Main Market Forms Foundation Economics BIMTECH June 2009

Market is a place where buyers and sellers appear to conduct exchange transactions. The only requirement of a market is that all potential buyers and sellers should be in close contact with each other to conduct exchange transaction. According to Cournot : “Market is not any particular place in which things are bought or sold, but the whole of any region in which buyers and sellers are in such free interaction with each other that the prices of the same goods tend to equality easily and quickly”. Basic Features :  Buyers  Sellers  Interaction  Existence of a commodity  Price

Market can be classified on the basis of :  Area : Local Market; National market; International market  Nature of transaction : –Spot : Exchange transactions are confined to a particular spot. –Future market : Goods are to be exchanged in future.  Volume of Business : Wholesale / retail market  Basis of time : Short / Long / Very long period  Status of sellers : – Primary market – Manufacturing units or producers who can sell their goods to wholesalers. –Secondary Market : Consists of middlemen / wholesalers. –Tertiary market : Consists of retailers  Basis of regulation : –Regulated and unregulated markets : Unregulated markets give full freedom to the producers and sellers to sell goods at their will. While for certain essential commodities and basic inputs the Government with the objective of public welfare and consumers protection regulates the supply and price.

Basis of Competition  Perfect Competition  Monopoly  Imperfect Competition Perfect Competition : A market is said to be perfect when there are large number of buyers and sellers of the product and the products are homogeneous so that consumers do not mind purchasing a commodity from M/S ABC or M/S XYZ. For homogeneous products the cross elasticity of demand are infinite ie. Products are perfect substitutes. Features : 1. There is free entry and exit of the firms. 2. Both buyers and sellers have full knowledge of the market conditions. 3. Price tends to be uniform all over the market. 4. Firms have to be content with normal profits in the long run. 5. Only efficient firms can exist in a perfect market. Perfect markets do not exist in real life. It is a hypothetical situation. It is so because the assumptions on which competitive model of market is based never holds goods in the real market.

Monopoly : Monopoly is a Greek word which means : “Monos”- Simple; “Plus” – Seller 1. There is a single seller of a product and he has full control over the supply of the product. 2. Monopoly firms produce a product which has no close substitutes in the market. 3. Demand for product produced by the firm constitutes the total demand for the product in the market. 4. Monopolist has wide latitude of choice in the price policy. 5. Monopoly firms may produce homogeneous goods and charge uniform price or follow the policy of price discrimination where it may differentiate between buyers and charge different prices according to their paying capacities. Monopsony : Sometimes a large number of firms confront a single buyer. Eg : Steel produced by different steel producing units is demanded by the automobile industry. In this case single buyer can dictate his terms. Bilateral Monopoly : Single firm (monopolist) confronts a single buyer (monopsonist). Both monopolist and monopsonist would like to exert their pressure on price. Price in such a market is determined by the relative strength of the bargaining power of the buyer and seller.

 Monopolistic Competition: Market with large number of buyers and sellers is rendered imperfect when product is not homogeneous. Different firms produce differentiated goods. There maybe differences on quality, style, color, size, packing etc. 1. In monopolistic competitive markets, every individual producer has his own independent price policy. Price policy of any individual firm does not call for equal and immediate retaliation from rival firms. 2. Every firm develops its own market and patronizes its customers and tries to entice more and more customers to it’s own market via advertisement, sales promotion activities etc. 3. There are no restrictions of entry and exit of firms. As an outcome of which in the short run firms manage to get abnormal profits while in the long rum they have to be contended with normal profits. 4. Firms do not produce perfect substitutes but do produce close substitutes. Selling cost plays a vital role which affects scale of production and sales of firms alongwith choice determination by consumers.

Oligopoly : Market of the commodity is dominated by few firms each of which is producing a large proportion of the total output of the industry. Eg : Few firms engaged in production of TV sets, cars, OPEC etc. Oligopoly refers to a market structure in which a few firms produce standardized goods with close substitutes. An oligopoly firm has to take into account the behavior and reaction of rival firms. Any change in price and output policy of a firm will have an enormous effect on sale prospects of other firms. Pure Oligopoly: Products of oligopoly firms are homogeneous. eg: Sugar, Coal, Cement etc Differentiated Oligopoly : Firms produce differentiated goods Duopoly : Two sellers. Duopoly pricing closely follows monopoly pricing where duopolists can enter into a collaboration

Kinds of Market Structure Types of Market Seller Entry Barrie rs Seller Number Buyer Entry Barrier s Buyer Numbers Product type Price Perfect Competition NoManyNoManyHomogeneousUniform Monopoly (Pure) YesOneNoManyHomogeneousUniform Monopoly (Discriminating ) YesOneNoManyDifferentiatedDifferentiated MonopsonyNoManyYesOneHomogeneous Lowest possible price Monopolistic Competition NoManyNoManyDifferentiatedDifferentiated OligopolyYesFewNoMany Homogeneous or Differentiated High DuopolyYesTwoNoMany High