44303726 Market Srtucture Analysis

Market Structure Analysis




Microeconomics: B-105

Submitted to : MR. Nahid Rabbani

Associate Professor

Department of Banking

University of Dhaka

Submitted by:

Md. Mezbaul Haider (16-030) …………………………….

Md. Mashrur Ali (16-031) …………………………….

Nazim Reza (16-011) ……………………………

Tauhidul Islam (16-071) …………………………….

Rafsan Mahtab (16-087) …………………………….

Rezaur Rahman (16-040) …………………………….

Nahid Bulbul (16-078) …………………………….

16th Batch


University of Dhaka

Date of Submission: 29th November, 2010


Date: November 29, 2010

Mr. Nahid Rabbani

Course Instructor

Micro economics


Faculty of business studies

University of Dhaka, Bangladesh.

Dear Sir,

It gives us pleasure to submit the report on “Market Structure Analysis” on the basis of the for

market structures: Monopoly, Oligopoly, Monopolistic and Perfect Competition as you authorized us to prepare by November 22, 2010.

It was a fantastic opportunity for us to prepare the report under your guidance, which really was a great experience for us. We have collected the information from their text books, Websites and business articles.

We have worked hard and tried our best to prepare the report. We will be very pleased to provide further information if necessary.

Sincerely,

Md. Mezbaul Haider (16-030)

Md. Mashroor Ali (16-031)

Nazim Reza (16-011)

Tauhidul Islam (16-071)

Rafsan Mahtab (16-087)

Rezaur Rahman (16-040)

Nahid Bulbul (16-078)


Acknowledgement

To begin with, We would like to express our infinite gratitude towards Almighty Allah and our course teacher Mr. Nahid Rabbani, Associate Professor, department of Banking, Faculty of

Business Studies, University of Dhaka, to provide not only extremely well arranged guidelines to complete our report work but would also help us to confront problems in our future career.

We would like to express our heartiest appreciation to our all classmates, who have been a constant support to us and have patiently helped us throughout our report. We wish to extend our thanks to the computer lab assistant and all the peers of the Department who made it possible to

work comfortably even in tough times.


Table of Contents

Chapter Topic Page

1 Introduction 1

2 Monopoly Market 1

2.1 Features of Monopoly 2

2.2 Reasons 3

2.3 Demand and Revenue 4

2.4 Short run production 5

2.5 Advantages of Monopoly 6

2.6 Disadvantages of Monopoly 7

3 Oligopoly 8

3.1 Features of Oligopoly 8

3.2 Behavior of oligopoly 10

3.3 Advantages of Oligopoly 11

3.4 Disadvantages of Oligopoly 11

4 Perfect Competition 12

4.1 Characteristics of Perfect Competition 13

4.2 Demand and revenue 14

4.3 Advantages of Perfect Competition 15

4.4 disadvantages of Perfect Competition 16

4.5 Short Run production 16

5 Monopolistic Competition 18

5.1 Characteristics Of Monopolistic market 18

5.2 Demand and Revenue 20

5.3 Advantages of Monopolistic Market structure 21

5.5 Disadvantages of Monopolistic Market 21

5.6 Short-Run Production 22

6 Comparison of market structure 23

7 Conclusion 24


Executive Summary In the premises of economics market structure is a very crucial topic. Market structure of an

industry is determined according to the products, customers, suppliers and many others issues. On the basis of market structure we can construe the demand, revenue and price of a product.

This report discusses about the market structures as we are assign to do. It also compares

different types of market structures after brief discussions.

The way, the market of a product is segmented is called market structure according to economists. The basis of segmenting the market according to the economists are number and size

of firms that make up the industry, control over price or output, freedom of entry and exit from the industry, nature of the product – degree of homogeneity of the products in the industry,

extent to which products can be regarded as substitutes for each other, diagrammatic representation or the shape of the demand curve, etc.

In this report we have discussed about four types of basic market structures but there can be

found more. In the discussion we included characteristics, advantages, disadvantages along with some important issues and graphs with some examples.

Advantages and disadvantages are given on the basis of prime characteristics as well as pros and

cons. Real life examples are given to make this report more useful. Sometimes real life example can not be described in a name or something like this. Then some situation have described

This report also compares these market structures according to their aspects. In real world this

comparison is valid and more constructive than usual discussions. As it help more to determine the actual structure of an industry and market power. This comparison enlightens the advantages and disadvantages of these market structures.

According to the views and materials of economics this report has been written.


1. Introduction

Market structure is 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. The structure of a market primarily depends on the number of firms operating in the market.

In Economics there are four general market structures. They are: 1. Monopoly

2. Oligopoly 3. Monopolistic Competition & 4. Perfect Competition

These types of market structured are described below:

2. Monopoly Market

A monopoly is a market structure in which there is only one producer/seller for a product. In

other words, the single business is the industry. Entry into such a market is restricted due to high

costs or other impediments, which may be economic, social or political. For instance, a

government can create a monopoly over an industry that it wants to control, such as electricity.

Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one

entity has the exclusive rights to a natural resource.

For example, in Saudi Arabia the government has sole control over the oil industry.

A monopoly may also form when a company has a copyright or patent that prevents others from

entering the market. Monopoly power is an example of market breakdown that occurs when the

member has the ability to control the price or other outcomes in a particular market.

Figure: Monopoly Profit


2.1 Features of Monopoly

The Monopoly Market structure has some special characteristics. Those are:

A single firm selling all output in a market: There is only one firm producing the good. In a real world monopoly, such as the operating system monopoly, there is one firm that provides the

overwhelming majority of sales (ex: Microsoft), and a handful of small companies that have little or no impact on the dominant firm

A unique product: A monopoly achieves single-seller status because the good supplied is unique. There are no close substitutes available for the good produced by a monopoly.

Restrictions on entry into the industry: A monopoly often acquires and generally maintains single seller status due to restrictions on the entry of other firms into the market. Some of the key

barriers to entry are:

i. government license or franchise,

ii. resource ownership, iii. patents and copyrights, iv. high start-up cost, and

v. Decreasing average total cost. These restrictions might be imposed for efficiency reasons or simply for the benefit of the

monopoly.

Specialized information about production techniques unavailable to other potential producers: A

monopoly often possesses information not available to others. This specialized information

comes in the form of legally-established patents, copyrights, or trademarks.

Price Control: In a monopoly, on account of a single market entity controlling supply and

demand, degree of price and supply control exerted by the enterprise or the individual is greater.

The absence of competition spares the monopolizing company from price pressure. Nevertheless,

to evade the entry from new market participants, the company needs to regulate the set product

or service price within the paradigms of the Monopoly Theorem. Monopoly has scope for

entrepreneurship to make available limited goods and/or services at a higher price. The price and

production decisions of such firms target profit maximizing via predetermined quantity choice.

This helps to cut even on the marginal and revenue outcomes.

Increased Scope for Mergers: In a monopoly, due to the dictates of a single entity, scope for

vertical and/or horizontal mergers increase. The mergers take on coercive form to effectively blot

out competitors and carry on supply chain management.

Legal Sanctions: Competition laws restrict a monopoly with regards to the extent of dominant


position held and exhibit of illegal and abusive behavior. This is, however, milder in the case of a

government-granted monopoly. Such a legal monopoly is offered as an incentive to a risky,

domestic venture.

Predatory Pricing: This feature of monopoly benefits the consumers. These are short term market

gains when prices drop to meet scarce demand for the product. The suppliers and direct

consumers benefit from the monopolizing company's attempt to increase sale for business

marketing. This kind of pricing also helps the government to step in and address any unregulated

monopoly. If the predatory pricing is not managed efficiently, the monopoly environment could

be split.

Price Elasticity: With regards to the demand of the product or service offered by the

monopolizing company or individual, the price elasticity to absolute value ratio is dictated by

price increase and market demand. It is not uncommon to see surplus and/or a loss categorized as

'dead-weight' within a monopoly. The latter refers to gain that evades both, the consumer and the

monopolist.

Lack of Innovation: On account of absolute market control, monopolies display a tendency to

lose efficiency over a period of time. With a one-product-shelf- life, innovative designing and

marketing techniques take a back seat.

Lack of Competition: When the market is designed to serve a monopoly, the lack of business

competition or the absence of viable goods and products shrinks the scope for 'perfect

competition'.

Monopoly Litigation: Lack of competition does not eliminate consumer dissatisfaction. High

market share results in consumers defying increased prices and welcome new entrants to the

seller's market. Competition law dictates are designed to pronounce a monopoly illegal, if found

to be abusing market power via practices of exclusionary nature. The law addresses abusive

conduct in the form of product tying, supply cuts, price discrimination and exploitative deals.

2.3 Reasons

Monopolies achieve their single-seller status for three interrelated reasons:

i. economies of scale,

ii. government decree,

iii. And resource ownership.

While a monopoly can emerge and persist for any one of these reasons, most monopolies rely on

two or all three.


Economies of Scale: Many real world monopolies emerge due to economies of scale and

decreasing average cost. If average cost decreases over the entire range of demand, then a single

seller can provide the good at lower per unit cost and more efficiently than multiple sellers. This

often leads to what is termed a natural monopoly. The market might start with more than one

seller, but it naturally ends up with a single seller that can best take advantage of decreasing

average cost. Many public utilities (such as electricity distribution, natural gas dis tribution,

garbage collection) have this natural monopoly inclination.

Government Decree: The monopoly status of a firm can be established by the mandate of

government. Government simply gives one and only one firm the legal authority to supply a

particular good. Such single seller legal status is usually justified on economic grounds, such as

an electric company that naturally tends to monopolize a market. However, it might also result

from political forces, such as mandating monopoly status to a firm controlled by a campaign

donor or close political associate.

