concept of

market
Ordinarily, for an individual, it would mean a shopping complex. But, for a
student of economics, this is not correct. In economics, the concept of
market has a special meaning. It does not refer to any geographical area
where goods are sold and purchased. Instead, it refers to all such systems (or
arrangements) that bring the buyers and sellers in contact with each other to
settle the sale and purchase of goods. The system could simply be an
electronic mail or a telephonic communication that brings the buyers and
sellers in contact with each other and settles the sale and purchase of goods.
Online marketing does not involve any shopping complex.
 Perfect Competition

Perfect competition is said to exist when there is a large

number of sellers and buyers of a commodity, and no
individual buyer or seller has any control over its price.
Product is homogeneous and its price is determined by the
forces of market supply and market demand.
 Features of Perfect Competition

1. Large Number of Firms or Sellers:

The number of firms selling a particular commodity is so large that any increase or decrease in the
supply of one particular firm hardly influences the total market supply. Accordingly, any individual
firm fails to make any influence on the price of the commodity. It is therefore said that a firm under
perfect competition is a price taker. In other words, it has to sell its products at the prevailing
market price.

2. Large Number of Buyers:

Not only is the number of sellers very large, but the number of buyers is very large as well.
Accordingly, like an individual firm, an individual buyer is also not able to influence the price of the
commodity. Any increase or decrease in individual demand will hardly make any difference to the
total market demand. Accordingly, an individual buyer under perfect competition is also a price
taker.
3. Homogeneous Product:
All sellers sell identical units of a given product. An important conclusion can be drawn from this
feature. It is that buyers will have no reason to prefer the product of one seller to the product of
another seller. Thus, the price of the product throughout the market will be the same. Selling
homogeneous products at the given price rules out the possibility of advertisement or other sales-
promotion expenses. So that there are no selling costs in a perfectly competitive market.

4. Perfect Knowledge:
Buyers and sellers are fully aware of the price prevailing in the market. Buyers know it fully well at
what price sellers are selling a given product. As a consequence, only one price prevails in the
market.
5. Free Entry and Exit of Firms:
A firm can enter and leave any industry freely. There is no legal restriction on entry or exit.

6. Independent Decision-making and Freedom from Checks:

There is no agreement between the sellers regarding production, quantity, or price nor is there any
restriction regarding the sale and purchase of any commodity.

7. Perfect Mobility:
Factors of production are perfectly mobile under perfect competition. Factors will move to that
industry which pays the highest remuneration.

8. No Extra Transport Cost:

For one price to prevail throughout the market, it is essential that there is no extra transport cost for
the consumers while buying a commodity from different sellers.
 Three Vital Conclusions
(1) A Firm Under Perfect Competition is a Price Taker, not a Price
Maker
Under perfect competition, there are a large number of firms
producing homogeneous commodities. An individual firm in such a
market cannot affect the price of the commodity. Price is fixed by the
forces of market demand and market supply. It is at this price all the
firms in the industry sell their output. On its own, no firm can affect
the prevailing market price. This is explained in terms of the following
reasons:
(i) Number of Firms:
The number of firms under perfect competition is so large that no individual firm, by changing
its sales, can cause any meaningful change in the total market supply. Accordingly, market
price cannot be affected on the basis of market supply.

(ii) Homogeneous Product:

All firms in a perfectly competitive industry produce homogeneous products. In such a
situation, if any firm fixes its price higher than the existing market price, buyers would shift
from this firm to other firms in the market.

(iii) Unnecessary Loss due to Lower Price Fixation:

A firm's demand curve under perfect competition is perfectly elastic. It means that a firm can
sell whatever amount it wishes to sell at the existing price. In such a situation, the policy of
attracting buyers by lowering the price would result in unnecessary loss. The policy of higher
price (higher than the existing market price) will simply fail.
 (2) Demand Curve of the Firm Under Perfect Competition is Perfectly Elastic
The demand curve of the firm is perfectly elastic (Ed=∞). It means that the firm can sell any
amount of its output at the prevailing price. The firm's demand curve is indicated by a horizontal
straight line parallel to the X-axis. This shows that the firm is to accept the price as determined
by the forces of market supply and market demand; it can sell whatever amount it wishes to sell
at this price. This is illustrated in Fig. 1.
Fig. 1 shows that at the given price OP, the firm can
sell (or buyers can buy from the firm) any quantity of
the commodity it produces. Price remains constant
whether the quantity demanded is OA or OB, or even
zero. A perfectly elastic demand curve simply
indicates that the firm has no control over price.
 (3) A Firm Under Perfect Competition Earns Only Normal Profits in
the Long Run
This is owing to the fact that there is freedom of entry and exit for the
firms under perfect competition. In situations of extra-normal profits,
new firms will join the industry. Consequently, market supply will
increase, and market price will fall. Extra-normal profits will be wiped
out. In situations of extra-normal losses, some firms will leave the
industry. Consequently, market supply will fall. Market price will rise.
Extra-normal losses will disappear.
 Monopoly

