Market Structure in Economics

• Market structure is present in engineering economics

Market

• In economics, a market is a social system where sellers and purchasers of a commodity or service interact.
• In common language, market means a place where goods are purchased.
• In economics, market is an arrangement establishing effective relationship between buyers and sellers of a commodity.
• Each commodity has its own market.
• Participants engage in buying and selling.
• A market does not have to be a particular place.
• It involves an institutional relationship between purchasers and sellers.
• It is an arrangement connecting buyers and sellers.
• Markets differ based on buyer and seller numbers, product nature, influence over price, information availability, and supply conditions.
• There are four broad categories of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly.

Types of Market Structures

• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
• Duopoly

Market Structures

• Market structures differ in competiveness
• Ranked in order of most to least competitive: Perfect competition, Monopolistic competition, Oligopoly, Monopoly

Market Structures based on Competition, Product Type and Competition in Advertising

• Pure competition involves a large number of buyers and sellers dealing in a homogeneous product, with perfect substitutes available, free entry and exit, perfect knowledge, and no advertising.
• Monopolistic competition features many sellers offering differentiated products, close substitutes, free entry and exit, and non-price competition through advertising and product innovation.
• Oligopoly consists of few sellers with homogeneous or differentiated products, interdependent decision-making, potential but difficult entry and exit, and strategic pricing with marketing efforts.
• Monopoly has a single seller producing a product with no close substitutes, impossible entry, and is usually regulated as a public utility, producing essential goods.

Perfect Competition

• Perfect competition involves a large number of sellers selling a homogeneous product at a uniform price.
• Firms are price takers in this environment.
• It's a market where infinite sellers offer a homogeneous good to infinite buyers, with both having perfect knowledge of market conditions.
• Presence of a large number of buyers and sellers is a feature of perfect competition
• Homogeneous product is a feature of perfect competition
• Freedom of entry and exit is a feature of perfect competition
• Perfect knowledge is a feature of perfect competition
• Perfectly elastic demand curve is a feature of perfect competition
• Perfect mobility of factors of production is a feature of perfect competition
• No governmental intervention is a feature of perfect competition
• A firm is a price taker
• A market is perfectly competitive if it has a large number of buyers and sellers.
• No single firm can influence price, making firms price takers, not price makers.
• Homogenous goods are identical in quantity, shape, size, packaging.
• Products are perfect substitutes for each other
• All sellers in the market sell the homogenous products at a uniform price.
• Price is determined by the forces of demand (buyers bidding) and supply (sellers bidding), accepted by all.
• Firms under perfect competition are price-takers.
• Any firm can freely enter or leave the industry.
• Free entry and exit ensure firms earn normal profits in the long run.
• If firms earn supernormal profits, new firms enter, increasing supply and reducing the market price, eliminating extra profit.
• If firms incur losses, they exit, decreasing supply, raising prices, and wiping out the losses.
• The goal of all firms is profit maximization.
• There is no government intervention.
• Resources can move freely between firms and jobs.
• Both buyers and sellers possess perfect market knowledge and free information.
• Each firm knows the prevailing market price.
• Each buyer knows the prevailing market price.
• Firms can use the best production techniques.
• Transport costs are zero. Product price unaffected by transportation.
• The demand curve is perfectly elastic, thus firms can sell as much as they want at the ruling market price.

Price Takers

• Price takers must charge the ruling market price.
• Price makers are able to fix their own price.
• Price leaders are market leaders whose price changes are followed by rivals.
• Price followers adopt the price changes of the market leader.

Imperfect Competition

• Imperfectly competitive markets include monopoly, monopolistic competition, oligopoly, and duopoly.
• It lies between perfect competition and monopoly.
• A monopoly firm produces the entire market supply of a particular good or service.
• In a duopoly, only two firms supply a particular product.
• In an oligopoly, a few large firms supply all or most of a particular product.
• In monopolistic competition many firms supply essentially the same product but each has brand loyalty.

Monopoly

• Monopoly is a market where there is one seller, and no close substitutes.
• The seller has full control over the supply of the commodity.
• A monopoly firm and the industry are the same.
• This structure is derived from the Greek words 'Mono' (single) and 'Poly' (seller), and 'monopoly' means a single seller.
• Single seller with large number of buyers.
• Faces no competition from other firms.
• No single buyer can influence the monopoly price.
• There is no close substitute for the product sold.
• Restriction on the entry of new firms.
• Monopolies can maintain super-normal profits in the long run
• A monopolist with no substitutes would be able to derive the greatest monopoly power.
• Wasteful duplication of infrastructure is avoided.
• Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues.
• Restricting output onto the market is a disadvantage of monopoly to the consumer.
• Charging a higher price than in a more competitive market is a disadvantage of monopoly to the consumer.
• Reducing consumers surplus and economic welfare is a disadvantage of monopoly to the consumer.
• Restricting choice for consumers is a disadvantage of monopoly to the consumer.
• Reducing consumer sovereignty is a disadvantage of monopoly to the consumer.
• A monopoly firm controls its product's supply and price.
• It can influence the market price by varying its supply.
• Price discrimination is possible, selling the same commodity at different prices in different markets based on demand elasticity.
• Can face threat of potential entrants, resulting in contestable monopoly
• The firm decides output levels for the entire market.
• The firm then sets price based on market demand for the product at that level of output.
• Monopoly has a downward sloping inelastic demand curve because the product does not have any close substitute.
• MR curve of the monopoly firm is also downward sloping and lies bellow AR curve.