Resource Ownership: A monopoly is likely to arise if a firm has complete control over a key

input or resource used in production. If the firm controls the input, then it controls the output.

Monopolies have arisen over the years due to control over material resources (petroleum and

bauxite ore), labor resources (talented entertainers and skilled athletes), or information resources

(patents and copyrights).

2.4 Demand and Revenue

Single-seller status means that monopoly faces a negatively-

sloped demand curve, such as the one displayed in the exhibit

to the right. In fact, the demand curve facing the monopoly is

the market demand curve for the product.

The top curve in the exhibit is the demand curve (D) facing the

monopoly. The lower curve is the marginal revenue curve

(MR).

Because a monopoly is a price maker with extensive market, it

faces a negatively-sloped demand curve. To sell a larger

quantity of output, it must lower the price. For example, the

monopoly can sell 1 unit for $10. However, if it wants to sell 2

units, then it must lower the price to $9.50.

Demand Curve,

Monopoly


For this reason, the marginal revenue generated from selling extra output is less than price.

While the price of the second unit sold is $9.50, the marginal revenue generated by selling the

second unit is only $9. While the $9.50 price means the monopoly gains $9.50 from selling the

second unit, it loses $0.50 due to the lower price on the first unit ($10 to $9.50). The net gain in

revenue, that is marginal revenue, is thus only $9 (= $9.50 - $0.50).

2.5 Short-Run Production

The analysis of short-run production by a

monopoly provides insight into efficiency (or lack

thereof). The key assumption is that a monopoly,

like any other firm, is motivated by profit

maximization. The firm chooses to produce the

quantity of output that generates highest possible

level of profit, given price, market demand, cost

conditions, production technology, etc.

The short-run production decision for monopoly

can be illustrated using the exhibit to the right.

The top panel indicates the two sides of the profit

decision--revenue and cost. The hump-shaped

green line is total revenue (TR). Because price

depends on quantity, the total revenue curve is a

hump-shaped line. The curved red line is total

cost (TC). The difference between total revenue

and total cost is profit, which is illustrated by the

lower panel as the brown line.

A firm maximizes profit by selecting the quantity

of output that generates the greatest gap between

the total revenue line and the total cost line in the

upper panel or at the peak of the profit curve in

the lower panel. In this example, the profit

maximizing output quantity is 6. Any other level

of production generates less profit.

Short-Run Production,

Monopoly


2.6 Advantages of Monopoly

Advantages of monopoly markets are there is no risk of over production. The owners

have edge that he knew his product will be sold because people prefer his product then

other. All the capital is invested in Research & Development. Reduction in price is

advantage to the monopoly market owner because by lowering prices, demand will get

high and efficiently used the organization resources.

Research and Development: Monopolist will have better resources to spend on research

and development and will be able to bring new techniques and products to strengthen its

position. Successful research can be used for improved products and lower costs in the

long term. E.g. Telecommunications and Pharmaceuticals. Supernormal Profit can be

used to fund high cost capital investment spending.

Economies of scale: A monopolist reacts to demand changes in a more effective manner

than other forms. Increased output will lead to a decrease in average costs of production.

These can be passed on to consumers in the form of lower prices.

International Competitiveness: A domestic firm may have Monopoly power in the

domestic country but face effective competition in global markets. E.g. British Steel

A firm may become a monopoly through being efficient and dynamic. A monopoly is

thus a sign of success not inefficiency.

For example – Google

Other advantages of monopoly are:

reduction in price of good

efficiently use of recourses

control over entire market

only producer of a particular product or service

others are price takers


2.7 Disadvantages of Monopoly

Disadvantages of monopolies also exist. Increase in prices of product any time because the

organization knows that there is no competitor, it leads to restriction of consumer choice.

Exploitation of labor and no competitor in market leads to inefficiency.

They abuse consumers in this way. Monopolist has the power to restrict market supply. It is also

argued that because there is no competition monopolist have little incentive to introduce new

products and techniques. Monopolies also restrict entries of new firms and drive them out of

business. Moreover there is lack of choice for consumers in the market. In a monopoly firm do

not respond to consumer demand. When there is competition forms supply more of what

consumers demand.

The major disadvantages of Monopoly are:

Higher Prices: Higher Price and Lower Output than under Perfect Competition. This leads to a

decline in consumer surplus and a deadweight welfare loss.

Allocatively Inefficiency: Assuming that a monopolist and a competitive firm have the same

costs, the welfare loss under monopoly is shown by a deadweight loss of consumer and producer

surplus compared to the competitive price and output. 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

Productive Inefficiency: Under monopoly, however, the presence of barriers of entry allows the

monopolist to earn abnormal profits in the long run. The monopolist is not forced to operate at

the lowest point on the AC curve. The monopolist is therefore unlikely to be productively

efficient (unlike the firm in perfect competition).

