1

MARKET STRUCTURE
1 EXTREME CASES OF
PERFECT COMPETITION
AND MONOPOLY

1.1 Market and Market Structure

1.2 Types of Market Structures
1.3 Two Extreme Cases

(a) Perfect Competition

(b) Monopoly

1.1 MARKET AND MARKET STRUCTURE

Market is usually understood as a place where sellers (producers)

and buyers meet for settling a transaction. A market is also defined
"as a group of firms and individuals that are in touch with each
other in order to buy or sell some good." In today's situation with
the progress in the communication system, it is not necessary to
nave a physical or personal contact in a physical or geographical
market area. Transactions take place through electronic commerce,
mobile commerce or with the help of other communication media.
what is essential is to have a communication between the buyer
and seller for settling a transaction.
Depending on the commodity and supporting factors a market can
national or international. For company stocks/ shares the
e 1OCal,
narkets have become national and in certain cases they are
ernationally traded. Currency market is an example or
international market.
 2 Business Economics- II
Market Structure (EY.B.Com: SEM
The term market structure refers to all the features thhat
the behaviour and pertormanceof the firms in a market, formaexampl
afe
affe
the number of firms in the market, or the type of product that
at the
sell. To make the analysis of market structure simple,
focus on four theoretical market structures that cover moe economist
acty
cases. These are called perfect competition, monopoly,
competition and oligopoly. monopol
A given type of market within the market structure depends onman
factors such as (1) nature of commodity, (1) freedom of entry an
many
exit, (ii) control over supply, (1v) control over price, etc. Basedand
o
the above and other factors there are different types of marke
structures in the economy.

1.2 TYPES OF MARKET STRUCTURES

To which type a market structure,

a firm or industry belongs depends
number of factors. They
number of
include the sellers and
on a
of a commodity, the influence
characteristics
buyers, the nature and
exercised by the sellers or buyers
in the market, the role, need and
advertisement or selling cost
and a host of other factors.
etfects of

commodity markets, that is,where

with
in this section we are dealing
are bought and
sold. In economic analysIs
goods and services
four categories, that is(1) Perter!
classified into
marketsaregenerally
Monopoly, (3) Oligopoly and (4) Monopolistc
Competition, (2)
Competition.
market situation where havea we lang
P e r f e c t Competition is a
commodity sold is identical
of sellers and buyers. The
ber differences. The large
and qualita tive
n o quantitative prevent a
single seller
number of buyers and sellers naturally tition a
orbuyér from influencing the price. In perfect
a
determined i
e

eer 15 a price taker. He accepts the price

market by the total demand and supply. Commodity

Lhth
ig
KGLipsey and Positive Economics,
y s t a l ; An Introduction to
Edition, P. 216 and 217.
 Extreme Cases of Perfect Competition& Monopoly
3
darket Structure
for any price differential and
identical there is no scope
sellers and buyers have complete
discrimination. Both
of market which helps establish uniform price.
information
restriction for any person to produce and sell thee
There is no
So also whoever wants to exít from the
existing commodity.
to do so. Examples are market for agricultural
market is free
commodities and (as suggested by some
street food vendors
countries. They, however, are only
economists) in developing
Stock market and foreign exchange market
a nearby examples.

can also be cited as an approximate examples.

Here
2 2. Monopoly market is different from perfect competition. or an
the homogeneous
we have one producer (seller) selling
has almost near total control on
unique product. The producer
the supply hence he can decide the price and output. However
he would control either price or
in order to maximise the profit
output. Being sole supplier he could discriminate the
a price
between buyers as well as between markets.

real situation of
Like perfect competition it is difficult to have a
control over
monopoly market where a producer has a total
the supply. The nearest example that we can have are the public
utility services which are usually controlled by the government.
Railway services are the monopoly of the Central Govermment.
Similarly BMC is the sole supplier of drinking water.

It is expected that the government would not exploit the

consumers since it has a responsibility to enhance the welfare
of the community. Wherever such a monopoly is allowed in
the private sector, the government acts as a regulator.

Entry to the market is highly restricted or almost nil. If the entry

is allowed then the market would not remain as a monopoly.

