services from London to Paris, but
faces competition from airlines.

see also: Advantages of Monopolies

Evaluation of Monopolies

 It depends on the industry in question. For example, a monopoly is needed in a natural

monopoly like tap water. However, for restaurants, there are not significant economies
of scale and it is important to have choice. Therefore monopoly would be very
inappropriate for restaurants.
 Some industries need a lot of research and development (e.g. building new aeroplanes,
research drugs). Therefore, a monopoly may be needed in this industry.
 A government may be able to regulate monopolies to gain benefits of economies of
scale, without the disadvantages of higher prices.

How Monopolies can develop

1. Horizontal Integration. Where two firms join at the same stage of production, e.g. two
banks such as TSB and Lloyds
2. Vertical Integration. Where a firm gains market power by controlling different stages of
the production process. A good example is the oil industry, where the leading firms
produce, refine and sell oil.
3. Legal Monopoly. E.g. Royal Mail or Patents for producing a drug.
 4. Internal Expansion of a firm. Firms can increase market share by increasing their sales
and possibly benefiting from economies of scale. For example, Google became a
monopoly through dominating the search engine market.
5. Being the First Firm e.g. Microsoft has created monopoly power by being the first firm.

Monopolies also need barriers to entry to protect them from new firms entering the market.
Barriers to entry can include – brand loyalty through advertising and economies of scale

Regulation of Monopolies

Governments can regulate monopolies through

 Price capping RPI-X to limit price increases

 Prevent mergers
 Investigating abuse of monopoly power, e.g. collusion

Oligopoly

An Oligopoly is an industry dominated by a few firms, e.g. supermarkets, petrol, car industry
e.t.c.

The main features of oligopoly:

 An industry which is dominated by a few firms.

o UK definition of an oligopoly is a five firm concentration ratio of more than 50%
(this means they have more than 50% of the market share)
 Interdependence of firms, firms will be affected by how other firms set price and output.
 Barriers to entry, but less than monopoly.
 Differentiated products, advertising is often important
 Most common market structure

Definition of Concentration Ratios:

This is a tool for measuring the market share of the 5 biggest firms in the industry. E.g. the 5
firm concentration ratio for supermarkets is about 58%

 Concentration ratios
Firms in Oligopoly

There are different possible ways that firms in oligopoly will compete and behave this will
depend upon:

 The objectives of the firms e.g. profit maximisation or sales maximisation

 The degree of contestability i.e. barriers to entry
 Government regulation

The Kinked Demand Curve Model

This model suggests that prices will be fairly stable and there is little incentive to change prices.
Therefore, firms compete using non-price competition methods.

 This assumes that firms seek to maximise profits

 If they increase price, then they will lose a large share of the market because they
become uncompetitive compared to other firms, therefore demand is elastic for price
increases.

 If firms cut price then they would gain a big increase in market share, however it is
unlikely that firms will allow this. Therefore other firms follow suit and cut price as well.
Therefore demand will only increase by a small amount: Demand is inelastic for a price
cut.

 Therefore this suggests that prices will be rigid in oligopoly

The below diagram suggests that a change in marginal Cost still leads to the same price, because
of the kinked demand curve  remember profit max occurs where MR = MC)

Evaluation of kinked demand curve

  In real world, prices do change
 Firms may not seek to maximise profits,  but prefer to increase market share
 Some firms may have very strong brand loyalty and be able to increase price without
demand being very price elastic.

Price wars

Firms in oligopoly may still be very competitive on price, especially if they are seeking to
increase market share.

Collusion

Another possibility for firms in oligopoly is for them to collude on price and set profit
maximising levels of output.

Collusion is illegal, but tacit collusion may  be hard to spot.

Monopolistic Competition
Tejvan Pettinger February 29, 2008 markets

Monopolistic Competition is a market structure which combines elements of monopoly and

competitive markets. Essentially a monopolistic competitive market is one with freedom of entry
and exit, but firms are able to differentiate their products. Therefore, they have an inelastic
demand curve and so they can set prices. However, because there is freedom of entry,
supernormal profits will encourage more firms to enter the market leading to normal profits in
the long term.

A monopolistic competitive industry has the following features:

 Many firms
 Freedom of entry and exit
 Produce differentiated products. Therefore firms have inelastic demand, they are price
makers because the good is highly differentiated
 Make normal profits in the long run, but could make supernormal profits in the short
term
 Are allocatively and productively inefficient.
Diagram Monopolistic Competition Short Run

Firms can make supernormal profits

Monopolistic Competition Long Run

Examples of monopolistic competition might include:

  Restaurants.
 Hair dressers

Limitations of the Model of Monopolistic Competition

 Some firms will be better at brand differentiation and therefore, in the real world will be
able to make supernormal profit. New firms will not be seen as a close substitute.
 There is considerable overlap with Oligopoly. Except the model of monopolistic
competition assumes no barriers to entry. In the real world, there are likely to be at
least some.

Key Difference with Monopoly – In monopolistic competition there are no barriers to entry.
Therefore in long run, market will be competitive, with firms making normal profit.

Key Difference with Perfect Competition. In Monopolistic competition, firms do produce

differentiated products, therefore, they are not price takers (perfectly elastic demand). They have
inelastic demand.

Conclusion

There are several market structures in which firms can operate. The type of structure influences
the firm's behaviour, whether it is efficient, and the level of profits it can generate

The importance of market structure in an economy cannot be over emphasized as the effect of
market structure on an economy, it’s development or degradation is recently been realized. Thus
we as the part of the economy need to understand the value of this concept while dealing with
others (buyers/sellers) in any market place to yield the optimum benefit and to create win-win
situation for all of us. The manner in which markets or industries are organized, based largely on
the number of participants in the market or industry and the extent of market control of each
participant
  Bibliography

http://www.economicshelp.org/blog/311/markets/monopolistic-competition/

www.wikipedia.com

https://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competition-
topic

www.yourarticlelibrary.com/economics/market/market...forms

ohri,v.k.,t.r.jain microeconomics ed.2013