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.

Supernormal Profit: A Monopolist makes Supernormal Profit QM * (AR – AC) leading to an

unequal distribution of income.

Higher Prices to Suppliers: A monopoly may use its market power and pay lower prices to its

suppliers. E.g. Supermarkets have been criticized for paying low prices to farmers.

Diseconomies of Scale: It is possible that if a monopoly gets too big it may experience

diseconomies of scale. Higher average costs because it gets too big

Worse products: Lack of competition may also lead to improved product innovation.


Charge higher prices to suppliers: Monopolies may use their supernormal profits to charge

higher prices to suppliers.

Unequal distribution of income: The high profits of monopolists may be considered by many as

unfair. The scale of this problem depends upon the size of the monopoly and the degree of its

power. The monopoly profits of a village store may seem of little consequence when compared

to that of a giant national or international company.

Other disadvantages are:

exploitation of consumers

restriction of consumer’s choice

Exploitation of labor i.e. when price is greater than marginal cost.

3. Oligopoly When the whole market structure of several firms controls the major share of market sales, then

the resulting structure is referred as Oligopoly. Oligopoly is a market structure characterized by a small number of relatively large firms that dominate an industry. The market can be dominated

by as few as two firms or as many as twenty, and still be considered oligopoly.

Because an oligopolistic firm is relatively large compared to the overall market, it has a substantial degree of market control. It does not have the total control over the supply side as exhibited by monopoly, but its capital is significantly greater than that of a monopolistically

competitive firm.

Relative size and extent of market control means that interdependence among firms in an industry is a key feature of oligopoly. The actions of one firm depend on and influence the

actions of another. Such interdependence creates a number of interesting economic issues. One is the tendency for competing oligopolistic firms to turn into cooperating oligopolistic firms. When

they do, inefficiency worsens, and they tend to come under the scrutiny of government. Alternatively, oligopolistic firms tend to be a prime source of innovations, innovations that promote technological advances and economic growth.

3.1 Features of Oligopoly

The main function of oligopoly is to engage in collusion, either by tacit or overt, and also thereby

work out market power. An open agreement belonging to oligopoly is called as cartel which

takes care of the market price or its resolution. Here, Oligopoly is a market conquered by some

large dealers. The amount of market concentration is very high and leading firms will take a

large percentage. Firms which are within an oligopoly produce more identified products. In that


case, advertising and marketing is the major feature of competition in case of such markets and

so, there is also no obstruction to other entries. The four most important characteristics of

oligopoly are:

Small Number of Large Firms: An oligopolistic industry is dominated by a small number of

large firms, each of which is relatively large compared to the overall size of the market. This

generates substantial market control, the extent of market control depending on the number and

size of the firms.

Identical or Differentiated Products: Some oligopolistic industries produce identical products,

while others produce differentiated products. Identical product oligopolies tend to process raw

materials or intermediate goods that are used as inputs by other industries. Notable examples are

petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer

goods that satisfy the wide variety of consumer wants and needs. A few examples of

differentiated oligopolistic industries include automobiles, household detergents, and computers.

Barriers to Entry: Firms in a oligopolistic industry attain and retain market control through

barriers to entry. The most common barriers to entry include patents, resource ownership,

government franchises, start-up cost, brand name recognition, and decreasing average cost. Each

of these makes it extremely difficult, if not impossible, for potential firms to enter an industry.

Inter-dependence of firms: Another important feature of an oligopoly is the dependence between

two firms. This is nothing but, that each firm should always take into account the possible reactions of other firms in the market when they are making pricing and investment decisions.

This may generate improbability in such markets. The behavior of firms in perfect case, in monopoly concept can be treated as a simple optimization.

Some other characteristics of Oligopoly are:

Some of the firms are selling product with similarity.

The production of each firms branded products.

To make the barriers to enter into the market in the long run that allows firms to make

supernormal profits.

High Barriers to entry

Goods could be homogeneous or highly differentiated

Branding or Brand loyalty may be a potent source of competitive advantages


3.2 Behavior

Although oligopolistic industries tend to be diverse, they also tend to exhibit several

behavioral tendencies:

Interdependence: Each oligopolistic firm keeps a close eye on the activities of other firms in the industry. Decisions made by one firm invariably affect others and are invariably affected by others. Competition among interdependent oligopoly firms is comparable to a game or an athletic contest. One team's success depends not only on its own actions but on the actions of its competitor. Oligopolistic firms engage in competition among the few.

Rigid Prices: Many oligopolistic industries (not all, but many) tend to keep prices relatively constant, preferring to compete in ways that do not involve changing the price. The prime reason for rigid prices is that competitors are likely to match price decreases, but not price

increases. As such, a firm has little to gain from changing prices.

Non price Competition: Because oligopolistic firms have little to gain through price competition, they generally rely on non price methods of competition. Three of the more

common methods of non price competition are:

i. Advertising,

ii. Product differentiation, and

iii. Barriers to entry.

