UNIT V PART B

1. What are the main features of monopolistic competition? (APRIL 2012)

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.

2. What are the distinguishing features of an oligopolistic market? (APRIL 2012)

1. Interdependence:
The foremost characteristic of oligopoly is interdependence of the various firms in the
decision making.This fact is recognized by all the firms in an oligopolistic industry. If a small
number of sizeable firms constitute an industry and one of these firms starts advertising
campaign on a big scale or designs a new model of the product which immediately captures
the market, it will surely provoke countermoves on the part of rival firms in the industry.
Thus different firms are closely inter dependent on each other.
2. Advertising:
Under perfect competition advertising is unnecessary while a monopolist may find
some advertising to be profitable when his product is new or when there exist a large number
of potential consumers who have never tried his product earlier. But according to Prof.
Baumol, “under oligopoly, advertising can become a life-and-death matter where a firm
which fails to keep up with the advertising budget of its competitors may find its customers
drifting off to rival products.”
3. Group Behaviour:
In oligopoly, the most relevant aspect is the behaviour of the group. There can be two
firms in the group, or three or five or even fifteen, but not a few hundred. Whatever the
number, it is quite small so that each firm knows that its actions will have some effect on
other firms in the group. In contrast, under perfect competition there are a large number of
firms each attempting to maximise its profits. Similar is the situation under monopolistic
competition. Under monopoly, there is just one profit maximising firm. Whether one
considers monopoly or a competitive market, the behaviour of a firm is generally predictable.
In oligopoly, however, this is not possible due to various reasons:
(i) The firms constituting the group may not have a common goal.
(ii) The group may or may not have a formal or informal organization with accepted rules of
conduct.
(iii) The group may be dominated by a leader but other firms in the group may not follow him
in a uniform manner.
4. Competition:
This leads to another feature of the oligopolistic market, the presence of competition.
Since under oligopoly, there are a few sellers, a move by one seller immediately affects the
rivals. So each seller is always on the alert and keeps a close watch over the moves of its
rivals in order to have a counter-move. This is true competition, “True competition consists
of the life of constant struggle, rival against rival, whom one can only find under oligopoly.”
5. Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers to entry
into or exit from it. However, in the long-run, there are some types of barriers to entry which
tend to restrain new firms from entering the industry.
These may be:
(a) Economics of scale enjoyed by a few large firms;
(b) Control over essential and specialized inputs;
(c) High capital requirements due to plant costs, advertising costs, etc.
(d) Exclusive patents; and licenses; and
(e) The existence of unused capacity which makes the industry unattractive.
When entry is restricted or blocked by such natural and artificial barriers the oligopolistic
industry can earn long-run supernormal profits.
6. Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms.
Firms differ considerably in size. Some may be small, others very large. Such a situation is
asymmetrical. This is very common in the American economy. A symmetrical situation with
firms of a uniform size is rare.
7. Existence of Price Rigidity:
In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its
price, the rival firms will retaliate by a higher reduction in their prices. This will lead to a
situation of price war which benefits none. On the other hand, if any firm increases its price
with a view to increase its profits; the other rival firms will not follow the same. Hence, no
firm would like to reduce the price or to increase the price. The price rigidity will take place.
8. No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two
conflicting motives. Each wants to remain independent and to get the maximum possible
profit. Towards this end, they act and react on the price-output movements of one another
which are a continuous element of uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes to
cooperate with his rivals to reduce or eliminate the element of uncertainty. All rivals enter
into tacit or formal agreement with regard to price-output changes.
It leads to a sort of monopoly within oligopoly. They may even recognize one seller as a
leader at whose initiative all the other sellers raise or lower the price. In this case, the
individual seller’s demand curve is a part of the industry demand curve, having the elasticity
of the latter. Given these conflicting attitudes, it is not possible to predict any unique pattern
of pricing behaviour in oligopoly markets.
9. Indeterminateness of Demand Curve:
In market structures other than oligopolistic, demand curve faced by a firm is
determinate. The interdependence of the oligopolists, however, makes it impossible to draw a
demand curve for such sellers except for the situations where the form of interdependence is
well defined. In real business operations, the demand curve remains indeterminate. Under
oligopoly a firm can expect at least three different reactions of the other sellers when it
lowers its prices.