Advertising may be resorted to only as a informative devise in

order to make consumers aware of the existence and usefulness
of the product.

Monopolistic competition is a market situation where there

are
many sellers, selling differentiated products. Garments
Soaps and detergents are some examples. Monopolistic
 Business Economics- II
(E.Y.B.Com. Spi
competition is clearly visible in retail trade where SEM-sIL
sellers
differentiated products.

Entry to the market is though not as froo.as

not difficult
competition. Since a product is differentiated, restrice perfee
entrythrough patent right is difficult. restricting the
Product differentiation is done through a different desion
colour and other characteristics associated with th e ign, size
produc
,Size
However the products remain close substitute to each other.
Selling cost is the essential aspectof monopolistic etition
Each producer tries to convince the consumer that his
is better than that ofhis competitors. Advertisements
produ
different media is resorted to. Non-price competition li throug
additional discount, longer warranty period, etC. is also widel
prevalent.

Demand for the product of a monopolistic competitive firm i

is
elastic since the products are close substitutes.

Though price is determined by the market forces yet there is

enough scope for price differentiation based on product
differentiation. Each firm may claim its product is superior to
its substitute in terms of quality attributes.
44 Oligopoly market has few sellers selling standardised or
differentiated commodities. The common examplesare airlines
automobile manufacturers, computer manufacturers, steel,
cement, medical drugs, chemicals, petroleum, broadcasting/
telecasting.
Entry to oligopoly market is free, however in reality itis very
difficult as there are many barriers such as technology, finance
etc. Being small in number there is a possibility of these firms
joining together and forming a cartel, as is the caseo
organisation of petroleum exporting countries (OPEC)
Ohgopoly firm may have an implicit understanding whereby
they influence price.
tach firm may have some influence over the price speclaluy
when the product is differentiated. Price of a oligopoly produc
can bedecided by a dominant firm which becomes a leader.
 & Monopoly 5
Structure
-
Extreme Cases of Perfect Competition
Larket
resorted since oligopoly firms compete with
Mark

Advertising is also to attract

also indulge in non-price competition
each other. They
customers.

for the firms

is small, there is always a tendency
I the number for the purpose of increasing
together and form a cartel
come
price and profits.

possibility of the oligopoly marketing turning

There is also
a
and acquisition.
into monopoly through mergers
and Characteristics
Table 1.1: Market Structure

No. of Nature Power to Barriers Non price

Examples
Market
Produ- of influence to Competition
Structure
cers Product Price Entry
Standardised None Nil None
Perfect Some Large
Competition agricultural (identical)
commodities
Public One Unique Consi- Very Advertising
Monopoly
utilities Product derable High (Informative)
Computers, Few Standardised Some High Product
Oligopoly differentiation
Crude oil, or
and
Steel, Differentiated
Airlines Advertising
Monopolistic Garments Many Differentiated Some Low Product

Competition differentiation
and

Advertising
For the above list we can add duopoly, where there are two
For example in soft
producers, selling differentiated commodities.
drinks market Coca-cola and Pepsi are the two leading firms. Though
there are other firms, they do not have much power to influence the
market.

Monopsony is another market where there is only a single purchaser.

Such a case appears usually in labour market. This market structure
ditters from monopoly where there is single seller of a commodity.
ln monopsony a single firm is the sole purchaser of an input, for

example labour. A near example is Indian railways, where it is the

only employer for those who want to work in Indian railways.
 0Nonics -I1 (E.Y.B.Co
1.3 TWO EXTREME CASES .Com:SEM
In a market structure we have two extreme types
of mo.
s of
is, perfect competition and monopoly.
markets, tha
(A) PERFECT COMPETITION