The goal for most oligopolistic firms is to attract buyers and increase market share, while

holding the line on price.

Mergers: Oligopolistic firms perpetually balance competition against cooperation. One way to pursue cooperation is through merger--legally combining two separate firms into a single

firm. Because oligopolistic industries have a small number of firms, the incentive to merge is quite high. Doing so then gives the resulting firm greater market control.

Collusion: Another common method of cooperation is through collusion--two or more firms

that secretly agree to control prices, production, or other aspects of the market. When done right, collusion means that the firms behave as if they are one firm, a monopoly. As such they can set a monopoly price, produce a monopoly quantity, and allocate resources as inefficiently as a monopoly. A formal method of collusion, usually found among international produces is a cartel.


3.4 Advantages of Oligopoly

Innovations: Of the four market structures, oligopoly is the one most likely to develop the

innovations that advance the level of technology, expand production capabilities, promote economic growth, and lead to higher living standards. Oligopoly has both the mo tive and the

opportunity to pursue innovation. Motive comes from interdependent competition and opportunity arises from access to abundant resources.

Economies of Scale: Oligopoly firms are also able to take advantage of economies of scale that

reduce production costs and prices. As large firms, they can "mass produce" at low average cost. Many modern goods--including cars, computers, aircraft, and assorted household products--

would be significantly more expensive if produced by a large number of small firms rather than a small number of large firms.

Some other Advantages of the Oligopoly are:

Firms are able to reap economies of scale, due to large scale competition. Products cannot

be produced by individual firms on a small scale.

There is an incentive to engage in Research & Development. They have the ability to

earn super normal profits and capture larger market share.

Firms enjoy lower costs due to technological improvement. This results in higher profits

which will improve firm's capacity to withstand price war.

more profits due to decreased competition

allows for greater efficiency through standardization, economies of scale (for production

and new product development)

and avoidance of a monopoly

3.5 Disadvantages of Oligopoly

Like much of life, Oligopolies in a market have several problems. They are:

Inefficiency: First and foremost, oligopoly does NOT efficiently allocate resources. Like any

firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. In fact, oligopoly tends to be the worst efficiency offender in the real world, because perfect competition does not exist, monopolistic competition

inefficiency is minor, and monopoly inefficiency has the potential for being so bad that it is inevitably subject to corrective government regulation.

Concentration: Another bad is that oligopoly tends to increase the concentration of wealth and income. This is not necessarily bad, but it can be self- reinforcing and inhibit pursuit of the


microeconomic goal of equity. While the concentration of wealth is not bad unto itself, such wealth can then be used (or abused) to exert influence over the economy, the political system,

and society, which might not be beneficial for society as a whole.

The other disadvantages of the oligopoly are:

Firms have extensive amounts of power and may even collude to set prices, which is

illegal.

For the consumer this means high prices accompanied by the possibility of a low quality

product.

It could be argued that it ends up being a less competitive market as smaller firms find it

impossible to compete with these brands established firms.

less innovation and hiring because competition is limited

4. Perfect Competition:

Market for a homogeneous product in which there are many producers and consumers, none of

which are large enough to have any individual effect upon the market on their own. In theory

such a market produces the largest output at the lowest price. There are few, if any, real-world

markets of this nature; probably the closest is markets for farm products.

An ideal market structure characterized by a large number of small firms, identical products sold

by all firms, freedom of entry into and exit out of the industry, and perfect knowledge of prices

and technology. This is one of four basic market structures which is pure or perfect competition.

Perfect competition is an idealized market structure that is not observed in the real world. While

unrealistic, it does provide an excellent benchmark that can be used to analyze real world market

structures. In particular, perfect competition efficiently allocates resources.

Perfect competition a market structure characterized by a large number of firms so small relative

to the overall size of the market, such that no single firm can affect the market price or quantity

exchanged. Perfectly competitive firms are price takers. They set a production level based on the

price determined in the market. If the market price changes, then the firm re-evaluates its

production decision. This means that the short-run marginal cost curve of the firm is its short-run

supply curve.

Examples: If a bakery set the market price for bread is tk10, charging more of that of other

bakeries of that area than no one will buy bread from that bakery as the customers can buy bread

at a cheaper rate. This policy is applicable for agricultural products like wheat, rice, potato and

spices for many fruit and flower market.


4.1 Characteristics of Perfect Competition

Large Number of Small Firms: A perfectly competitive industry contains a large number of

small firms, each of which is relatively small compared to the overall size of the market. This

ensures that no single firm can exert market control over price or quantity. If one firm decides to

double its output or stop producing entirely, the market is unaffected. The price do there is not

discernible change in the quantity exchanged in the market.

Identical Products: Each firm in a perfectly competitive market sells an identical product, what

is often termed "homogeneous goods." The essential feature of this characteristic is not so much

that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern

any difference. In particular, buyers cannot tell which firm produces a given product. There are

no brand names or distinguishing features that differentiate products.