This happened due to the reason:
(i) It is possible that other maintain the prices they had before. In this case, an oligopolist can
hope that its demand would increase substantially as the prices are lowered,
(ii) When an oligopolist reduces his price, the other sellers also lower their prices by an
equivalent amount. In this situation although demand of the oligopolist making the first move
will increase as he lowers his price, the increase itself would be much smaller than in the first
case.
(iii) When a firm reduces its price, the other sellers reduce their prices far more. Under the
circumstances the demand for the product of the oligopolistic firm which makes the first
move may decrease. Thus uncertainty under oligopoly is inevitable, and as a result, the
demand curve faced by each firm belonging to the group is necessarily indeterminate.
3. Describe the characteristics of oligopoly. (APRIL 2013) (APRIL 2016)
Small Number of Large Firms
The most important characteristic of oligopoly is an industry dominated by a small
number of large firms, each of which is relatively large compared to the overall size of the
market. This characteristic gives each of the relatively large firms substantial market control.
While each firm does not have as much market control as monopoly, it definitely has more
than a monopolistically competitive firm.
Identical or Differentiate Products
Some oligopolistic industries produce identical products, like perfect competition in
this regard, while others produce differentiated products, more like monopolistic competition.
This characteristic might seem to be a bit wishy-washy, taking both sides of product
differentiation issue. In actuality it points out that oligopolistic industries general come in two
varieties.
 Identical Product Oligopoly: This type of oligopoly tends to process raw materials or
produce intermediate goods that are used as inputs by other industries. Notable examples are
petroleum, steel, and aluminium.
 Differentiate Product Oligopoly: This type of oligopoly tends to focus on goods sold
for personal consumption. The key is that people have different wants and needs and thus
enjoy variety. A few examples of differentiated oligopolistic industries include automobiles,
household detergents, and computers.
Barriers to Entry
Firms in an oligopolistic industry attain and retain market control through barriers to
entry. The most noted entry barriers are: (1) exclusive resource ownership, (2) patents and
copyrights, (3) other government restrictions, and (4) high start-up cost. Barriers to entry are
the key characteristic that separates oligopoly from monopolistic competition on the
continuum of market structures. With few if any barriers to entry, firms can enter a
monopolistically competitive industry when existing firms receive economic profit. This
diminishes the market control of any given firm. However, with substantial entry barriers
found in oligopoly, firms cannot enter the industry as easily and thus existing firms maintain
greater market control.
4. Describe the four types of imperfect competition. (APRIL 2014)
1. Oligopoly
Oligopoly describes a market in which there are a small number of sellers for a particular
product. For example, think of Amazon and eBay. These ecommerce giants offer a similar
service—an online platform for people to buy and sell products. As these platforms have
grown, they’ve both introduced concepts that have changed the nature of online shopping.
For example, Amazon invented the “Buy It Now” button, which eBay emulates. Both
websites offer product and seller ratings in a 5-star system, making it easy for consumers to
compare products on both platforms before making their choice.

It is important to watch how consumers are interacting with your competition is that,
generally speaking, there has been a critical shift in the consumer mindset about
trustworthiness. Where once the “corporate to consumer” messaging was trustworthy enough
to shape buyer decisions, today “consumer to consumer” messaging–such as public feedback
or reviews about a product, or forums discussing it–is what shoppers rely on.
2. Monopolistic Competition
A monopolistic market is one in which each seller provides a unique product, so no seller’s
product can be a perfect substitute for another. Even though the base product is the same,
each store offers different styles of shirts, different prices and different services. Another
differentiator is branding and logos; a sport shirt from Nike might be identical to one from
Puma if not for the different logos featured on them.
One of the most important factors for driving your success in a monopolistic market is
your customers and their feedback. Since what you’re offering is unique, you can gain a lot of
knowledge about what works and what doesn’t from the people who are interested in doing
business with you. Put this into use by obtaining as much feedback from your customers and
prospects as you can.
3. Monopoly
A market in which there is one seller, but many different buyers. For example, the
vast majority of active blogs on the internet are powered by Word Press, which holds a
monopoly on blog-based websites and is also growing as a host for CMS systems. Other blog
platforms have existed, but no competitor to date has had the same lasting power. The
company continues to attract new customers by offering its base product for free and only
charging for hosting and support.
