market structure f

8/6/2019 Market Structure F

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MarketStructures

MarketStructures


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The Degree of CompetitionThe Degree of Competition

Classifying markets number of firms freedom of entry to industry

nature of product nature of demand curveThe four market structures

perfect competition monopoly monopolistic competition oligopoly

Classifying markets number of firms freedom of entry to industry

nature of product nature of demand curveThe four market structures

perfect competition monopoly monopolistic competition oligopoly


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Revenue ConceptsRevenue Concepts

The demand for the product in the marketreflects the revenue side of the firm.The concept of revenue is an important toprice determination & the equilibrium of Revenue TotalRevenue AverageRevenue & - MarginalRevenue

The demand for the product in the marketreflects the revenue side of the firm.The concept of revenue is an important toprice determination & the equilibrium of Revenue TotalRevenue AverageRevenue & - MarginalRevenue


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Total & AverageRevenueTotal & AverageRevenue

Total income received by the seller froma given amount of the product is calledTotalRevenue.

TotalRevenue is calculated by multiplyitotal output/total sales by the price at wthe product is sold. [TR = Q x P ]

Total income received by the seller froma given amount of the product is calledTotalRevenue.

TotalRevenue is calculated by multiplyitotal output/total sales by the price at wthe product is sold. [TR = Q x P ]


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AverageRevenueis revenue earned per uof output.

AverageRevenue is obtained by dividintotal revenue by the number of units[AR = TR /n]

AverageRevenueis revenue earned per uof output.

AverageRevenue is obtained by dividintotal revenue by the number of units[AR = TR /n]


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MarginalRevenueMarginalRevenue

Marginal revenueis the net revenue earnedby selling an additional unit of the produ

Marginal revenue is the addition madtotal revenue by selling (n) units of a proinstead of (n-1) where n is any given nu

thus, MR = TRn T Rn-1

Marginal revenueis the net revenue earnedby selling an additional unit of the produ

Marginal revenue is the addition madtotal revenue by selling (n) units of a proinstead of (n-1) where n is any given nu

thus, MR = TRn T Rn-1


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F eatures of the four market structuresF eatures of the four market structures

Type of market

Number of firms

F reedom of entry

Nature of product

Examples Implications for demand curvefaced by firm

Perfectcompetition

Verymany Unrestricted

Homogeneous(undifferentiated)

Cabbages, carrots(approximately)

Horizontal:firm is a price taker

onopolisticcompetition

any /several

Unrestricted Differentiated Builders,restaurants

Downward sloping,but relatively elastic

Oligopoly F ew RestrictedUndifferentiated

or differentiated

Cement

cars, electricalappliances

Downward sloping.Relatively inelastic(shape depends onreactions of rivals)

onopoly One Restricted or completely

blocked

UniqueLocal water

company, trainoperators (over

particular routes)

Downward sloping:more inelastic thanoligopoly. F irm has

considerablecontrol over price


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Type of market

Number of firms

F reedom of entry

Nature of product


Perfectcompetition






any /several




or differentiated

Cement




blocked

UniqueLocal water


particular routes)




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Type of market

Number of firms

F reedom of entry

Nature of product


Perfectcompetition






any /several




or differentiated

Cement




blocked

UniqueLocal water


particular routes)




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Type of market

Number of firms

F reedom of entry

Nature of product


Perfectcompetition






any /several




or differentiated

Cement




blocked

UniqueLocal water


particular routes)




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Type of market

Number of firms

F reedom of entry

Nature of product


Perfectcompetition






any /several




or differentiated

Cement




blocked

UniqueLocal water


particular routes)




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Pure & PerfectCompetitionPure & PerfectCompetition


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Pure &Perfect CompetitionPure &Perfect Competition

PURE COMPE TITIONLarge No of Buyers & SellersHomogenous / IdenticalProductsFreeE ntry &Ex itIn addition to the above,PER FE CT

COMPE TITION has the following features

PURE COMPE TITIONLarge No of Buyers & SellersHomogenous / IdenticalProductsFreeE ntry &Ex itIn addition to the above,PER FE CT

COMPE TITION has the following features


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Perfect CompetitionPerfect Competition

Perfect Knowledge of marketPerfect Mobility of Factors of Production

No Transport CostFirms put together form an Industry under PerfectCompetition

Perfect Knowledge of marketPerfect Mobility of Factors of Production

No Transport CostFirms put together form an Industry under PerfectCompetition


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AssumptionsAssumptions

The firm operates in a perfectly competitive and hence a price taker.The firm makes the distinction between the s

long run.The firms objective is to maximize profits in the shorun, or to minimize loss.