Perfect Resource Mobility: Perfectly competitive firms are free to enter and exit an industry.

They are not restricted by government rules and regulations, start-up cost, or other barriers to

entry. While some firms incur high start-up cost or need government permits to enter an industry,

this is not the case for perfectly competitive firms. Likewise, a perfectly competitive firm is not

prevented from leaving an industry as is the case for government-regulated public utilities.

Perfect Knowledge: In perfect competition, buyers are completely aware of sellers' prices, such

that one firm cannot sell its good at a higher price than other firms. Each seller also has complete

information about the prices charged by other sellers so they do not inadvertently charge less

than the going market price. Perfect knowledge also extends to technology. All perfectly

competitive firms have access to the same production techniques. No firm can produce its good

faster, better, or cheaper because of special knowledge of information.

Price takers: Individual firms exert no significant control over product price; a firm only can

measure the price according to the demand and supply of the product but can not set price. Each

firm produces such a small fraction of total output that increasing or decreas ing its output will

not perceptibly influence total supply or product price. The individual competitive producer is at

the mercy of the market; asking a price higher than the market price would be futile. Because the

market is filled with an infinite number of firms all selling the same product, any single firm

represents a minuscule portion of the whole market causing. no single firm can change market

price by adjusting output as it makes up a small percentage of the entire market supply . So

competitive firm is a price taker, because it cannot change market price; it can only adjust to it.

There is no profit to be made because the price each business operates at is only enough to cover

a unified normal profit, therefore going below the price would result in an economic loss.


Free entry and exit: There are no legal, technological, financial, or other obstacles that prevent

firms from entering or leaving a competitive market. It is easy for firms to enter or exit the

industry. This is only possible in a purely competitive market because firms in this type of

market are "price takers," and the number of firms does not affect the price of a product.

Perfectly elastic demand: A perfectly elastic demand means that the firm can produce as much as

they want at that price and it will still be sold. Purchasers will be willing to buy any quantity at

that price. In this market structure perfectly elastic demand is seen.


The characteristics of perfect competition mean a perfectly competitive firm faces a horizontal

or elastic demand curve, such as the one displayed in the exhibit below.

Demand Curve, Perfect Competition

Each firm in a perfectly competitive market is a price taker and can sell all of the output that it

wants at the going market price, in this case tk2.5. A firm is able to do this because it is a

relatively small part of the market and its output is identical to that of every other firm. As a

price taker, the firm has no ability to charge a higher price and no reason to charge a lower one.

Because it can sell all of the output it wants at the going market price, it has no reason to charge

less. If it tries to charge more than the going market price, then buyers can simply buy output

from any of the large number of perfect substitutes produced by other firms.


Because the price facing a perfectly competitive firm is unrelated to the quantity of output

produced and sold, this price is also equal to the marginal revenue and average revenue

generated by the firm. If a firm is able to sell any quantity of output for tk250 each, then the

average revenue, revenue per unit sold, is also tk2.5 Moreover, each additiona l unit of output

sold, marginal revenue, generates an extra tk2.5.

4.3 Advantages of perfect competition

Optimal allocation of resources: All the firms want to minimize the cost of product as they have

to offer a lower price. The finest way of minimizing the cost of production is minimizing the

misuse of and assuring the optimal use of resources. Thus the best use of resources is secured,

Competition encourages efficiency: In pure competition the intensity of contest compel the

firms to attain efficiency. The pure competition market is more efficient than any other markets.

Such markets are usually allocatively and productively efficient.

Consumers charged a lower price : As in pure competition there are many firms participating in

the business and all of the goods are identical, the customers buy the commodity from the firm

which offers lest price, So every firm wants to offer lower price than other firms. As a result the

consumers can get product at a lower rate.

Responsive to consumer wishes: In pure competition, the firms of the industry response

according to the claims and wishes of consumers. In a short the customers can have their wishes

fulfilled.

Change in demand: In pure competition if there is any change in demand the suppliers can react

to the change more easily, as there are a large numbers of suppliers.

Leads extra supply: The large numbers of suppliers lead to extra large supply.

Easy entry and exit: It is relatively easy to enter or exit as a business in a perfectly competitive

market for its characteristics.

Knowledge and information: In this market structure the suppliers known about the customers

and the customers knows about the suppliers well.


4.4 Disadvantages of Perfect Competition

Lack of product variety: The product introduced in this market are same, all the suppliers supply

same product, so their is not any variety.

Lack of competition over product design and specification: All the suppliers try to provide goods

at a cheap rate, to attain this goal they seldom concentrate on improving the product. So this

causes a lacking of competition over product design and specification.

Unequal distribution of goods and income: The consumers who can pay more can get more and

the suppliers who can invest more can earn more in pure competition, this cause’s unequal

distribution of goods and income.