4. Oligopsony
A market in which there are many sellers but few buyers. Consumers have the power
in this marketplace and can choose exactly what they want. When buyers have the power to
choose from a wide marketplace, you need to stand out among your competition. Especially
in an oligopsony where there are few buyers whose attention you’re competing for, there
must be something that drives them to choose you.
For starters, this knowledge will help you understand the nuances of the playing field
in which you’re aiming to become a leader. These defining characteristics will impact the
marketing strategies you adopt and how you execute them. For example, marketers across
fields are now turning to behavioural economics principles to inform their tactics for doing
things like minimizing shopping cart abandonment rates or increasing customer loyalty.
The type of marketplace you’re competing in will also determine which behavioural
economics strategies will be most effective, and the ways it makes most sense for you to do
things like adopt personalization in ecommerce.
5. Classify goods on the basis of difference in their nature. (APRIL 2014)
1. Free goods and economic goods.
2. Free services and economic services.
3. Consumer goods and producer goods.
4. Consumer services and producer services.
5. Single use goods and durable use goods.
6. Private goods and public goods.
1. Free goods and economic goods
Free goods are free gifts of nature. They are available in abundance i.e. in unlimited
quantity and the supply is much more than the demand. That is why they are called free
goods. In short we can define free goods as goods which posses utility but which are not
scarce.
Economic goods are those goods (manmade or free gifts of nature) whose demand is
more than supply. They command a price and they can be bought in the market. 2. Free
services and economic services In case of services too, there are free services and economic
services. Free services are those, which cannot be bought in the market and which are
rendered due to love, affection etc.
3. Consumer goods and Producer goods
This classification is based on the purpose for which a particular good is used.
Consumer goods are those goods, which satisfy the want of consumer directly. They are
goods, which are used for consumption. For example bread, fruits, milk, clothes etc. Producer
goods are those goods, which satisfy the want of consumers indirectly. As they help in
producing other goods, they are known as producer goods. For example machinery, tools,
raw materials, seeds, manure and tractor etc are all example of producer goods.
3a. Intermediate goods
Raw materials, power, fuels etc. used by the producers for further production of final
goods and services are also called intermediate goods. Example : Wheat flour is an
intermediate good in the production of bread in the bakery.
4. Consumer’s services and producer’s services
Here too the basis of classification is the same as that of goods. When the consumers
or the households directly use services, they are known as consumer services. Producer
services on the other hand are used to produce other goods and services, which are in turn
demanded by the consumers. In other words producer services satisfy the human wants
indirectly.
5. Single use and durable use goods
All types of goods whether consumer goods or the producer goods are further
classified into single use and durable use goods. Single use goods are those goods, which can
be used only once. They are finished only in one use.
Durable use goods are those goods, which can be used again and again for a long
period of time. There are durable use consumer goods as well as durable use producer goods.
Durable use consumer goods are cloth, furniture, television, scooter etc. that can be used by
consumer again and again. Durable use producer goods are used in production again and
again for example, machines, tools, tractors and implments etc. this does not mean that
repeated use of these goods does not make any difference to them. In fact the value of these
goods gets depreciated after continuous use.
6. Private goods and public goods
 Goods can be classified on the basis of their ownership. All goods that are privately
owned and are exclusively enjoyed by individuals are called private goods. For example all
the goods owned by you are private goods. This includes your watch, pen, scooter, books,
table, chair, bed, clothes etc. If you own a factory then its building, machinery; tools etc are
your private goods.
Public goods are those goods, which are owned and enjoyed by the society as a
whole. For example roads, bridges, park, town hall etc. are all collectively owned. They are
available to all people in a society without any discrimination, i.e. no one is denied from the
consumption of public goods. Both government and private entrepreneurs may produces
public goods.
6. Is monopoly price always high? Explain. (APRIL 2017)
We have seen that monopoly power enables a monopolist to restrict its output
and charge a price higher than the marginal cost. Competitive price tends to equal the
marginal cost. This however, monopoly price is necessarily and invariably higher than
competitive price. Several influences may keep the monopoly price down and in some cases
may bring it to a level lower than what-is would he under competition.
