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Briefly describe the characteristics of perfect competition, monopoly, monopolistic competition, and

oligopoly markets. Identify any four products one each from these markets.

Ans: Meaning and Definition of Perfect Competition:

A Perfect Competition market is that type of market in which the number of buyers and sellers is very
large, all are engaged in buying and selling a homogeneous product without any artificial restrictions and
possessing perfect knowledge of the market at a time.

In other words it can be saidA market is said to be perfect when all the potential buyers and sellers are
promptly aware of the prices at which the transaction take place. Under such conditions the price of the
commodity will tend to be equal everywhere.

In this connection Mrs. Joan Robinson has saidPerfect Competition prevails when the demand for
the output of each producer is perfectly elastic.
According to BouldingA Perfect Competition market may be defined as a large number of buyers and
sellers all engaged in the purchase and sale of identically similar commodities, who are in close contact
with one another and who buy and sell freely among themselves.

Characteristics of Perfect Competition:


The following characteristics are essential for the existence of Perfect Competition:
1. Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large that none of them individually
is in a position to influence the price and output of the industry as a whole. In the market the position of a
purchaser or a seller is just like a drop of water in an ocean.

2. Homogeneity of the Product:


Each firm should produce and sell a homogeneous product so that no buyer has any preference for the
product of any individual seller over others. If goods will be homogeneous then price will also be uniform
everywhere.

3. Free Entry and Exit of Firms:


The firm should be free to enter or leave the firm. If there is hope of profit the firm will enter in business
and if there is profitability of loss, the firm will leave the business.
4. Perfect Knowledge of the Market:
Buyers and sellers must possess complete knowledge about the prices at which goods are being bought
and sold and of the prices at which others are prepared to buy and sell. This will help in having uniformity
in prices.

5. Perfect Mobility of the Factors of Production and Goods:


There should be perfect mobility of goods and factors between industries. Goods should be free to move
to those places where they can fetch the highest price.

6. Absence of Price Control:


There should be complete openness in buying and selling of goods. Here prices are liable to change freely
in response to demand and supply conditions.

7. Perfect Competition among Buyers and Sellers:


In this purchasers and sellers have got complete freedom for bargaining, no restrictions in charging more
or demanding less, competition feeling must be present there.

8. Absence of Transport Cost:


There must be absence of transport cost. In having less or negligible transport cost will help complete
market in maintaining uniformity in price.

9. One Price of the Commodity:


There is always one price of the commodity available in the market.

10. Independent Relationship between Buyers and Sellers:


There should not be any attachment between sellers and purchasers in the market. Here, the seller should
not show prick and choose method in accepting the price of the commodity. If we will see from the close
we will find that in real life Perfect Competition is a pure myth.

Monopoly : Features

The word monopoly has been derived from the combination of two words i.e., Mono and Poly. Mono
refers to a single and poly to control.

In this way, monopoly refers to a market situation in which there is only one seller of a commodity.
There are no close substitutes for the commodity it produces and there are barriers to entry. The single
producer may be in the form of individual owner or a single partnership or a joint stock company. In other
words, under monopoly there is no difference between firm and industry.

Monopolist has full control over the supply of commodity. Having control over the supply of the
commodity he possesses the market power to set the price. Thus, as a single seller, monopolist may be a
king without a crown. If there is to be monopoly, the cross elasticity of demand between the product of
the monopolist and the product of any other seller must be very small.

Definitions:

Pure monopoly is represented by a market situation in which there is a single seller of a product for
which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs
of other products sold in the economy. Bilas

Monopoly is a market situation in which there is a single seller. There are no close substitutes of the
commodity it produces, there are barriers to entry. -Koutsoyiannis

Under pure monopoly there is a single seller in the market. The monopolist demand is market demand.
The monopolist is a price-maker. Pure monopoly suggests no substitute situation. -A. J. Braff

A pure monopoly exists when there is only one producer in the market. There are no dire competitions.
-Ferguson

Pure or absolute monopoly exists when a single firm is the sole producer for a product for which there
are no close substitutes. -McConnel

Features:

We may state the features of monopoly as:

1. One Seller and Large Number of Buyers:

The monopolists firm is the only firm; it is an industry. But the number of buyers is assumed to be large.