Lack of capital: In pure competition there are a large numbers of small firms so they do not have

a huge capital.

Price setting: An individual firm can not set a price; it can only measure a price according to the

demand and supply and sell the product.

Other drawbacks:

Price undercutting,,

advertising, innovation,

Activities that - the critics argue - characterize most industries and markets.


The analysis of short-run production by a perfectly competitive firm provides insight into

market supply. The key assumption is that a perfectly competitive firm, like any other firm, is

motivate by profit maximization. The firm chooses to produce the quantity of output that

generates highest possible level of profit, based on price, market demand, cost conditions,

production technology, etc.

The short-run production decision for perfect competition can be illustrated using the exhibit to

the below. The top panel indicates the two sides of the profit decision--revenue and cost. The

straight green line is total revenue. Because price is constant, the total revenue curve is a straight


line. The curved red line is total cost. The shape of the total cost curve is based on increasing

then decreasing marginal returns. The difference between total revenue and total cost is profit,

which is illustrated by the lower panel as the brown line.


Perfect Competition

A firm maximizes profit by selecting the quantity of output that generates the greatest gap

between the total revenue line and the total cost line in the upper panel or at the peak of the profit

curve in the lower panel. In this example, the profit maximizing output quantity is 7. Any other

level of production generates less profit.


5. Monopolistic Competition:

Monopolistic competition is a market structure characterized by a large number of relatively

small firms. While the goods produced by the firms in the industry are similar, s light differences

often exist. As such, firms operating in monopolistic competition are extremely competitive but

each has a small degree of market control.

In effect, monopolistic competition is something of a hybrid between perfect competition and

monopoly. Comparable to perfect competition, monopolistic competition contains a large

number of extremely competitive firms. However, comparable to monopoly, each firm has

market control and faces a negatively-sloped demand curve.

The real world is widely populated by monopolistic competition. Perhaps half of the economy's

total production comes from monopolistically competitive firms. The best examples of

monopolistic competition come from retail trade, including restaurants, clothing stores, and

convenience stores.

Monopolistic Competitive Industries:

Shoes -Nike, Addidas, Reebok

Jewelry

Asphalt paving

Signs

Bottled water

ice cream-Breyers, Tom & Jerry

Mobile Phone- Nokia, Samsung, Sony Ericcson

5.1 Characteristics Of Monopolistic Competition

Many Numbers of Firms: A monopolistically competitive industry contains a large number of

small firms, each of which is relatively small compared to the overall size of the market. This

ensures that all firms are relatively competitive with very little market control over price or

quantity. In particular, each firm has hundreds or even thousands of potential competitors.

Similar Products but not perfect substitute: Each firm in a monopolistically competitive market

sells a similar, but not absolutely identical, product. The goods sold by the firms are close

substitutes for one another, just not perfect substitutes. Most important, each good satisfies the

same basic want or need. The goods might have subtle but actual physical differences or they


might only be perceived different by the buyers. Whatever the reason, buyers treat the goods as

similar, but different.

Relative Resource Mobility: Monopolistically competitive firms are relatively free to enter and

exit an industry. There might be a few restrictions, but not many. These firms are not "perfectly"

mobile as with perfect competition, but they are largely unrestricted by government rules and

regulations, start-up cost, or other substantial barriers to entry.

Extensive Knowledge: In monopolistic competition, buyers do not know everything, but they

have relatively complete information about alternative prices. They also have relatively complete

information about product differences, brand names, etc. Each seller also has relatively complete

information about production techniques and the prices charged by their competitors.

Price maker: A monopolistically competitive firm is a price maker, with some degree of control

over price. Once again, unlike perfect competition, a monopolistically competitive firm has the

ability to raise or lower the price a little, not much, but a little. And like monopoly, the price

received by a monopolistically competitive firm which is also the firm's average revenue is

greater than its marginal revenue.

Product Differentiation: The goods produced by firms operating in a monopolistically

competitive market are subject to product differentiation. The goods are essentially the same, but

they have slight differences.

Product differentiation is usually achieved in one of three ways:

physical differences,

perceived differences, and

Support services.

Physical Differences: In some cases the product of one firm is physically different form the

product of other firms. One good is chocolate, the other is vanilla. One good uses plastic, the

other aluminum.

Perceived Differences: In other cases goods are only perceived to be different by the buyers,

even though no physical differences exist. Such differences are often created by brand names,

where the only difference is the packaging.

Support Services: In still other cases, products that are physically identical and perceived to be

identical are differentiated by support services. Even though the products purchased are identical,

one retail store might offer "service with a smile," while another provides express checkout.

Product differentiation is the primary reason that each firm operating in a monopolistically

competitive market is able to create a little monopoly all to itself.


Advertising: A unique feature of a monopolistic competitive market is that there are product

differentiations. Therefore, companies rely on advertising to flaunt their products and try to get

consumers to buy their product over another.