It is that situation of the market in which there is a single seller of a product with no close
substitutes in the market. It is explained with the help of a few examples. Suppose, there is
only one firm dealing in the sale of cooking gas in your town. You get your electricity supply
from one agency, that is the Electricity Board; you can travel by railways owned, controlled,
and run by the Government of India alone. All these are examples of monopoly. This situation
of market, where a single (Mono) firm controls (Poly) the production of a commodity, is called
Monopoly. Hence, monopoly is a market situation in which there is only one producer of a
commodity with no close substitutes.
 Features of Monopoly
One Seller and Large Number of Buyers:
Under monopoly, there should be a single producer of a commodity. He may be alone, or there may be a
group of partners or a joint stock company or a state. Thus, there is only one firm under monopoly. But
the buyers of the product are in large number. Consequently, no buyer can influence the price of the
product.

Restrictions on the Entry of New Firms:

Under monopoly, there are some restrictions on the entry of new firms into the monopoly industry.
Generally, there are patent rights granted to the monopoly firm. Or, a monopoly firm has exclusive
control over a technique (of production) or over the raw material needed for production.

No Close Substitutes:
A monopoly firm produces a commodity that has no close substitutes.
Example: There is no close substitute for railways as a "bulk carrier."
Full Control Over Price:
Since he alone produces the commodity in the market, a monopolist has full control over its
price. A monopolist is a price maker. He can fix whatever price he wishes to fix for his product.

Possibility of Price Discrimination:

Many a time, a monopolist charges different prices from different consumers. It is called price
discrimination.
Price discrimination refers to the practice by a seller of charging different prices from different
buyers for the same good. In monopoly, there is a possibility of price discrimination.
Demand Curve for a Monopoly Firm
Full control over price under monopoly does not mean the monopolist can sell any amount of
the commodity at any price. Once the monopolist fixes the price of the commodity, the quantity
demanded will entirely depend upon the buyers. If the buyers feel that the price is high, the
quantity demanded will be low, and vice versa. Accordingly, there is an inverse relationship
between price fixed by the monopolist and quantity sold by the monopoly firm or quantity
demanded of the monopoly product. Thus, the demand curve facing a monopoly firm is
downward sloping, as shown in Fig. 2.
Fig. 2 shows that if OP price is fixed by the monopolist, demand for its product will be OQ. In
case price is OP1​, quantity demanded is OQ1​. This proves the point that monopolist faces a
downward sloping demand curve (Dm) which shows that more can be sold only at a lower price.
Accordingly, demand curve facing a monopolist is a constraining factor. Unlike a perfectly
competitive firm, a monopolist cannot sell any amount at the given price.
How does a Monopoly Market Structure arise?

Government Licensing/Government Control:

The government may grant license for the production of a particular commodity
only to one producer. Accordingly, monopoly comes into existence. Also, the
government may decide to control the production of certain goods (or services)
exclusively through its departmental undertakings, like Railways in India.

Patent Rights:
New products may secure patent rights. It amounts to monopoly rights regarding
the shape, design, or other characteristics of the product. Likewise, patent rights
may be secured on new technology which prohibits the use of patented
technology by others. Accordingly, monopoly market structure emerges.
Cartels:
It refers to collective decision-making by a group of firms with a view to avoid
competition and securing monopoly control of the market. Competing firms may
reach a broad agreement on pricing and output policy so that competition is avoided,
and a sort of joint monopoly structure of the market emerges.

Natural Occurrence:
Monopoly may exist as a natural phenomenon. The only spring of water in an island,
for example, may be under the control of one person who exercises full control over
the price of water, without any competition.
 Monopolistic Competition

It is a form of market in which there are many buyers and sellers of the product, but the product of
each seller is different from that of the others. Thus, there are many sellers, selling a differentiated
product. Product differentiation is generally promoted through trademark or brand name.
Example: Firms producing different brands of toothpaste, viz., Colgate, Close-up, Pepsodent, etc.

Monopolistic competition includes the features of monopoly and perfect competition. Trademark
or brand name gives some monopoly power to the firms. Different firms often charge different
prices for their product. In other words, each firm tends to exercise some control over price. On the
other hand, since many firms are producing a commodity (like toothpaste), there is competition in
the market. No firm is able to exercise full control over the price of the product. Thus, we can say
that a firm under monopolistic competition exercises only a partial control over price.
 Features of Monopolistic Competition

(1) Large Number of Buyers and Sellers:

As under perfect competition, there are a large number of buyers and sellers. Also, the size of each
firm is small. Each firm has a limited share of the market.