The firm includes its opportunity cost of opeas part of its total cost.

The firm operates in a perfectly competitive and hence a price taker.The firm makes the distinction between the s

long run.The firms objective is to maximize profits in the shorun, or to minimize loss.

The firm includes its opportunity cost of opeas part of its total cost.


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The consideration of opportunity cost in thestructure of the firm is vital to the decision model.

The going market price should enables it torevenue that covers not only its out-of-pockbut also the opportunity cost.

The consideration of opportunity cost in thestructure of the firm is vital to the decision model.

The going market price should enables it torevenue that covers not only its out-of-pockbut also the opportunity cost.


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Statement of projected cost for first yeStatement of projected cost for first ye

Particulars Amount ($)Cost of goods sold 300,000Gen. & AdminEx p 150,000

Total Accounting Cost 450,000Foregone salary 45,000

ForegoneReturns on

Investment

5000

Total Opportunity Cost 50,000

TotalE conomic Cost 500,000


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If revenue is $ 500,000 for the first year Accounting profit would be $ 50,000 (500,0450,000)E conomic profit would be zero becauserevenue= economic costAt break-even point revenue is just sufficiecover out-of-pocket cost and opportunity co

If revenue is $ 500,000 for the first year Accounting profit would be $ 50,000 (500,0450,000)E conomic profit would be zero becauserevenue= economic costAt break-even point revenue is just sufficiecover out-of-pocket cost and opportunity co


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When a firm breaks-even in economic senseearning accounting profitequal to opportunity cosi.e. $ 50,000This isnormal profitIf the revenue is $ 550,000 a profit of 50,00

(500,000 550,000)This is above normal profit or economic profit

When a firm breaks-even in economic senseearning accounting profitequal to opportunity cosi.e. $ 50,000This isnormal profitIf the revenue is $ 550,000 a profit of 50,00

(500,000 550,000)This is above normal profit or economic profit


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If the revenue is $ 480,000, theeconomic lossis $20,000(500,000 480,000)

The accounting profit is $30,000(480,000 450,000)The economic loss may coincide with firm eaccounting profit.

If the revenue is $ 480,000, theeconomic lossis $20,000(500,000 480,000)

The accounting profit is $30,000(480,000 450,000)The economic loss may coincide with firm eaccounting profit.


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E quilibrium ConditionsE quilibrium Conditions

A Firm is said to be in equilibrium when it mximizesprofits.Profits depend on the revenue & cost structuE quilibriumPosition (Profits)= TR = TC or

AR

=

AC or MR = MC

A Firm is said to be in equilibrium when it mximizesprofits.Profits depend on the revenue & cost structuE quilibriumPosition (Profits)= TR = TC or

AR

=

AC or MR = MC


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Relation between AR & MRRelation between AR & MR

Revenue Structure of a Firm U nder Perfect Competition, AR curve is

horizontal and MR curve coincides with it. HenP = AR = MR

U nder Monopoly, AR curve is a downward slopcurve and MR curve lies below AR curve.

Revenue Structure of a Firm U nder Perfect Competition, AR curve is

horizontal and MR curve coincides with it. HenP = AR = MR

U nder Monopoly, AR curve is a downward slopcurve and MR curve lies below AR curve.


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Price Q ty TR AR MR

25 1 25 25 -25 2 50 25 25

25 3 75 25 25

25 4 100 25 25

Perfect Competition P = AR = MR


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Price Q ty TR AR MR180 1 180 180 -

140 3 420 140 100160 2 320 160 140

120 4 480 120 60100 5 500 100 20

Monopoly P = AR > MR


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E quilibrium ConditionE quilibrium Condition

Perfect Competition - MonopolyPerfect Competition - MonopolyPrice/Cost

P E

MC

P=AR=MR

Q Quantity

Price/Revenue/Cost

P

MC

AR MR

Q Quantity

E

P=AR > MR


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Short-run ConditionsShort-run Conditions

Price is determined at industry level by suppdemand forces;E ach firm has a horizontal demand curve at

market price;Demand, average revenue and marginal revecurve are same;E quilibrium P = AR = MR = MC;Firms make supernormal profits.