The monopolist to produce an good at a lower cost per unit on account of the
exceptional advantages that it may enjoy as regard the scale of production. In advertising,
marketing expenses and other overhead charges. Thus, even though it may charge a price
higher than its own marginal cost, it may be lower than what would be the marginal
cost under competition. This is the ease especially with industries using large and expensive
indivisible equipment, and the demand for the products of which is elastic. Expansion of
output in such industries reduces cost per unit, and larger output can remunerative, though
low, prices. Normally however monopoly price lower than the price under competition. But
the monopoly price is inordinately a high price. There are serious limitations on the power of
a monopolist. He is not always able to charge price which would theoretically maximize his
profit. Apart from the fact that the monopolist may be ignorant of the level of the price.
Conclusion: Out in spite of these restraining influences, monopoly prices are generally higher
than the competitive prices.
7. Describe the importance of monopoly power. (NOV 2012)
 Research and Development. Monopolies can make supernormal profit; this can be
used to fund high cost capital investment spending. Successful research can be used for
improved products and lower costs in the long term. This is important for industries like
telecommunications, aeroplane manufacture and Pharmaceuticals. Without monopoly power
that a patent gives, there may be less development of medical drugs.
 Economies of scale. Increased output will lead to a decrease in average costs of
production. These can be passed on to consumers in the form of lower prices. Economies of
Scale This is important for industries with high fixed costs, such as tap water and steel
production.
 International Competitiveness. A domestic firm may have Monopoly power in the
domestic country but face effective competition in global markets. E.g. British Steel. With
markets increasingly globalised, it may be necessary for a firm to have a domestic monopoly
in order to be competitive internationally
 Monopolies can be successful firms. A firm may become a monopoly through being
efficient and dynamic. A monopoly is thus a sign of success not inefficiency. For example –
Google has gained monopoly power through being regarded as best firm for search engines.
Apple has a degree of monopoly power through successful innovation.
8. Determine the essentials of a market.(NOV 2013)
Good or service to be traded.
A SERVICE is an action that a person does for someone else. Examples: Goods are
items you buy, such as food, clothing, toys, furniture, and toothpaste. Services are actions
such as haircuts, medical check-ups, mail delivery, car repair, and teaching. Goods are
tangible objects that satisfy people's wants.
Buyers and sellers
Buyers demand goods and services; sellers supply goods and services. Markets exist
when buyers and sellers interact. This interaction determines market prices and thereby
allocates goods and services. The price is what people pay when they buy a good or service,
and what they receive when they sell a good or service. Businesses want to sell the goods and
services consumers will buy. A market exists when buyers and sellers exchange goods and
services. People’s choices about what goods and services to buy ultimately determine what
producers produce.
Place:
A place, be it with real boundaries or imaginary (like world market) A market,
or marketplace, is a location where people regularly gather for the purchase and sale of
provisions, livestock, and other goods. Some markets operate daily and are said to
be permanent markets while others are held once a week or on less frequent specified days
such as festival days and are said to be periodic markets. The form that a market adopts is
dependent on the population, culture, ambient and geographic conditions of the market's
locality.
Contact between buyers and sellers
It is impossible to set up any yardstick for relationship between a buyer and a seller.
No two organizations can have similar set of rules for maintaining relationship. Even if on a
particular occasion a situation prompted a particular behavior, it is not necessary that a
similar behavior is necessary on another occasion. The time, place and group of person might
be the same but behave in different way, though circumstances and situations might be
identical.
A buyer is also a seller. A seller is also a buyer. Both could also be customers.
To make the point clear let us take the example of a trader who buys goods for resale or a
buyer who buys goods and then sells it after value addition. Therefore , you can not show
same behaviour when you are in the role of a buyer as then your priorities are different then
when you are in the role of a seller.
9. What are the factors determining the extent of market? (NOV 15)
1. Nature of Demand:
The extent of the market is greatly influenced by the nature of the demand of the commodity.
The commodities like silver, gold etc. having permanent demand would have a larger size of
the market. On the contrary, if the demand is limited to a particular area then it would have
the small size of the market.
