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Chapter VII & VIIIChapter VII & VIII
CompetitionCompetition
Dr. Gopalakrishna B.V.,Dr. Gopalakrishna B.V.,
Faculty in MBA,Faculty in MBA,
SDM, MangaloreSDM, Mangalore
In the traditional sense, the market means a In the traditional sense, the market means a particular place or locality where buyers & sellers particular place or locality where buyers & sellers meet together and deals with their business meet together and deals with their business transactiontransaction. .
For example, For example, Bombay market, Delhi market, Bombay market, Delhi market, Calcutta market, Bangalore market, Mangalore Calcutta market, Bangalore market, Mangalore market & Mysore market market & Mysore market etc.etc.
But in economics, the term market, it is not a But in economics, the term market, it is not a particular place/locality where goods are bought and particular place/locality where goods are bought and sold.sold.
Buyers and sellers can contact through personally by Buyers and sellers can contact through personally by the way of the way of exchange of letters, telegrams, telephones exchange of letters, telegrams, telephones and internet (e-mail & other waysand internet (e-mail & other ways) etc.) etc.
For example trade between America and India.For example trade between America and India.
Classification of Market
Area Time Commodities Competition
Local
Regional
National
International
Market Period
Short Period
Long Period
Very Long Period
Bullion Market
Share Market
Money Market
Capital Market
Perfect Competition
ImperfectCompetition
Monopoly
Duopoly
Oligopoly
MonopolisticCompetition
Forms of Market CompetitionForms of Market Competition
Models ofModels ofCompetitionCompetition
Number ofNumber ofbuyersbuyers
Number ofNumber ofsellerssellers
Nature ofNature ofproductsproducts
Barriers toBarriers toentry andentry and
exitexit
PerfectPerfectcompetitioncompetition
Very largeVery large Very largeVery largeIdenticalIdenticalproductsproducts
NoneNone
MonopolyMonopoly Very largeVery large OneOneSingleSingle
productproductVery largeVery large
MonopolisticMonopolisticcompetitioncompetition
Very largeVery large LargeLargeMinimumMinimumdifferencesdifferences
NoneNone
OligopolyOligopoly Very largeVery large Very fewVery fewLargeLarge
differencesdifferencesLargeLarge
Classification of Market StructureClassification of Market Structure
1. Perfect Competition 1. Perfect Competition market, where there is a large number of market, where there is a large number of producers (firms) producing a homogeneous producers (firms) producing a homogeneous product, homogeneous price existence.product, homogeneous price existence.2. Imperfect competition2. Imperfect competitionIt is an important market category where in It is an important market category where in individual firms exercise control over the price of individual firms exercise control over the price of commodity.commodity.
Imperfect competition has several sub-markets Imperfect competition has several sub-markets
1)1) Monopolistic competitionMonopolistic competition2)2) Pure OligopolyPure Oligopoly3)3) Differentiated OligopolyDifferentiated Oligopoly4)4) Monopoly Monopoly
Perfect competitive marketPerfect competitive market Perfect competition refers to a market situation in Perfect competition refers to a market situation in
which there are which there are large number of buyers & sellers of large number of buyers & sellers of homogeneous productshomogeneous products..
The price of the product is The price of the product is determined by industry determined by industry with the forces of demand and supplywith the forces of demand and supply..
Homogeneous price & commodities is special Homogeneous price & commodities is special characterstics of perfect competition market.characterstics of perfect competition market.
All the firms in the perfect competition is the All the firms in the perfect competition is the price price taker (price receiver) rather than price makers.taker (price receiver) rather than price makers.
Thus, perfect competition in a market structure Thus, perfect competition in a market structure characterised by the characterised by the complete absence of rivalry complete absence of rivalry among individual firmsamong individual firms..
Features of perfect competitive marketFeatures of perfect competitive market
1)1) Large number of buyers and sellers existedLarge number of buyers and sellers existed
2)2) Homogeneous productHomogeneous product
3)3) Free entry and exist of firms in the Free entry and exist of firms in the industryindustry
4)4) Perfect knowledge about marketPerfect knowledge about market
5)5) Perfect mobility of factors of productionPerfect mobility of factors of production
6)6) Absence of government regulationAbsence of government regulation
7)7) Absence of transport costAbsence of transport cost
1. Large Number of buyers and sellers existed1. Large Number of buyers and sellers existed There will be a There will be a large number of buyers and sellers existed large number of buyers and sellers existed
in the market.in the market. Any Any single firms in the industry cannot influences on single firms in the industry cannot influences on
prices prices of commodity – they are of commodity – they are price taker not a price price taker not a price makersmakers – it is like a drop of water put into sea. – it is like a drop of water put into sea.