Price is determined at industry level by suppdemand forces;E ach firm has a horizontal demand curve at

market price;Demand, average revenue and marginal revecurve are same;E quilibrium P = AR = MR = MC;Firms make supernormal profits.


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O

( ) F irm

Q (thousands)

O

(a) I ustr

P

Q (millions)

S

D

P e

MC

AR D = AR = MR

Qe

AC

AC

Short-run equilibrium of industry and firperfect competition

Short-run equilibrium of industry and firperfect competition


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Qe

P 1D1 = AR 1

= MR 1 AR 1

O O

(a) I ustr

P

Q (millions)

S

D

( ) F irm

MC AC

AC

Q (thousands)

Loss under perfect competitionLoss under perfect competition


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Long-run ConditionsLong-run Conditions

E ntry takes place, shifting supply curve to and price down;

Super-normal profits are competed away, leP = AR = MR = MC= minimum LAC, OR

LRAC = AC = MC= MR = AR

E ntry takes place, shifting supply curve to and price down;

Super-normal profits are competed away, leP = AR = MR = MC= minimum LAC, OR

LRAC = AC = MC= MR = AR


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O O

(a) I ustr

P

Q (millions)

S 1

D

( ) F irm

LRAC

P L

P 1

Q L

S e

AR 1 D1 AR L DL

Q (thousands)

Long-run equilibrium under perfect competLong-run equilibrium under perfect compet

New firms enterSupernormal profitsProfits return

to normal


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Perfect Competition: ShortRunPerfect Competition: ShortRun

The Firm in More Detail -ProfitsThe Firm in More Detail -Profits

P = AR =MR

Q

P

( SR)MC ( SR)AC Price/Cost

QuantityCostRevenue

PROFIT


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Perfect Competition: ShortRunPerfect Competition: ShortRun

The Firm in More Detail - LossesThe Firm in More Detail - Losses

P = AR =MR

Q

P

( SR)MC Price/Cost

QuantityCostRevenue

Loss


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QO

( SR)AC

(LR)MC

LRAC

AR = MR

DL

LRAC = ( SR)AC = (LR)MC = MR = AR

Long-run equilibrium of the firm under perfect comLong-run equilibrium of the firm under perfect com


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Shut down conditionsShut down conditions

If the firm is in a loss-making position It can continue the production process as it covers its variable cost.

If it shuts down, it has to bear fixed cost. The firm should reduce costs so as to makprofits.

If the firm is in a loss-making position It can continue the production process as it covers its variable cost.

If it shuts down, it has to bear fixed cost. The firm should reduce costs so as to makprofits.

The concept of average cost, normal profitand average variable cost can help understandthe shut-down position.


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Should the firm shut down if it is makingShould the firm shut down if it is making

Shut-down conditionsShut-down conditions

E

Shut- ooi t

=A =M

S MC S AC

S AVC

AC-NP

Quantity

P =A =M

P =A =M

Price/Cost

N

Q

O

P

P 1

P 2

At market price-P: the

firm covers AVC butmakes zero normal profit.(AC-NP)

If market price fallsdown-P 1:the firm coversonly average variable cost

in the short run.The firm can remain in

the market as long as it isable to recover AVC.

At price P 1, output ON isthe maximum bearable loss

output in the short run.If market price fallsdown-P 2: the firm shouldshut down .


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Shut down conditionsShut down conditions

WhenPrice/AR > AC, there are excess profits.WhenPrice/AR = AC, there are only normalprofits.WhenPrice/AR < AC, there are losses incurreby the firm.The firms in the short-run is solely influenvariable cost.The firm has to recover current business expenses.

WhenPrice/AR > AC, there are excess profits.WhenPrice/AR = AC, there are only normalprofits.WhenPrice/AR < AC, there are losses incurreby the firm.The firms in the short-run is solely influenvariable cost.The firm has to recover current business expenses.