Perfect competition based on its assumptions is an

where for a given commodity, same price
ideal markotd
prevails
market. An individual seller is a price taker. Price isthrougho
market by aggregate demand and supply. Firms indecidedin th
the lon
produce optimum output and earn oniy normal profit (P=D
MR AC =MC). Consumers pay minimum possible price AR
maximum possible consumer surplus.
Relax all the assumptions and we land in a real
world mari
situation, where we would not find any such market, and rke
we succeed it is some what near
if at all
aPproximation like agricultural
commodity market like market for rice and wheat or
market fo
corporate stock/share.
Economics being a social science deals with
many variables, of which
most
of them are not quantifiable, It builds models on assumptions
which are not realistic. The conclusions arrived in such
however applied to the real world situation by relaxing
models are
many of the
assumptions. Theories of demand, supply and price determination
are
examples to this effect. Similarly, in a perfectly competitive
market model, many conclusions arrived at,
have practical
applicability. Business firms, irrespective of market form they
operate in apply certain principles arrived at in perfect competition
They are, for example, MR MC to decide the equilibrium outpui
=

and total revenue

(TR) should be equal to total variable cost (TV
to decide about
operating a firm in the short-run.
(B) MONOPOLY
Monopoly with a single seller of a good or service, with no clos
Substitute is a rare case
except in cases like natural monopoly wI
thesole supplier is the government.
dirinking water or railway services by Examples
the government ofsupply
are BMC's
inaidIn
 Structure
-
Monopoly
Extreme Cases of Perfect Competilion&Mo
arket

case
where authority is the sole supplier of good or service,
pub
is not profit but public welfare.
e
objective
ts

eivate monopolies they exist, will have a greater

wherever
total control. Such private monopolies are
poly power lbut not
monopoly power
Based on the
controlled or regulated by the government.
s/eryoften
the private monopolies may produce
egreeof monopoly power,
supernormal profit
utb-optimum output, charge higher prices,
earn

In most of the countries

resort to price discrimination.
and may the monopoly power of private
laws to restrict
oovern ments enact in the real world scenario, with
industries. Private monopolies to function more like
different degrees of monopoly power require control on
with 100 percent supply
oligopoly firms. monopoly
Thus a
in case of public utilities.
does not exist except

REVIEW QUESTIONS

the term 'market structure

1.
1. What is a market ? Explain fully
of markets that constitute
Discuss the characteristics différent types
of
2.
the market structure.
two extreme types of
Explain perfect competition and monopoly
as
3.
markets.

4. Write short notes on:

different markets
(a) Market Structure (6) Nature of product in

5 Explain the following concepts:

(a) Market (b) Market structure
(c) Perfect competition (d) Monopoly
(e) Oligopoly ( Monopolistic competition
6. Answer briefly:
(a) What has been the impact of technology on the concept of the
market?
(b) What are the factors that determine market structures?
()Why is a seller in perfect competition a price taker?
(d) What kind of control can a monopolist exercise over the price of
the product?
(e) Why does the government have monopoly in certain goods and
services?
() Why is it difficult to enter an oligopoly market?
(8) Why are selling costs important for a firm in
monopolistic
competition?
 8 Business Economics-II
(F.Y.B.Com
resort sto SEM
(h) Why do firms under monopolistic competition MI
differentiation?
produe
Differentiate between pertect competition and
competition.
)(0 Differentiate between oligopoly and monopoly
monopolisti,
()How does the knowledge ot market structure help afirm
pricing decisions?

OBJECTIVE QUESTIONS
A. State with reasons whether the following statements are tr
false:
1. A market is a well defined geographical area where buyers and sella
meet. ers
A market can be local, national or international.
2
3. A market structure depends on a number of factors.
The products sold by different sellers in perfect competition are similar
to each other.
5. In perfect competition, the seller is a price maker.
6. In case of monopoly, government regulation is necessary.
7 It is easy for a new firm to enter an oligopoly market.
8. Cartel formation takes place in monopoly.
9. Cartels are not beneficial to consumers.
10. There is a possibility for an oligopoly market to turn into monopoly.
11. In monopolistic competition, restricting entry of new firms through

patent rights is difficult.

