1. Market Structure

2. Market Structure
Market structure – identifies how a market is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms’ behaviour – pricing strategies, non-price competition, output levels
The extent of barriers to entry
The impact on efficiency

3. Types of Market Structure
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly

4. Greater degree of monopoly power
Market Structure
Perfect
Competition
Pure Monopoly
Greater degree of monopoly power
More competitive

5. Perfect Competition

6. Features Large number of buyers and sellers Homogeneous products
Perfect mobility of factors of production
Free entry & free exit of firms
Perfect knowledge
Absence of collusion or artificial restaraint
No govt. intervention

7. Price Determination under Perfect Competition

8. Price determination under perfect competition is analyzed under three different time periods:
Market period or very short run
Short run
Long run

9. Pricing in “Market Period”
Demand determined Price
Supply determined Price

10. Pricing in the “Short Run”
industry
Firm

11. Pricing in the “Long Run”
Industry
Firm

13. Monopoly
Only one seller of a particular product

14. Characteristics of Monopoly
Single Producer
No close substitute
Inelastic demand curve
Price Maker
Barriers to entry
Legal restrictions or barriers to entry of other firms
Control over key raw material
Examples: Public utilities – telephones and electricity etc.

15. Pricing & Output Decision: Monopoly
Costs / Revenue
Given the barriers to entry, the monopolist will be able to exploit abnormal profits in the long run as entry to the market is restricted. MC
AR (D) curve for a monopolist likely to be relatively price inelastic.
7.00
Monopoly
Profit AC
3.00 AR MR
Output / Sales Q1

16. Price Discrimination
It refers to discrimination of price for different consumers on the basis of their income or purchasing power, geographical location, age, sex, colour, marital status, quantity purchased, time of purchase etc. for eg:-
Physicians and hospitals
Merchandise sellers
Railways and Airlines
Cinema shows or musical concerts
Domestic and foreign markets

17. Necessary conditions Different Markets must be separable for a seller
The Elasticity of demand must be different in different markets
There must be imperfect competition in the market
Profit maximizing output should be larger than the quantity demanded in a single market or section of consumers

18. First Degree of Price Discrimination
Costs / Revenue S P D Q
Output / Sales

19. Second Degree of Price Discrimination
Costs / Revenue S P1 P2 P3 P Q1 Q2 Q3 Q D
Output / Sales

20. Third Degree of Price Discrimination
Costs / Revenue
Market B
Total Market
Market A MC PB PA
AR=D
ARA
ARB
MRB
MRA MR Q QA QB
Output / Sales
Output / Sales
Output / Sales

21. Monopolistic Competition

22. Features: Large no. of sellers Free entry & free exit
Perfect factor mobility
Complete dissemination of market information
Differentiated product

23. Monopolistic vs. Perfect Competition
Differentiated & Homogeneous products
Decision making

24. Price & output decisions in “Short Run”

25. Price & output decisions in “Long Run”

26. Non Price Competition: Selling Cost
Two common forms of non price competition are
Product Innovation
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27. Oligopoly
Ipod Zune

28. Oligopoly
Few producers control supply and price

29. Characteristics of Oligopoly
Small number of sellers
Homogenous or differentiated products
Interdependence of decision making
Barriers to entry
Indeterminate price and output
Examples : Aluminum, steel, cigarettes, cars etc

30. Sweezy’s Kinked Demand Curve

31. d1 is relatively elastic
d2 is relatively inelastic

32. The kinked demand curve indicates the possibility of price rigidity

33. Changes in cost do not impact output and prices as long as MC remains in the vertical portion of MR

34. Price Leadership Models
Sometimes, a Leading role is played by the dominant firm due to its size, efficiency, economies of scale or firm’s ability to forecast market conditions accurately. It initiates a change in price and other small firms follow.
The dominant firm may also serve as a means to price discipline and price stabilization which is knows as “Effective Price leadership”

35. Price Leadership by Low Cost Firm
Costs / Revenue
MC’ P3
AC’ P2 MC AC E’ P1 E AR MR Q1 Q2
Output / Sales

36. Price Leadership by Dominant Firm
Cost/Revenue
Output/Sales QD
MCD P3 P’ P2 P1 P DM DD S D
MRD F C A B E

37. Barometric Price Leadership
The barometric Firm may not necessarily be the largest firm but it is supposed to have a better knowledge of the prevailing market conditions.
Advantages:
Better Price
Dependence
Reaction to Economics warfare

38. Collusion Model : The Cartel
A cartel is an association of business firms formed by an explicit agreement between them. They jointly establish a cartel organization to:
Make Price and output decisions
Establish Production Quotas.
Supervise market activities of the firms.

39. Market Allocation under Cartel
Costs / Revenue
Output / Sales q1 q2 Q
mc2
ac1
mc1
ac2
Firm A MC MR
AR=D C P
Industry
Firm B

40. Thank You!