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Perfect CompetitionPerfect Competition

Incompatibility of economies of scaleperfect competition

Benefits of perfect competition price equals marginal cost

prices kept low

firms must be efficient to survive

Incompatibility of economies of scaleperfect competition

Benefits of perfect competition price equals marginal cost

prices kept low

firms must be efficient to survive


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MonopolyMonopoly


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MonopolyMonopolyPure Monopoly (total control) & LimitedMonopoly (possibility of remote substitute

Single Seller producing / selling product wsubstitutesNoE ntry

Monopolist can fixeither price or quantity.Firm is the same as industry. Firms demanis industrys demand curve

Pure Monopoly (total control) & LimitedMonopoly (possibility of remote substitute

Single Seller producing / selling product wsubstitutesNoE ntry

Monopolist can fixeither price or quantity.Firm is the same as industry. Firms demanis industrys demand curve

Revive S tarch


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MonopolyMonopoly

Downward sloping Demand curve, Demand is reinelasticPrice= AverageRevenue > MarginalRevenue

Price > Marginal Cost :- economic inefficiency. Tdoes not necessarily use the plant which gives loSupernormal-profits are made in the short as wel

long run.

Downward sloping Demand curve, Demand is reinelasticPrice= AverageRevenue > MarginalRevenue

Price > Marginal Cost :- economic inefficiency. Tdoes not necessarily use the plant which gives loSupernormal-profits are made in the short as wel

long run.


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Barriers to entryBarriers to entry

E conomies of scaleProduct differentiation and brand loyaltyLower costs for an established firm

Ownership/control of key factorsOwnership/control over outletsLegal protection

Mergers and takeoversAggressive tacticsIntimidation

E conomies of scaleProduct differentiation and brand loyaltyLower costs for an established firm

Ownership/control of key factorsOwnership/control over outletsLegal protection

Mergers and takeoversAggressive tacticsIntimidation


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MonopolyMonopoly

The monopolists demand curve downward sloping MR below AR

E quilibrium price and output E quilibrium output, where MC= MR


E quilibrium price and output E quilibrium output, where MC= MR


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Price DeterminationPrice Determination

A monopoly firms ability to set its price by Demand curve for its product, and The price elasticity of demand for its producThe price elasticity of demand indicates much more or less people are willing to brelation to price decrease or increase.

A monopoly firms ability to set its price by Demand curve for its product, and The price elasticity of demand for its producThe price elasticity of demand indicates much more or less people are willing to brelation to price decrease or increase.


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Price DeterminationPrice Determination

Assuming that a firms demand curve is thenAs the price falls, the marginal revenue rzero, and then becomes negative.Assuming the firms marginal cost is conthe short run.

The downward sloping demand curve, thR curve, and the constant MC curve can bethus,

Assuming that a firms demand curve is thenAs the price falls, the marginal revenue rzero, and then becomes negative.Assuming the firms marginal cost is conthe short run.

The downward sloping demand curve, thR curve, and the constant MC curve can bethus,


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Q MR

D

Profit maximising under monopolyProfit maximising under monopoly

P *

P = AR

P 1

P 2

Marginal loss

MC = AVC

Forgone marginal profit

If the firm charges tohigh a price (i.e.P1) itsMR will exceed its MCIt will be foregoing s

amount of marginalprofit.If the firm sets its prtoo low, its MC willexceed its MRThe firm will experiencea marginal loss.

If the firm charges tohigh a price (i.e.P1) itsMR will exceed its MCIt will be foregoing s

amount of marginalprofit.If the firm sets its prtoo low, its MC willexceed its MRThe firm will experiencea marginal loss.


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MR

QO

MC

Q

D

The firms ability to setprice is further limited bthe possibility of rising MC.This begins atQ

Hence the monopoly firshould not set its price athe highest possible levIt should set it at the riglevel.The right level is

MR = MC

The firms ability to setprice is further limited bthe possibility of rising MC.This begins atQ

Hence the monopoly firshould not set its price athe highest possible levIt should set it at the riglevel.The right level is

MR = MC

sing an to etermine ptima ricesing an to etermine ptima rice


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Q P ($) TR MR AC TC MC T Pr 0 180 0 100 -1001 170 170 170 155.70 155.70 55.70 14.302 160 320 150 102.80 205.60 49.90 114.43 150 450 130 84.63 253.90 48.30 196.14 140 560 110 76.20 304.80 50.90 255.25 130 650 90 72.50 362.50 57.70 287.56 120 720 70 71.87 431.20 68.70 288.57 110 770 50 73.59 515.10 83.90254.90

8 100 800 30 77.30 618.40 103.30 181.69 90 810 10 82.81 745.30 126.90 64.7010 80 800 -10 90.00 900.00 154.70 -100.11 70 770 -30 98.79 1086.70 186.70 -316.12 60 720 -50 109.13 1309.60 222.90 -589

sing an to etermine ptima rice Output

sing an to etermine ptima rice Output

TR - TCTC / Q


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Starting from zero output level, as the outpuincreases, the MR associated with each unit exceedsthe MC up to 6 units.Beyond this point the firm actually incurs mloss.However, beyond this point, total profit is spositive, but not maximum.Hence, by following MR=MC rule, a profitmaximizing firm would produce 6 units per tTo do so, it would have to set price of $120