2. No Close Substitutes:
There shall not be any close substitutes for the product sold by the monopolist. The cross elasticity of
demand between the product of the monopolist and others must be negligible or zero.

3. Difficulty of Entry of New Firms:

There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm
is making abnormal profits.

4. Monopoly is also an Industry:

Under monopoly there is only one firm which constitutes the industry. Difference between firm and
industry comes to an end.

5. Price Maker:

Under monopoly, monopolist has full control over the supply of the commodity. But due to large number
of buyers, demand of any one buyer constitutes an infinitely small part of the total demand. Therefore,
buyers have to pay the price fixed by the monopolist.

Monopolistic Competition

Monopolistic competition is a market structure characterized by many firms selling products that are
similar but not identical, so firms compete on other factors besides price. Monopolistic competition is
sometimes referred to as imperfect competition, because the market structure is between pure
monopoly and pure competition.

The main features of monopolistic competition are as under:

1. Large Number of Buyers and Sellers:

There are large number of firms but not as large as under perfect competition.

That means each firm can control its price-output policy to some extent. It is assumed that any price-
output policy of a firm will not get reaction from other firms that means each firm follows the
independent price policy.
If a firm reduces its price, the gains in sales will be slightly spread over many of its rivals so that the
extent to which each of the rival firms suffers will be very small. Thus these rival firms will have no
reason to react.

2. Free Entry and Exit of Firms:

Like perfect competition, under monopolistic competition also, the firms can enter or exit freely. The
firms will enter when the existing firms are making super-normal profits. With the entry of new firms, the
supply would increase which would reduce the price and hence the existing firms will be left only with
normal profits. Similarly, if the existing firms are sustaining losses, some of the marginal firms will exit.
It will reduce the supply due to which price would rise and the existing firms will be left only with normal
profit.

3. Product Differentiation:

Another feature of the monopolistic competition is the product differentiation. Product differentiation
refers to a situation when the buyers of the product differentiate the product with other. Basically, the
products of different firms are not altogether different; they are slightly different from others. Although
each firm producing differentiated product has the monopoly of its own product, yet he has to face the
competition. This product differentiation may be real or imaginary. Real differences are like design,
material used, skill etc. whereas imaginary differences are through advertising, trade mark and so on.

4. Selling Cost:

Another feature of the monopolistic competition is that every firm tries to promote its product by different
types of expenditures. Advertisement is the most important constituent of the selling cost which affects
demand as well as cost of the product. The main purpose of the monopolist is to earn maximum profits;
therefore, he adjusts this type of expenditure accordingly.

5. Lack of Perfect Knowledge:

The buyers and sellers do not have perfect knowledge of the market. There are innumerable products each
being a close substitute of the other. The buyers do not know about all these products, their qualities and
prices.
Therefore, so many buyers purchase a product out of a few varieties which are offered for sale near the
home. Sometimes a buyer knows about a particular commodity where it is available at low price. But he
is unable to go there due to lack of time or he is too lethargic to go or he is unable to find proper
conveyance. Likewise, the seller does not know the exact preference of buyers and is, therefore, unable to
get advantage out of the situation.

6. Less Mobility:

Under monopolistic competition both the factors of production as well as goods and services are not
perfectly mobile.

7. More Elastic Demand:

Under monopolistic competition, demand curve is more elastic. In order to sell more, the firms must
reduce its price.

Oligopoly

The term oligopoly is derived from two Greek words: oligi means few and polein means to sell.
Oligopoly is a market structure in which there are only a few sellers (but more than two) of the
homogeneous or differentiated products. So, oligopoly lies in between monopolistic competition and
monopoly.