The price of the product is determined by the collective The price of the product is determined by the collective forces of industry demand and industry supplyforces of industry demand and industry supply..
2. Homogeneous Product2. Homogeneous Product Commodities produced by all the firms is Commodities produced by all the firms is homogenous and homogenous and
identicalidentical in all respects. in all respects. There is no changes in terms of There is no changes in terms of quality, size, fragrence etc quality, size, fragrence etc
between the firms.between the firms. No. one firms No. one firms influences prices either increase/decrease influences prices either increase/decrease in in
the market.the market.
3. Free entry and exists3. Free entry and exists There are There are no barrier to entry or exit from the no barrier to entry or exit from the
industryindustry. Entry or exit may take time but firms have . Entry or exit may take time but firms have freedom of movement in and out of the industryfreedom of movement in and out of the industry..
If the industry earns abnormal profits, new firms will If the industry earns abnormal profits, new firms will enter the industry enter the industry and compete away the excess and compete away the excess profits.profits.
Similarly, Similarly, if the firms in the industry are incurring if the firms in the industry are incurring losses some of them will leave the industry losses some of them will leave the industry which will which will reduce the supply of the industry and will thus raise reduce the supply of the industry and will thus raise the price and wipe away the losses.the price and wipe away the losses.
The The firms have full liberty to choose either to firms have full liberty to choose either to continue or go out of the industry.continue or go out of the industry.
4. Perfect knowledge 4. Perfect knowledge It is also assumed that It is also assumed that all sellers and buyers have complete all sellers and buyers have complete
knowledge of the conditions of the marketknowledge of the conditions of the market.. This knowledge refers not only to the prevailing conditions This knowledge refers not only to the prevailing conditions
in the in the current period but in all future periods current period but in all future periods as well.as well. Information is free and costlessInformation is free and costless. Under these conditions . Under these conditions
uncertainty about future development in the market is ruled uncertainty about future development in the market is ruled out.out.
5. Perfect mobility of factors of production5. Perfect mobility of factors of production The factors of production are The factors of production are free to move from one firm free to move from one firm
to another throughout the economyto another throughout the economy.. It is also assumed that It is also assumed that workers can move between different workers can move between different
jobsjobs.. Raw-materials & other factors are not monopolised & Raw-materials & other factors are not monopolised &
labour is not unionised. labour is not unionised. In short, there is perfect competition in the factor market.In short, there is perfect competition in the factor market.
6. Absence of government regulation6. Absence of government regulation There is no government intervention in the form of tariffs, There is no government intervention in the form of tariffs,
subsidies, relationship of production or demand.subsidies, relationship of production or demand. If these assumptions are fulfilled, it is called pure If these assumptions are fulfilled, it is called pure
competition which requires the fulfillment of some more competition which requires the fulfillment of some more condition.condition.
7. Absence of transport cost7. Absence of transport cost In a perfectly competitive market, it is assumed that there In a perfectly competitive market, it is assumed that there
are no transport cost.are no transport cost.
Price and Output DeterminationPrice and Output Determination
Price under perfect competition is determined by the Price under perfect competition is determined by the interaction of the two forces – interaction of the two forces – demand and supplydemand and supply..
Though individuals cannot change the price, but Though individuals cannot change the price, but aggregate forces of demand and supply can change.aggregate forces of demand and supply can change.
Demand side – marginal utility of commodity to the Demand side – marginal utility of commodity to the buyersbuyers
Supply side – cost of production – producersSupply side – cost of production – producers The interaction of demand and supply is called the The interaction of demand and supply is called the
equilibrium price.equilibrium price. Equilibrium price is that price at which quantity Equilibrium price is that price at which quantity
demanded is equal to the quantity supplied at give price – demanded is equal to the quantity supplied at give price – both buyers and sellers satisfiedboth buyers and sellers satisfied
Equilibrium between demand and supplyEquilibrium between demand and supply
Price of Price of commoditiescommodities
DemandDemand SupplySupply Pressure Pressure on priceon price
55 1212 11
Excess Excess DemandDemand
1010 1010 22
1515 0808 44
2020 0606 66 EquilibriumEquilibrium
2525 0404 88
Excess Excess SupplySupply
3030 0202 1010
3535 0101 1212
14
Price and Output DeterminationPrice and Output Determination
Elements of time – price theoryElements of time – price theory Alfred MarshallAlfred Marshall was the first economists to was the first economists to
introduced “introduced “Time FactorTime Factor” – price ” – price determination.determination.