(2) Product Differentiation:

Product differentiation (briefly called 'differentiation') is a distinct feature of monopolistic
competition. Differentiation implies that rival firms are selling products which are not perfect
substitutes but are close substitutes of each other.
Example: Colgate toothpaste and Close-up toothpaste are close substitutes of each other, even
when they may not be perfect substitutes for most buyers in the market.
(3) Selling Costs: Each firm has to spend a lot on the advertisement of its products. In order to sell
more units of the product, it gives wide publicity of its product in newspapers, cinemas, journals,
radio, TV, etc. The expenses on advertisement and publicity are called selling costs.

(4) Downward Sloping Demand Curve: Partial control over price leads to a downward sloping
demand curve (Fig. 3) of the firm: quantity sold increases when price is reduced. If price is raised,
quantity sold tends to reduce.
Note: Both under monopoly and monopolistic competition, the firm's demand curve tends to
slope downward from left to right. But, under monopolistic competition, the demand curve is
much flatter than under monopoly. We know, the flatter the curve, the more elastic it is. So that,
the demand curve under monopolistic competition shows a higher degree of elasticity of
demand than under monopoly. This is because a large number of close substitutes (of the
product) are available in a monopolistic competitive market, whereas in monopoly, there are no
close substitutes at all.
(5) Non-price Competition:
Non-price competition is another important feature of monopolistic competition. The firms often avoid getting
into price-war. Instead, they focus on non-price competition.

(6) Freedom of Entry and Exit:

Firms are free to enter the industry or leave it. However, new firms may not have absolute freedom of entry
into the industry. Products of some firms may be legally patented. New firms cannot produce identical
products.
Example: No rival firm can produce/sell a patented item like Woodland brand of shoes.

(7) Lack of Perfect Mobility:

Factors of production lack perfect mobility. Accordingly, different prices prevail for the same factor in the
market.

(8) Lack of Perfect Knowledge:

Sellers and buyers of the products (as well as owners of factors of production) lack perfect knowledge about the
market. Because of product differentiation, it is not even possible to have perfect knowledge about a variety of
brands in the market. This leads to consumer's exploitation by way of higher prices for low-quality products.
 Oligopoly

It is a form of market in which there are a few big firms and a large number of buyers of a
commodity. Each firm has a significant share of the market. Price and output decisions of
one firm significantly impact the price and output decisions of the rival firms in the market.
Accordingly, there is a high degree of interdependence among the competing firms: price
and output policy of one firm depends on the price and output policy of others. This type of
competition (involving high degree of interdependence) is called "cut-throat competition."

Example: There are only a few car producers in the Indian Auto market. Toyota, Ford, GM,
Audi, BMW, and Volkswagen are some well-known brands. Each one is capturing a
significant share of the Auto market. Price and output decisions of each producer (like
Toyota) significantly impacts the price and output decisions of other producers (like Ford
and GM).
 Features of Oligopoly

(1) Small Number of Big Firms:

A few firms, but large in size, dominate the market for a commodity. Each firm commands a significant
share of the market: it enjoys partial control over price through brand loyalty. Brand loyalty is achieved
through heavy advertisement. However, full control over price is not possible as there are competitors in
the market.
(2) High Degree of Interdependence:
There is a high degree of interdependence among the firms. Price and output policy of one firm
significantly impacts the price and output policy of the rival firms in the market. A producer may not be
willing to raise the price of the product, fearing that the rival firms might not raise it, and the buyers
would shift to the rivals. Likewise, a firm may not be willing to lower the price of its product, fearing that
the rival firms might lower it more, and the buyers would shift to the rivals. For example, if GM Motors
reduces the price of its cars, Ford Motors may also do the same. Accordingly, while taking an action on
price or output, a firm must consider the possible reaction of the rival firms in the market.
(3) Not Possible to Determine Firm's Demand Curve:
It is not possible to determine a firm's demand curve under oligopoly. Simply because, it is not
possible to predict changes in quantity when price changes. When a firm increases its price,
demand for its product may not increase, because the rival firms may also lower the price.

(4) Formation of Cartels:

With a view to avoid competition, firms may form a cartel. It is a kind of agreement among the
firms to avoid competition. It is a situation of collusive oligopoly. Under it, output quotas and
prices are fixed. Sometimes, the leading firm in the market is accepted by the cartel as a "Price
Leader." All firms in the cartel choose the same price as set by the price leader. Collusive oligopoly
is like a monopoly form of the market. A cartel takes full control of the market. It makes monopoly
profit.
(5) Entry Barriers:
There are various barriers to the entry of new firms. These barriers are created largely through
patent rights. Because of these barriers, the existing firms are not much worried about the entry of
new firms in the market.

(6) Non-price Competition:

Under oligopoly, firms tend to avoid price competition. Instead, they focus on non-price
competition.
Example: In India, both Coke and Pepsi sell their products at the same price. But, in order to
increase its share of the market, each firm adopts the policy of aggressive non-price competition.
Coke and Pepsi sponsor different games and sports; they also offer lucrative services (like
maintenance of school gardens) if their product is promoted.