2. Means of Transportation and Communication:
Means of transportation and communication determine the extent of the market. If the means
of transportation and communication are well developed, wide contacts can be easily
established.
3. Nature of the Commodity:
The nature of commodity also influences the extent of the market. To have larger market,
commodity must be durable, portable, etc. Perishable goods have narrow market. In case of
perishable goods, extent of the market is small.
4. Currency and Credit:
The market can be conveniently carried to extensive areas only if the currency and credit
system of the country is well developed, because only the good currency and credit policy
can inspire the confidence of the people.
5. State Policy:
The state policy is another factor to influence the size of the market. If the Government
imposes prohibitive duties and quotas, the size of the market would be narrow. Therefore, we
may say that state policy has its effect on the size of the market.
6. Degree of Division of Labour:
The size of the market is also determined by the division of labour, if there exists greater
division of labour, articles would be cheaper and the market would be wider.
7. Durability:
The extent of market of things, which do not perish quickly, that, is, durable and large. But
the commodities such as fresh vegetables, milk, and eggs etc. which perish quickly have
narrow extent of the market. These cannot be transported from one place to the other.
8. Portability:
The commodity which can be transported from one place to the other has large extent of
market. But the things which are heavy and much expenditure is incurred on their
transportation have limited extent of market. For example, bricks have a local market. If huge
expenditure on its transport is made only then would it be carried to another place.
9. Sampling and Grading:
The commodities which can be sampled and graded have a large extent of market because
customers place orders only on seeing sample or grade of such commodities. They do have
not to go personally to see the commodities. For example, woolen cloth, fountain pen, electric
fans etc. But if the products can neither be sampled nor graded, the customers have to see
them personally. Therefore, their extent of market is limited.
10. Peace, Security and Honesty:
A trader will like to send his products to the country where peace and security exist. As a
result, the extent of market will be large. But a place where there are unrest, poor law and
order situation will not be liked by the businessmen. They will avoid sending their
commodity to that place and there will be limited extent of the market.
11. Number of Substitutes:
The more number of substitutes of an article, the narrower the demand for it and extent of its
market will become less because when a certain article is not available in the market or its
price is high people will purchase an article similar to that and the substitute will serve their
purpose.
12. Modern Methods of Trade:
The extent of market will depend on the modern methods of trade. By using the methods of
propaganda, advertisement, storage etc. size of market expands.
10. Explain the features of perfect completion. (NOV 16)
1. Free and Perfect Competition:
In a perfect market, there are no checks either on the buyers or sellers. They are free to buy or
to sell to any person. It means there are no monopolies.
2. Cheap and Efficient Transport and Communication:
Uniform price for the commodity would not be possible if the changes in the prices are not
quickly adjusted or the commodity cannot be quickly transported. Thus cheap and efficient
means of transport and communication are must.
3. Wide Extent:
Sometimes wide market is regarded as the same thing as the perfect market. For wide market,
the commodity should have permanent and universal demand. The commodity should be
portable. Means of transport and communication should be quick. There should be peace and
security and extensive division of labour.
4. Large number of firms:
In this market, a product is produced and sold by large number of firms. Since there are large
number of firms, therefore each firm is supplying only a small part of the total supply in the
market, thus no one firm has any market power. It implies that no firm can influence the price
of the product rather each must accept the price set by the forces of market demand and
supply. The firms are price-takers instead of price-makers.
5. Large number of buyers:
In a perfectly competitive market, there are large numbers of buyers each demanding a small
part of the total market supply of the product. As a result, no single buyer is in a position to
influence the market price determined by the forces of market demand and supply.
6. Homogeneous Product:
In a perfectly competitive market, all the firms produce and supply the identical products. It
means that the products of all the firms are perfect substitutes of each other. As a result of
this, the price elasticity of demand for a firm’s product is infinite.
7. Free entry and exit:
In a perfectly competitive market, there are no restrictions on the entry of new firms into
market or on the exit of existing firms from the market.
8. Perfect knowledge:
In a perfectly competitive market, the firms and the buyers possess perfect information about
the market. It implies that no buyer or firm is ignorant about the price prevailing in the
market.
9. Perfect mobility of factors of production:
In a perfectly competitive market, the factors of production are completely mobile leading to
factor-price equalization throughout the market.