Starting from zero output level, as the outpuincreases, the MR associated with each unit exceedsthe MC up to 6 units.Beyond this point the firm actually incurs mloss.However, beyond this point, total profit is spositive, but not maximum.Hence, by following MR=MC rule, a profitmaximizing firm would produce 6 units per tTo do so, it would have to set price of $120


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MonopolyMonopoly


E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cu



ll


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MonopolyMonopoly

Let us see how MR-MC rule underlies themonopoly pricing Here the firm would selectP*because, this is the

price at which customers would byQ*

.Q* is the quantity the firm would want to prbecause here the revenue received by sellinunit is just equal to its cost, (MR=MC).The shaded area ABDC is total profit.

Let us see how MR-MC rule underlies themonopoly pricing Here the firm would selectP*because, this is the

price at which customers would byQ*

.Q* is the quantity the firm would want to prbecause here the revenue received by sellinunit is just equal to its cost, (MR=MC).The shaded area ABDC is total profit.

P fi i i i d lP fi i i i d l


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QO

MC

C

Q*= 6

MR

AR


A

P = AR

P* = 120

B

D

M lM l


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MonopolyMonopoly

The monopolists demand curve downward sloping MRbelow AR

E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cur

Profit Measuring profit

The monopolists demand curve downward sloping MRbelow AR

E quilibrium price and output E quilibrium output, where MC= MR E quilibrium price, found from demand cur

Profit Measuring profit

P fi i i i d lP fi i i i d l


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QO

MC

AC

Q m

MR

AR

AC


AR

T otal profit

M lM l


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MonopolyMonopoly



Profit Measuring profit Supernormal profit can persist in long run



Profit Measuring profit Supernormal profit can persist in long run

L E ilib i M lL E ilib i M l


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Long-runE quilibrium-MonopolyLong-runE quilibrium-Monopoly

Price

Q

LMC

Demand/AR E

S PERNOR MAPRO F I S

[PR S ]

eS MC

S AC

S MCS AC

MR Quantity

P

TS

R

p

q

L AC

M lM l


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MonopolyMonopoly

Disadvantages of monopoly high prices / low output: short run high prices / low output: long run

lack of incentive to innovate inefficiencyAdvantages of monopoly economies of scale profits can be used for investment high profits encourage risk taking

Disadvantages of monopoly high prices / low output: short run high prices / low output: long run

lack of incentive to innovate inefficiencyAdvantages of monopoly economies of scale profits can be used for investment high profits encourage risk taking


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MonopolisticCompetitionMonopolisticCompetition


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Monopolistic CompetitionMonopolistic CompetitionLarge number of Buyers & SellersDifferentiatedProduct, Differentiation either Real or Imaginary;Free entry & exit;Selling cost is an important feature - Product differentiation make selling costs nece Not necessary for homogenous products under

competition Monopolist is notorious enough

Large number of Buyers & SellersDifferentiatedProduct, Differentiation either Real or Imaginary;Free entry & exit;Selling cost is an important feature - Product differentiation make selling costs nece Not necessary for homogenous products under

competition Monopolist is notorious enough


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Monopolistic CompetitionMonopolistic Competition

Downward-sloping demand-curves. Demandrelatively elastic.Firms form Groups, Groups are part of Indust [Auto Industry Small car segment, Luxury car

segment, SUV s, LCVs, etc.] [Detergents Luxury soaps, detergent bars,

detergent powders, liquid soaps, shampoos,]Firms make supernormal profit in the short ru

Downward-sloping demand-curves. Demandrelatively elastic.Firms form Groups, Groups are part of Indust [Auto Industry Small car segment, Luxury car

segment, SUV s, LCVs, etc.] [Detergents Luxury soaps, detergent bars,

detergent powders, liquid soaps, shampoos,]Firms make supernormal profit in the short ru

Short run equilibrium of the firmShort run equilibrium of the firm


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QO Q s

AR ! D

MC

AC

MR

Short-run equilibrium of the firmunder monopolistic competitionShort-run equilibrium of the firmunder monopolistic competition

