Market Structure

The firm’s price and output decisions are made in a given market. The term market is used in different ways. The market can be viewed as the context within which voluntary exchanges among buyers and sellers take place. The most common method of classifying markets is on the basis of the number of sellers and buyers and the homogeneity or degree of differentiation of the product.

The term competition always specifies the presence in a specific market of two or more sellers and two or more buyers of a definite commodity, each seller acting independently of every other seller and each buyer acting independently of the buyer. Perfect competition is a market in which every firm is too small to affect the market sellers (and buyers) transacting a homogeneous product.

In the real-world, business people use the word competition similar to that of rivalry. In economic theory, perfect competition means no rivalry among the sellers. The perfectly competitive market is characterized by a complete absence of rivalry among the sellers. The perfectly competitive market is characterized by a complete absence of rivalry among the firms (sellers).

Perfect Competition is a market structure where a large number of buyers and sellers are present, and all are engaged in the buying and selling of homogeneous products at a single price prevailing in the market.

1. Large number of buyers and sellers: In perfect competition, the buyers and sellers are large enough, that no individual can influence the price and the output of the industry. An individual customer cannot influence the price of the product, as he is too small in relation to the whole market. Similarly, a single seller cannot influence the levels of output, who is too small in relation to the gamut of sellers operating in the market.

 2. Homogeneous Product: Each competing firm offers a homogeneous product, such that no individual has a preference for a particular seller over the others. Salt, wheat, coal, etc. are some of the homogeneous products for which customers are indifferent and buy these from the one who charges a less price. Thus, an increase in the price would let the customer go to some other supplier.

3. Free Entry and Exit: Under the perfect competition, the firms are free to enter or exit the industry. This implies, If a firm suffers from a huge loss due to the intense competition in the industry, then it is free to leave that industry and begin its business operations in any of the industry, it wants. Thus, there is no restriction on the mobility of sellers.

4. Perfect knowledge of prices and technology: This implies, that both the buyers and sellers have complete knowledge of the market conditions such as the prices of products and the latest technology being used to produce them. Hence, they can buy or sell the products anywhere and anytime they want. 

5. No transportation cost/ Perfect mobility of resources: There is an absence of transportation cost, i.e. incurred in carrying the goods from one market to another. This is an essential condition of the perfect competition since the homogeneous product should have the same price across the market and if the transportation cost is added to it, then the prices may differ. 

6. Absence of Government and Artificial Restrictions: Under the perfect competition, both the buyers and sellers are free to buy and sell the goods and services. This means any customer can buy from any seller, and any seller can sell to any buyer. Thus, no restriction is imposed on either party. Also, the prices are liable to change freely as per the demand-supply conditions. In such a situation, no big producer and the government can intervene and control the demand, supply, or price of the goods and services.

Imperfect Competition- Any deviation from the conditions of perfect competition in a market leads to the existence of imperfect competition.

1. Few numbers of buyer and seller

2. Heterogeneous product

3. Restricted entry and exit of firms

4. Govt. Regulation

5. Less mobility of resources

6. Less knowledge

Types of imperfect competition

1. Monopoly- One seller

2. Duopoly- Two seller

3. Oligopoly- More than two but few sellers

4. Monopsony- One buyer

5. Duopsony- Two buyer

6. Oligospony- More than two but few buyers

7. Bilateral monopoly- One buyer and one seller

8. Monopolistic competition- Many sellers with heterogeneous products.

MONOPOLY

Monopoly is a market condition, wherein the entire supply of a commodity is concentrated in the hands of a single firm. There exist no close substitutes for the product produced by a monopolist. The cross elasticity of demand is very low for the product. In a monopoly, the firm and the industry are the same. Though he controls both price and output policies, he cannot adopt the same simultaneously, because the monopolist has the choice of fixing its own price, but cannot sell the expected quantity at the chosen price. Normally he decides the output and fixes the price for the product. He chooses between two options. He has to produce either more output to sell at a lower price or produce less output to sell at a higher price. Monopoly is of two types, viz., pure monopoly and imperfect monopoly.

The cross elasticity of demand for the product under pure monopoly is zero. The existence of pure monopoly is of theoretical interest only. It is far from reality in the real world situation. As against pure monopoly, imperfect monopoly is a condition that is found in reality with the following features.

(1)Product with a very low cross elasticity of demand.

(2)Intentions to maximize profits.

(3)No role of individual consumer influencing the price.

(4)Uniform price for all the consumers, and

(5)Absolutely no threat from the other firms.

DUOPOLY

Duopoly is a market situation in which there are only two sellers. It is very close to oligopoly in all respects barring the number of firms. Each firm keeps a close watch on the actions of the other firms as a chain reaction is imminent since the policy of one is immediately challenged by the other. This sort of rivalry goes ahead in the duopoly. So as to continue in the business, one firm has to make an intelligent guess of rival’s actions. Hence, stiff competition exists between the two firms. If each seller feels that the competition in which there are locked in is going to ruin their fortunes, a mutual agreement is arrived at for the benefit of both firms. Thus, in a duopoly, competitions, as well as co-operation, coexist.

OLIGOPOLY

It represents the presence of a few firms in the market, producing either a homogeneous product or products which are close but not perfect substitutes to each other. Oligopoly can be divided into two forms, viz., perfect oligopoly, wherein a few firms produce a homogenous product, and imperfect oligopoly wherein there are a few firms producing heterogeneous products. The examples are televisions, two-wheelers, four-wheelers, types, cigarettes, textiles, etc.

MONOPSONY

Monopsony means the presence of a single buyer for the products produced by the firms. The example that can be cited is the sugar factory. Farmers who are registered as sugarcane growers under the factory’s jurisdiction are supposed to sell the cane to the sugar factory only. Tobacco boards and coffee boards can be cited as other relevant examples.

OLIGOPSONY

It is from the buyer’s side in a market. There are only a few in number buying sizeable quantities of a product. Each individual buyer is so powerful that his buying behavi0our influences the market price. The relevant examples are gas and iron ores. These are purchased by a few firms in the country and final products are supplied to the market through these oligopsonies, viz., Tata Company for purchases iron ore, Hindustan Petroleum Corporation buys the gas from Government or supplies to consumers after refinement, etc.

MONOPOLISTIC COMPETITION

It is a market situation in which the transacted products of various firms are not perfect substitutes. Firms in the industry produce heterogeneous products. Products look rather similar but possess some distinguishing features. They are not identical. Thus product differentiation is an important feature of monopolistic competition. Another feature is the production of goods under different brand names. There is a large number of firms so that no single firm is in a position to influence the industry through its output and price policies.

Under competition of this nature, since every good satisfies a given want of the consumers, the quality aspects of the product of a given firm catch the attention of the consumers over the same type of product produced by other firms. Some consumers don’t mind paying premium prices for certain quality products of a given firm. Sales promotion activity viz., advertisement and propaganda is another feature of monopolistic competition.