Oligopoly refers to a market situation in which there are a few firms selling homogeneous or
differentiated products. Oligopoly is, sometimes, also known as competition among the few as there are
few sellers in the market and every seller influences and is influenced by the behaviour of other firms.

The main features of oligopoly are elaborated as follows:


1. Few firms:
Under oligopoly, there are few large firms. The exact number of firms is not defined. Each firm produces
a significant portion of the total output. There exists severe competition among different firms and each
firm try to manipulate both prices and volume of production to outsmart each other. For example, the
market for automobiles in India is an oligopolist structure as there are only few producers of automobiles.

The number of the firms is so small that an action by any one firm is likely to affect the rival firms. So,
every firm keeps a close watch on the activities of rival firms.
2. Interdependence:
Firms under oligopoly are interdependent. Interdependence means that actions of one firm affect the
actions of other firms. A firm considers the action and reaction of the rival firms while determining its
price and output levels. A change in output or price by one firm evokes reaction from other firms
operating in the market.

For example, market for cars in India is dominated by few firms (Maruti, Tata, Hyundai, Ford, Honda,
etc.). A change by any one firm (say, Tata) in any of its vehicle (say, Indica) will induce other firms (say,
Maruti, Hyundai, etc.) to make changes in their respective vehicles.

3. Non-Price Competition:
Under oligopoly, firms are in a position to influence the prices. However, they try to avoid price
competition for the fear of price war. They follow the policy of price rigidity. Price rigidity refers to a
situation in which price tends to stay fixed irrespective of changes in demand and supply conditions.
Firms use other methods like advertising, better services to customers, etc. to compete with each other.

If a firm tries to reduce the price, the rivals will also react by reducing their prices. However, if it tries to
raise the price, other firms might not do so. It will lead to loss of customers for the firm, which intended
to raise the price. So, firms prefer non- price competition instead of price competition.

4. Barriers to Entry of Firms:


The main reason for few firms under oligopoly is the barriers, which prevent entry of new firms into the
industry. Patents, requirement of large capital, control over crucial raw materials, etc, are some of the
reasons, which prevent new firms from entering into industry. Only those firms enter into the industry
which is able to cross these barriers. As a result, firms can earn abnormal profits in the long run.

5. Role of Selling Costs:


Due to severe competition and interdependence of the firms, various sales promotion techniques are used
to promote sales of the product. Advertisement is in full swing under oligopoly, and many a times
advertisement can become a matter of life-and-death. A firm under oligopoly relies more on non-price
competition.

Selling costs are more important under oligopoly than under monopolistic competition.

6. Group Behaviour:
Under oligopoly, there is complete interdependence among different firms. So, price and output decisions
of a particular firm directly influence the competing firms. Instead of independent price and output
strategy, oligopoly firms prefer group decisions that will protect the interest of all the firms. Group
Behaviour means that firms tend to behave as if they were a single firm even though individually they
retain their independence.

7. Nature of the Product:


The firms under oligopoly may produce homogeneous or differentiated product.

i. If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect
oligopoly.

ii. If the firms produce a differentiated product, like automobiles, the industry is called differentiated or
imperfect oligopoly.

8. Indeterminate Demand Curve:


Under oligopoly, the exact behaviour pattern of a producer cannot be determined with certainty. So,
demand curve faced by an oligopolist is indeterminate (uncertain). As firms are inter-dependent, a firm
cannot ignore the reaction of the rival firms. Any change in price by one firm may lead to change in prices
by the competing firms. So, demand curve keeps on shifting and it is not definite, rather it is
indeterminate.

Identification of products of monopoly, perfect competition, oligopoly, monopolistic


competition

Products Market
Indian Railways, State Electricity Board, Hindustan Aeronautics Monopoly
Limited
Banking System in India after financial reform in 1992, Restaurants, Monopolistic Competition
multi-cylinder diesel engine fuel injection pumps
Indian Fish market might be an example of something close to this Perfect competition
market.
Oligopoly
Mobile telephony (Airtel, Idea, BSNL,Reliance), Automobile
industry, Internet service providers, Airlines industry