The four characteristics of monopolistic competition mean that a monopolistically competitive

firm faces a relatively elastic, but not perfectly elastic, demand curve, such as the one displayed

in the exhibit to the right.

Demand Curve, Monopolistic Competition

Each firm in a monopolistically competitive market can sell a wide range of output within a

relatively narrow range of prices. Demand is relatively elastic in monopolistic competition

because each firm faces competition from a large number of very, very close substitutes.

However, demand is not perfectly elastic (as in perfect competition) because the output of each

firm is slightly different from that of other firms. Monopolistically competitive goods are close

substitutes, but not perfect substitutes.


5.3 Advantages of Monopolistic Market structure

Monopolistic competition can bring the following advantages:

Price setting: The firms here can set the price product by changing the product or some other

alterations.

Elastic demand: The demand faced here is not perfectly elastic but elastic.

Service orientation: There is a provision of after sale services in this type of market structure.

Successful service improvement by one firm encourages other firms to also improve or imitate.

Product Varity and betterment: Each firm has a product that is distinguishable in some way from

those of the other producers. Therefore, firms are able to have profit from differentiation. In the

long run, monopolistic competitive markets will only earn a normal profit due to easy entry and

exit of the industry.

Satisfaction of customers: Product variety, services satisfies a wide range of consumer tastes.

Entry and exit: In this structure a firm can easily enter or exit in the industry.

5.4 Disadvantages of Monopolistic Market

There are several potential disadvantages associated with monopolistic competition, including:

Complex situation: Situation of a monopolistic competitor is complex due to its ability to

engage in non price competition. This complex situation is not expressed in a single simple

economic model.

Cost increase: Advertisement, product variety, service and other factors cause increased cost.

Allocatively Inefficiency: Firms produce at a point where P>MC, meaning that resources are

under allocated; not allocatively efficient.

Productive Inefficiency: Firms do not produce where Price= min Average Total Cost; therefore,

no productively efficient



The analysis of short-run production by a monopolistically competitive firm provides insight

into market supply. The key assumption is that a monopolistically competitive firm, like any

other firm, is motivated by profit maximization. The firm chooses to produce the quantity of

output that generates the highest possible level of profit, given price, market demand, cost

conditions, production technology, etc.

The short-run production decision for monopolistic competition can be illustrated using the

exhibit to the above. The top panel indicates the two sides of the profit decision--revenue and

cost. The slightly curved green line is total revenue. Because price depends on quantity, the total

revenue curve is not a straight line. The curved red line is total cost. The difference between total

revenue and total cost is profit, which is illustrated in the lower panel as the brown line.


Monopolistic Competition

A firm maximizes profit by selecting the quantity of output that generates the greatest gap

between the total revenue line and the total cost line in the upper panel or at the peak of the profit

curve in the lower panel. In this example, the profit maximizing output quantity is 6. Any other

level of production generates less profit.


6. Comparison of market structures

As we have discussed about the four market structures that is Monopoly, Oligopoly, Monopoly

and Perfect Competition market and their Characteristics, advantages, disadvantages, Demand

curve, How they arises, number of suppliers and buyers, price strategy, market power, profit

maximization etc, we can easily see some basic differences among themselves.

Here is a Brief comparison of these market structures:

Characteristics Perfect

Competition Oligopoly Monopolistic

competition Monopoly

Number of firms Large number of buyers and sellers – no individual seller can influence price

Industry dominated by small number of large firms. Many firms may make up the industry

Many buyers and sellers

Where only one producer exists in the industry. In reality, rarely exists –always some form of substitute available!

Type of product Homogenous product – identical so no consumer preference

Products could be highly differentiated – branding or homogenous

Products differentiated

Product is very limited.

Barriers to entry Free entry and exit to industry

High barriers to entry

Relatively free entry and exit

High barriers to entry

Pricing Large number of buyers and sellers – no individual seller can influence price. Sellers are price takers – have to accept the market price

In Oligopoly sellers are price maker

Firm has some control over price

In Monopoly sellers are price maker

Profit maximization Always Not always Not always Usually, but not always

Economic efficiency

In perfect competition economic efficiency is high

In oligopoly economic efficiency is Low

In monopolistic economic efficiency is low

In monopoly economic efficiency is Low

Innovative behavior Weak Very Strong Strong Potentially strong


7. Conclusion:

The graphs and models can be used as a comparison of structures. When looking at real world

examples, focus on the behaviour of the firm in relation to what the model predicts would

happen – that gives the basis for analysis and evaluation of the real world situation. Regulation

or the threat of regulation may well affect the way a firm behaves. Remember that these models

are based on certain assumptions – in the real world some of these assumptions may not be valid,

this allows us to draw comparisons and contrasts. The way that governments deal with firms may

be based on a general assumption that more competition is better than less.


Bibliography:

1. Microeconomics, Michael Parkin, 8th Edition

2. www.myeconlab.com/

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44303726 Market Srtucture Analysis

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