Monopolistic Competition

• This market is one in which there are large numbers of sellers selling differentiated products.
• The products sold in monopolistic competition are similar in nature but not homogenous, e.g., the different brands of soap.
• The goods are closely related with a little difference in odour, size and shape.
• The concept was developed by Chamberline
• Is a combination of perfect competition and monopoly.
• Product differentiation exists
• There is a large number of sellers and buyers.
• Sellers act independently, with no mutual dependence.
• Firms are not price takers.
• Firms sell products which are not homogenous in nature but are close substitutes.
• Real product differentiation arises due to differences in the quality of inputs or location/service.
• Artificial differentiation is created through advertisements and attractive packing.
• Firms compete with each other by spending on advertisements, keeping the product prices unchanged.
• Selling cost is the expenditure incurred on advertisements and sales promotion by a firm to promote the sale of its product.
• Selling costs are the expenses incurred on advertisement, publicity, salesmanship etc.
• Firms incur selling costs to make aware of the product, to attract new customers, to create customer base and loyalty.
• There are no restrictions on the entry of new firms and the firms decide to leave the industry.
• All firms earn normal profits in the long run.
• Firms can influence the price of the commodity.
• They face an inverse relationship between price and quantity.

Product Differentiation

• Product differentiation is the process of distinguishing a product or service from others
• Makes the product more attractive to a particular target market
• This involves differentiating it from competitors' products as well as a firm's own products.
• Non-price Competition includes improving innovation, quality of service, adding free upgrades and shipping, exclusivity or loyalty programs, or improve branding.

Oligopoly

• Few firms producing differential goods or closely differential goods.
• So small that every seller is affected by the activities of the others.
• The actions of every seller predictably affect the other sellers/rivals.
• Oligopoly is called competition amongst the few
• Categories include pure oligopoly (without product differentiation) and differentiated oligopoly (with product differentiation).
• Consists of a few sellers
• Has products standardized or differentiated products
• Has significant barriers to entry
• Has market power
• Is Interdependent
• There are few sellers
• There is control over supply
• There is interdependence of firms
• There are conflicting attitudes of firms
• There is lack of uniformity of size of firm
• There is group behavior
• There is advertising and selling costs
• There is price rigidity
• There is intense Competition
• There is indeterminateness of demand curve
• The number of sellers is so small that each seller is affected by the activities of the others.
• Interdependence among firms is a key characteristic.
• Each firm contributes a significant portion of the total output.
• Oligopoly firms make homogenous goods or differentiated goods.
• Exisence of barrier to the entry of the new firms

Duopoly

• It is a specific type of oligopoly where only two producers exist in one market.
• Only two firms have dominant control over a market.
• Provides a simplified model for showing the main principles of the theory of oligopoly.
• Change in the price or output of one will affect the other; and his reactions in turn will affect the first.
• Two variables of interest: prices set by each firm and the quantity produced by each firm.
• Duopoly is a market in which there are two sellers of a commodity such that actions of each seller has predictable effect on the other seller/rival.

Paul Sweezy's Kinked Demand Curve

• Kink demand curve has a kink at the prevailing level of price.
• The segment of the demand curve above the kink is highly elastic.
• The segment of the demand curve bellow the kink is highly inelastic.
• If the oligopoly firm reduce the price bellow the prevailing price (at kink), his rivals will follow him and accordingly lower their price.
• The oligopolist has no incentive to raise its price or reduce it.
• There is price rigidity/stable price in the market.
• Due to to the factors above, very little increase in the sale can be obtained by a reduction in price by the oligopolist.
• If the oligopoly firm raises the price above the prevailing price (at kink), his rivals will not follow him.
• Large fall in sale is expected from increasing price
• Sweezy argued that an ordinary demand curve does not apply to oligopoly markets and promotes a kinked demand curve.

Revenue

• Revenue refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at various prices.
• Revenue is the receipt of money from the sale of output by a firm in a given time period.
• The income generated from sale of goods or services, or any other use of capital or assets, associated with the main

Types of Revenue

• Total revenue
• Average revenue
• Marginal revenue

Total Revenue (TR)

• Total revenue is the total sale proceeds of a firm by selling certain units of a commodity at a given price.
• If a firm sell 10 units of a commodity at 20 each,Them TR = 20 x 10 =200.00
• Total revenue is price per unit multiplied by the number of units sold.
• Total revenue (TR) = Price X Quantity Sold
• The total amount of money received by a business selling products
• Is NOT profit

Average Revenue (AR)

• Average revenue is the revenue earned per unit of output.
• Average revenue is found out by dividing the total revenue by the number of units sold.
• Average Revenue = Price

Marginal Revenue (MR)

• Marginal Revenue is the change in total revenue resulting from sale of an additional unit of the commodity.
• If a seller realises 200.00 after selling 10 units and225 by selling 11 units,Then MR = (225.00 - 200.00) = `25.00
• Marginal Revenue (MR) is the rate of change in total revenue with respect to change in output.

Revenue under Perfect Competition

• Under perfect competition price is uniform and given
• As such, AR(price) and MR become equal.
• AR and MR curves coincide and become parallel to output axis.
• AR curve is perfectly elastic.

Revenue under Imperfect Competition

• When total Revenue is maximised, MR=0
• AR curve is the demand curve facing a firm in the market
• AR and MR curves are downward sloping, MR curve lies below AR curve.

Profit

• Profit is the gap between total revenue and total cost.
• Profit =Total Revenue - Total Cost
• When profit is negative, a firm is suffering from loss.
• Profit indicates the level of output at which Total Revenue just equals Total Cost
• A firm is said to in equilibrium when it maximises its profit at given level of output.
• At firm's equilibrium, profit(TR-TC) is maximum.
• Output must be equal if revenues are equal to costs for equilibrium. A firm is in equilibrium (maximum profit) at Q level of output after which the gap between TR and TC goes on narrowing.
• Conditions For Profit Maximisation/Firm's Equilibrium
• MR=MC (Necessary Condition)
• In equilibrium, MC must be rising