P s

AC s

Long run equilibrium of the firmLong run equilibrium of the firm


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Long-run equilibrium of the firmunder monopolistic competitionLong-run equilibrium of the firmunder monopolistic competition

AR L ! DL

MR L

QO Q L

P L

LRAC

LRMC


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Monopolistic CompetitionMonopolistic Competition

In the long-run,Price=Average Cost. Firms haveplants which are too small to take full advanscale economies.

when new firms enter, they take customerproportions from all old firms

all firms have same cost and demand curvproducing different products

will new firms not imitate successful old o

In the long-run,Price=Average Cost. Firms haveplants which are too small to take full advanscale economies.

when new firms enter, they take customerproportions from all old firms

all firms have same cost and demand curvproducing different products

will new firms not imitate successful old o


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PriceDiscriminationPriceDiscrimination


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Price discrimination means one of the followProducts with identical costs are sold in diffmarkets at different prices

The ratio of price to marginal cost differs frproducts.

Price discrimination means one of the followProducts with identical costs are sold in diffmarkets at different prices

The ratio of price to marginal cost differs frproducts.

Two conditions for price discriminTwo conditions for price discrimin


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Two conditions for price discriminTwo conditions for price discrimin

Price discrimination ispossiblewhen,the two or more markets in which the product

must be capable of being separated, andPrice discrimination isprofitablewhen,The product in question hasdifferent elasticitiesin thetwo markets.

Price discrimination ispossiblewhen,the two or more markets in which the product

must be capable of being separated, andPrice discrimination isprofitablewhen,The product in question hasdifferent elasticitiesin thetwo markets.

Types of DiscriminationTypes of Discrimination


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Types of DiscriminationTypes of DiscriminationPersonal-based on income of the consumer (e g doctors, lawyers, etc)

Nature of the product

(e.g branded and un-branded products, economy andcinema halls, consumer notions, state v/s private univAge, sexand status of the customer

(e.g. insurance,Railway travel, air travel, cinemas &entertainment )

Personal-based on income of the consumer (e g doctors, lawyers, etc)

Nature of the product

(e.g branded and un-branded products, economy andcinema halls, consumer notions, state v/s private univAge, sexand status of the customer

(e.g. insurance,Railway travel, air travel, cinemas &entertainment )



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Time of service(e.g. matinee shows, auto rickshaws, celcos,days and week ends, prime time)

Geographical factors(e.g. liquor, legal sanctions, prevention of reexchange)U se of the product(e.g. electricity, domestic and export market, )

Time of service(e.g. matinee shows, auto rickshaws, celcos,days and week ends, prime time)

Geographical factors(e.g. liquor, legal sanctions, prevention of reexchange)U se of the product(e.g. electricity, domestic and export market, )

Recent examples ofPDRecent examples ofPD


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Recent examples of PDRecent examples of PD

Advance reservation and advance purchaseRate differentiated on the basis of days in athe reservation is madeFlexibility to change arrangementsRefundability

Tie-up arrangements

Advance reservation and advance purchaseRate differentiated on the basis of days in athe reservation is madeFlexibility to change arrangementsRefundability

Tie-up arrangements

Conditions for DiscriminationConditions for Discrimination


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Conditions for DiscriminationConditions for Discrimination

Market imperfectionsAgreement between rival sellers (direct servGeographical / tariff barriers

Differentiated productsIgnorance of buyersArtificial difference between goodsE lasticity of Demand

Market imperfectionsAgreement between rival sellers (direct servGeographical / tariff barriers

Differentiated productsIgnorance of buyersArtificial difference between goodsE lasticity of Demand

Price DiscriminationPrice Discrimination


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Price DiscriminationPrice Discrimination

Meaning of price discrimination First degree (rare / infrequent) Second degree (frequent) Third degree (the most common form)

Meaning of price discrimination First degree (rare / infrequent) Second degree (frequent) Third degree (the most common form)


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Second degreeSecond degree


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A monopolist divides the whole market for hproduction into severalsub-marketsand each submarket is charged adifferent price.

The price in each case is decided according tthemarginal buyersof the market are prepared topay.

A monopolist divides the whole market for hproduction into severalsub-marketsand each submarket is charged adifferent price.

The price in each case is decided according tthemarginal buyersof the market are prepared topay.



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The degree of the lowest price would be diffeach class of market.