He divided time period into three ways –He divided time period into three ways –1.1. Market PeriodMarket Period
2.2. Short Period andShort Period and
3.3. Long PeriodLong Period
1. Market Period1. Market Period Market period are also called as very short period.Market period are also called as very short period. The supply of a commodity is almost fixed and the The supply of a commodity is almost fixed and the
demand will play a decisive role in determining the demand will play a decisive role in determining the price of products.price of products.
This market period may be an hour, a day, or few This market period may be an hour, a day, or few days or even a few weeks – depends on nature of days or even a few weeks – depends on nature of commodities.commodities.
Types of commodities are –Types of commodities are –1.1. Perishable commoditiesPerishable commodities
2.2. Non-perishable commoditiesNon-perishable commodities
Perishable commoditiesPerishable commodities
Fish, milk, vegetables, flowers, meat and butters etc Fish, milk, vegetables, flowers, meat and butters etc are perishable commodities. Supply is limited in the are perishable commodities. Supply is limited in the existing stocks.existing stocks.
The fundamental features of this period – supply of The fundamental features of this period – supply of the commodity is absolutely fixed and therefore, the the commodity is absolutely fixed and therefore, the supply curve of each firm will be a vertical straight supply curve of each firm will be a vertical straight line.line.
Demand factors more important than supply in Demand factors more important than supply in determining price.determining price.
Perishable commoditiesPerishable commodities
O X
Y
M
S
P
P1
P2
D
D
D1
D2
D2
D2
Price
Quantities
Non-perishable/Durable commoditiesNon-perishable/Durable commodities
Durable goods are those which can be Durable goods are those which can be reproduced or those can be stored. Like reproduced or those can be stored. Like perishable goods, the supply of durable perishable goods, the supply of durable goods is not vertical throughout the length.goods is not vertical throughout the length.
Firms selling such goods have a minimum Firms selling such goods have a minimum reserve price – they will not sell goods at reserve price – they will not sell goods at less than reserve price – wheat, soap & oil less than reserve price – wheat, soap & oil etc.etc.
Factors affecting Reserve PriceFactors affecting Reserve Price1.1. Price in future Price in future – if seller expects that a high price will prevail in future.– if seller expects that a high price will prevail in future.
2.2. Liquidity preference Liquidity preference – if the seller is in urgent need of money his – if the seller is in urgent need of money his reserve price will be low & vice-versa.reserve price will be low & vice-versa.
3.3. Future cost of production Future cost of production – if the seller expects that in future the cost – if the seller expects that in future the cost of production will fall, his reserve price will be lower & vice-versa.of production will fall, his reserve price will be lower & vice-versa.
4.4. Storage Expenses – if the seller finds that the storage expenses are Storage Expenses – if the seller finds that the storage expenses are higher & the time for which the stocks have to be held are longer, his higher & the time for which the stocks have to be held are longer, his reserve price will be lower & vice-versa.reserve price will be lower & vice-versa.
5.5. Durability of commodity Durability of commodity – more durable commodity is higher will be – more durable commodity is higher will be the reserved price.the reserved price.
6.6. 6. Future demand 6. Future demand Future demand of a commodity also influences the reserve price of the Future demand of a commodity also influences the reserve price of the
producer.producer. If the producer expects a higher demand in future, his reserve price will also If the producer expects a higher demand in future, his reserve price will also
be higher.be higher.
Short period – Price determinationShort period – Price determination Short period refers to that period in which supply can Short period refers to that period in which supply can
be adjusted to a be adjusted to a limited extentlimited extent.. StiglerStigler in his word short period is a period in which the in his word short period is a period in which the
rate of production, change by change in variable with rate of production, change by change in variable with existence of fixed inputs. existence of fixed inputs.
In short period fixed factors – machinery, plant, In short period fixed factors – machinery, plant, building etc cannot be altered and variable factors may building etc cannot be altered and variable factors may be increased or decreased according to the change in be increased or decreased according to the change in demand.demand.
In short period, price is determined by the interaction of In short period, price is determined by the interaction of two forces – demand and supply.two forces – demand and supply.
Demand factors were more dominated factors in short Demand factors were more dominated factors in short period.period.
Short period price determinationShort period price determination
Out put
Pri
ce
P1
P2
P E
E2
E1
S
S
D
D
D1
D1
M M1
Long period price determinationLong period price determination
Long period is a period of many years 5, 10, Long period is a period of many years 5, 10, 15 20 & above.15 20 & above.
In this period supply conditions are fully able In this period supply conditions are fully able to meet the new demand conditions.to meet the new demand conditions.
In the long run no fixed & variable factors all In the long run no fixed & variable factors all the factors treated as variable factors.the factors treated as variable factors.
New plants/new firms can enter into the New plants/new firms can enter into the market & old firms can leave the market.market & old firms can leave the market.