12 A monopolist may resort to advertising.
13. The demand for products sold in monopolistically competitive
markets is relatively elastic.
14. There is no scope for price differentiation in monopolistic competition.
15 Selling costs are very important for firms in monopolistic competition
16. Monopolistic competition has a very large number of sellers.
17. An oligopoly firm does not carry out non-price competition.
18. Perfect competition and monopoly are widely prevailing marker
forms.
Ans.:
1. False; For Reasons: Refer Section 1.1.
2 True; For Reasons: Refer Section 1.1.
3 True; For Reasons: Refer Section 1.2.
 -
Extreme Cases of Perfect Competition &Monopoly
Extreme 9
S t r u c t u r e

: Refer Section 1.2.

Market
Reasons
Ealse; For
Reasons Refer Section 1.2.
4 False; For ;
True;
For : Refer Section 1.2.
Reasons

R e a s o n s : Refer
Section 1.2.
b For
False; Section 1.2.
For Reasons KRefer
:
False;
8. Reasons : Refer Section 1.2.
True; For
09. Reasons : Refer Section 1.2.
True; For
10.
True; For
Reasons : Refer Section 1.2.
11.
11. Reasons : Refer Section 1.2.
True; For
12. Keasons : Refer Section 1.2.
True; For
13. Refer Section 1.2.
Reasons:
False; For
14.
True; For Reasons:
Refer Section 1.2.
15. 1.2 (3)
False; For Reasons: Refer Section
16. Section 1.2 (4).
For Reasons: Refer
False;
17.
Reasons: Refer Section 1.3.
False; For
18.
answer:
Choose the correct
B.
not true of a market?
1. Which of the following is
and sellers in contact
(a) lt brings buyers
(b) It is confined to a place
(c) Its a type or category determined by nature of commodity
(d) shaped by technology
It is

22. Which of the following factors determine the structure of a market?

(a) Nature of commodity b) Number of sellers

(c) Use of selling costs (d) All the above

3 What prevents a seller in perfect competition to influence the price?
(a) Large number of sellers
(b) Similarity of products
(c)Effective advertising by other sellers
(d) Interdependence of firms
4. Which of the following is a feature of oligopoly?
(a) Products are always identical
(b) Products do not have any substitute
(c) Products may be differentiated
(d) None of the above
5 A new firm can
easily enter a/an - market.
(a) Oligopoly (b) Monopoly
(c) Perfectly competitive (d) All the above
6. Which market structure is
clearly visible in the retail trade?
(a)
Monopolistic competition (b) Perfect competition
() Oligopoly
(d) Monopoly
 Business Economics- lI (E.Y.B.Com.: SEMJ.
10
Demand curve faced by an individual seller under perfect
7 competition
(a) Downward and gradual (b) Downward and steep
(c) Vertical (d) Horizontal
Cartel formation is most likely
to happen under
(a) Perfect competition (b) Monopoly
() Oligopoly (d) Monopolistic competition
Usually, in natural monopoly, the only supplier of a good or service
is the
(a) private sector (b) government
(c) retailer (d) wholesaler
10. Which of the following is true of private monopoly?
for the
products sold
(a) There are no close
substitute

the government
(b) They are never regulated by
They have greater monopoly power but not total control
(c)
(d) The objective is public welfare
11. Price in oligopoly may be decided by
(a) the government (b) any firm
(c) a regulator (d) a price leader firm
12 Oligopoly can turn into a monopoly market through

(a) mergers and acquisition (b) government regulation

(c) breaking up into smaller firms
(d) auction of assets
13. Demand curve of a firm in monopolistic competition is
(a) relatively inelastic (b) perfectly inelastic
() relatively elastic (d) perfectly elastic

14. Demand curve of a monopoly firm is

(a) relatively inelastic (b) perfectly inelastic
(c) relatively elastic (d) perfectly elastic
Ans.:1)-(b), (2) - (d), (3) - (a), (4) - (c), (5) - (c), (6) - (a), (7) - (d), (8) - (©)
(9)- (b), (10) - (c), (11) - (d), (12) - (a), (13) - (), (14) - (a)

C. Match the following statements

Column A Column B
(1) Perfect competition (a) Two sellers
(2) Monopoly (b) Large number of sellers
(3) Monopolistic competition (c) Unique product
(4) Oligopoly (d) Many sellers

(e) High barriers to entry

Ans.:(1)-b), (2) - (c), (3) - (d), (4) - (e)