Price discrimination isfeasiblewhen the total markeis very wide withlarge no. of buyershaving different

taste, different incomes and different conditiE

.g. public utilities transport, telecos, etc.

The degree of the lowest price would be diffeach class of market.

Price discrimination isfeasiblewhen the total markeis very wide withlarge no. of buyershaving different

taste, different incomes and different conditiE

.g. public utilities transport, telecos, etc.

Third degreeThird degree


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Most frequently encountered.

The monopolist divides the total market into

sub-marketsand setsdifferent pricesfor its productsin each market in a separate manner.

Most frequently encountered.

The monopolist divides the total market into

sub-marketsand setsdifferent pricesfor its productsin each market in a separate manner.



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Insecond degreeprice discrimination the price tto be theminimumas per the marginal utility of thmarginal buyer,

whereas, in third degree price discriminationdepends on the allocation of output and the dconditions in each market.

This is the most practical method.

Insecond degreeprice discrimination the price tto be theminimumas per the marginal utility of thmarginal buyer,

whereas, in third degree price discriminationdepends on the allocation of output and the dconditions in each market.

This is the most practical method.

Third-degree price discriminationThird-degree price discrimination


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g pg pP

QO

P 1

D

200

Revenue froma single price

Third-degree price discriminationThird-degree price discrimination


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O

P 1

D

200

P 2

150

P

Q

I ncreased revenuefrom price

discriminationA higher discriminatoryprice is now introduced

g pg p

Profit maximising output underProfit maximising output under


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O O OMR X

(a) Market X

DX

Profit-maximising output under third degree price discriminationProfit-maximising output under third degree price discrimination



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O O O

DY

MR X

MR Y

(a) Market X (b) Market Y

DX




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O O OMR X

MR Y MR T

(a) Market X (b) Market Y (c) Total(markets X + Y)

DX


DY



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O O OMR X

MR Y MR T

MC


DX

DY



85/108

O O OMR X

MR Y MR T

MC


DX

3000


DY

Profit-maximising output underProfit-maximising output under


86/108

O O O

DX

MR X

MR Y MR T

MC

5


3000


DY



87/108

O O OMR X

MR Y MR T

MC

5

1000


DX

3000


DY



88/108

O O OMR X

MR Y MR T

MC

5

1000 2000


DX

3000


DY



89/108

O O OMR X

MR Y MR T

MC

5

9

1000 2000


DX

3000


DY


90/108


91/108

OligopolyOligopoly

OligopolyOligopoly


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OligopolyOligopoly

Competition amongst Few (4-5Producers/Sellers) Key feature mutualinterdependencewith bulkproduction of the market output.

Rivalry- one firm depends not only on the reacticonsumers but also the reaction of rival firms Homogenous or DifferentiatedProducts.Product

Differentiation may varyPriceRigidity

Competition amongst Few (4-5Producers/Sellers) Key feature mutualinterdependencewith bulkproduction of the market output.

Rivalry- one firm depends not only on the reacticonsumers but also the reaction of rival firms Homogenous or DifferentiatedProducts.Product

Differentiation may varyPriceRigidity

OligopolyOligopoly


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OligopolyOligopoly

Decision-making is a complicated phenomenOne firm cannot take any decision without takconsideration theprobable reactionof therival firms.

Difficulty for new firms to enter the market.E ntry barriers areindirectin the forms of mergers,ownership & control of key factors, advantageestablished firms, economies of scale, etc.

Decision-making is a complicated phenomenOne firm cannot take any decision without takconsideration theprobable reactionof therival firms.

Difficulty for new firms to enter the market.E ntry barriers areindirectin the forms of mergers,ownership & control of key factors, advantageestablished firms, economies of scale, etc.

OligopolyOligopoly


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g p yg p y

Ex cessive expenditure on AdvertisementPossible outcomes include:

co-operation andcollusion- the monopoly price price war - the perfectly competitive price

Ex cessive expenditure on AdvertisementPossible outcomes include:

co-operation andcollusion- the monopoly price price war - the perfectly competitive price

Classification of OligopolyClassification of Oligopoly


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On the basis of product differentiation Pure[OPE C] or Differentiated[Two-wheeler/4-wheeler marke

India in the 80s]On the basis of entry of firms Open(free to enter) or Closed(barrier to entry)

On the basis of product differentiation Pure[OPE C] or Differentiated[Two-wheeler/4-wheeler marke

India in the 80s]On the basis of entry of firms Open(free to enter) or Closed(barrier to entry)



96/108


On the basis of presence/absence of price lead Partial(follow the leader)Ex . SBI as leader andPublic Sector banks as followers pre-90 or

Full(No leader-no follower)

On the basis of presence/absence of price lead Partial(follow the leader)Ex . SBI as leader andPublic Sector banks as followers pre-90 or

Full(No leader-no follower)



97/108

g p yg p y

On the basis of deliberate agreement Collusive(one common uniform price policy

monopoly) or Non-collusive (E ach firm takes its own decisi

On the basis of deliberate agreement Collusive(one common uniform price policy

monopoly) or Non-collusive (E ach firm takes its own decisi

The Kinked Demand Curve under OligoThe Kinked Demand Curve under Oligo


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The Kinked Demand Curve under OligoThe Kinked Demand Curve under Oligo

P rice

Qua titQ

K

R elati elE lasticema

R elati el

I elasticema

P

D

D

OligopolyOligopoly


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OligopolyOligopolyKinked Demand CurveKinked Demand Curve Point D-K shows relatively

elastic demand, the firm raisthe price of its product, rivaldo not raise their prices; thedemand for the firms produfalls considerable. This is fo

demand curve DK above theoriginal price OP.Point K-D shows relativelyinelastic demand, the firmlowers the price of its produrivals too will lower their prthe demand for the firmsproduct will not show anysizeable increase. This is fothe demand curve KD belowthe original price OP.

Point D-K shows relativelyelastic demand, the firm raisthe price of its product, rivaldo not raise their prices; thedemand for the firms produfalls considerable. This is fo

demand curve DK above theoriginal price OP.Point K-D shows relativelyinelastic demand, the firmlowers the price of its produrivals too will lower their prthe demand for the firmsproduct will not show anysizeable increase. This is fothe demand curve KD belowthe original price OP.

P rice

Qua tit

D

D

K

O Q

P

OligopolyOligopoly


100/108

OligopolyOligopolyKinked Demand CurveKinked Demand Curve There is a sudden bend in th

slope of the demand curve othe average revenue curve othe firm at point K. Thissudden bend is called theKINK. So, the oligopolistfaces a kinked demand curvRivals immediately and quic

match price reductions but ohesitantly and incompletelyfollow price increase, this leto the kinked demand curve

There is a sudden bend in thslope of the demand curve othe average revenue curve othe firm at point K. Thissudden bend is called theKINK. So, the oligopolistfaces a kinked demand curvRivals immediately and quic

match price reductions but ohesitantly and incompletelyfollow price increase, this leto the kinked demand curve

P rice

Qua tit

D

D

K

O Q

P

AR & MR curves under OligopolyAR & MR curves under Oligopoly


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A & M curves under OligopolyA & M curves under Oligopoly

AR curve is a kinked curve and MR curve isdiscontinuousDiscontinuity depend on Number of rivals Size of rivals Differentiation of products

Ex tent of collusion.

AR curve is a kinked curve and MR curve isdiscontinuousDiscontinuity depend on Number of rivals Size of rivals Differentiation of products

Ex tent of collusion.

Kinked demand for a firm under oligopolKinked demand for a firm under oligopol


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QO

P 1

Q1

Current priceand quantity

give one pointon demand curve

Kinked demand for a firm under oligopolKinked demand for a firm under oligopol


103/108

QO

P 1

Q 1

D

D

Stable price under conditions of a kinked demand Stable price under conditions of a kinked demand


104/108

QO

P 1

Q 1

MC 2

MC 1

MR

a

bD ! AR

Stable price under conditions of a kinked demand Stable price under conditions of a kinked demand


105/108

QO

P 1

Q 1

MC 2

MC 1

a

b

D ! AR

MR

K

Price Determination at KPrice Determination at K


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How the price is determined at pointKinvolves theconcept of an industryprice leader .This is the firm that dares to break out of thewithout fearing the consequences.If the firm decides to raise its price, it assumwill follow.If the firm decides to lower its price, it assumother may follow, but will not go lower.That would trigger a price war hurting the enindustry.

How the price is determined at pointKinvolves theconcept of an industryprice leader .This is the firm that dares to break out of thewithout fearing the consequences.If the firm decides to raise its price, it assumwill follow.If the firm decides to lower its price, it assumother may follow, but will not go lower.That would trigger a price war hurting the enindustry.


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108/108

market structure f

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