Market structure

Market Structure

 Market structure refers to the nature and degree of competition in the

market for goods and services. The structures of market both for goods market
and service (factor) market are determined by the nature of competition prevailing
in particular market.
Determinants of Market Structure
 Number and Nature of Sellers: The market structures are influenced by the
number and nature of sellers in the market. They range from large number of sellers
in perfect competition to a single seller in pure monopoly, to two sellers in duopoly,
to a few sellers in oligopoly, and to many sellers of differentiated products.
 Number and Nature of Buyers: The market structures are also influenced by the
number and nature of buyers in the market. If there is a single buyer in the
market, this is buyers' monopoly and is called monopoly market. There
may be two buyers who act jointly in the market .This is called duopoly market.
They may also be a few organized buyers of a product.This is known as oligopoly.
 Nature of Product: It is the nature of product that determines the market structure there is
product differentiation; products are close substitutes and the market is
characterized by monopolistic competition. On the other hand, in case of no product
differentiation, the market is characterized by perfect competition, and if a product is
completely different from other products, it has no close substitutes and there is pure
monopoly in the market.
 Entry and Exit Conditions: The conditions for entry and exit of firms` in a market depend
upon profitability or loss in a particular market. Profits in a market will attract the entry of
new firms and losses lead to the exit.
Types of Market Structures
The type of market depends on the degree of competition prevailing in the
market. Broadly speaking, there are four types of competition prevailing in the
markets.These are:
 Perfect Competition
 Imperfect Competition
a. Monopoly
b. Monopolistic competition
c. Oligopoly
d. Duopoly
 Perfect Competition: Perfect competition is characterized by many sellers selling
identical products to many buyers.
 Monopoly: Monopoly is a situation of a single seller producing for many buyers. Its
product is necessarily extremely differentiated since there are no competing sellers
producing near substitute product.
 Monopolistic Competition: If differs in only one respect, namely, there are
many sellers offering differentiated product to many buyers.
 Oligopoly: In oligopoly, there are a few sellers selling competing products for
many buyers.
 Duopoly: A duopoly is a market that has only two suppliers, or a market that is
dominated by two suppliers to:-the extent that they jointly control prices
Pricing under different market structure
a. Perfect Competition
A perfectly competitive market is one in which the number of buyers and
sellers is very large, all engaged in buying and. selling a homogeneous product
without any artificial restrictions and possessing perfect knowledge of market at
a time, e.g., fruit and vegetable market.
 According to A. Koutsoyiannis, "Perfect competition is a market structure
characterized by a complete absence of rivalry among the individual
firms."
 According to R.G. Lipsey, "Perfect competition is a market structure in
which all firms in an industry are price-takers and in which there is
freedom of entry into, and exit from, industry."
 Features of Perfect Competition/Condition Necessary for Perfect Competition

 Large Number of Buyers and Sellers: The first condition is that there are large
number of buyers and sellers, and if not, no single producer or purchaser will be able to
influence the market- price by varying respectively his supply of demand.
 Homogeneous Product: The second condition of perfect competition is that the
articles produced by all firms should be standardized or exactly identical as a result no
buyer has any preference for the product of any individual seller over others. In other
words, the cross elasticity of the products of sellers is infinite.
 Free Entry and Exit: Under perfect competition, all firms in the industry will be earning
normal profit. This will happen only if there are no restrictions on the firms' entry into, or
exit from, that industry.
 Perfect Knowledge: The buyers and sellers should have perfect knowledge of the
market. The buyers and sellers should be fully aware of the prices that are being offered
and accepted.
 Absence of Transport Costs: Here free transport facilities have to be assumed. If the
same price is to rule, it is necessary that no cost of transport has to be incurred.
 Absence of Artificial Restrictions: The next condition is that there is complete
openness in buying and selling of goods.
Revenue concepts

Price of Good Quantity sold Total Revenue Average Marginal

X of Good X Revenue Revenue

10 10 100 10 -

9 20 180 9 8

8 30 240 8 6

7 40 280 7 4

6 50 300 6 2

5 60 300 5 0

4 70 280 4 -2
Relationship between AR & MR Curve
 when the average revenue remains constant, the marginal
revenue will also remain constant and will coincide with the
average revenue
 A firm can sell large quantities only at lower prices. In that
case, the average revenue of the product falls. When AR falls
MR will also fall. But fall in MR will be more than the fall in
the AR. Hence, marginal revenue curve will lie below the
average revenue line.
 Price Determined under Perfect Competition

 Perfect competition is a market setting in which there are a large number of sellers of
homogenous product.
 Each seller supplies a very small fraction of total supply. No single seller is powerful
enough to influence the market price. Nor can a given buyer influence the market
price.
 Market prices in the perfectly competitive market is determined by the
market forces- market demand and market supply.
 The market price is therefore determined for the industry and is given for each
individual firm and for each buyer.
 Thus a seller in a perfectly competitive market is price taker not a price
maker.
 The main problem of profit maximisation is not to determine the prices of the
product but to adjust its output to the market price so that profit is maximum.
 Conditions for Equilibrium of a Firm

 The marginal revenue should be equal to the marginal cost. i.e. MR = MC. If MR is
greater than MC, there is always an incentive for the firm to expand its
production further and gain by sale of additional unit, adds more to
cost than to reduce output since an additional unit adds more to cost
than to revenue. Profits are maximum only at the point where MR =MC.
 The MC Curve should cut MR curve from below. In other words, MC should have
positive slope.
Price Determined under Perfect Competition
Price Determination and Equilibrium of the Firm in Short Run
 A firm is price taker and not a price maker in the market.
 The difference between a competitive industry's role in determining the price
and output level and the firm role can be seen in following cases:

 Abnormal Profit/ Supernormal Profit: At the equilibrium level of output

a firm may get abnormal profit if its average revenue exceeds the
average cost of production.
 In the figure aside, firm's
equilibrium is attained at point
E where the MC curve
intersects the MR curve. At OP
price, firm produces OQ
output.
 At OQ output, firm's
average revenue (AR) is EQ,
while its average cost (AC)
is BQ.
 Since AR is more than AC,
firms get abnormal profit.
Thus, the firm gets abnormal
profit EB per unit of output,
total profit being PAPE, I;e per
unit profit multiplied by the
total output.
 Losses: At equilibrium output a
firm may suffer loss. It is
because of the fact that a part
of the fixed cost may not be
recovered in the short run.
In spite of these losses the firm
would decide to produce so
long as it is able to recover the
average variable cost.
 In the figure aside, E is the
equilibrium point and at
this point AR = EQ and AO
= BQ since BQ > EQ, firm is
earning BE per unit loss and
total loss is ABEP.
 Normal Profits or Break-Even:
When the firm just meets its
average total cost, it earns
normal profits. Here AR =
ATC
 The figure shows that MR = MC
at E. the equilibrium output is 0Q.
Since here AR = ATC or OP =
EQ, the firm is just earning normal
profits.

Conclusion:
 if AR = AC, the firm will get
normal profit (i e., breakeven)
 If AR > AC, the firm will get
abnormal profit.
 If AR < AC, the firm will suffer
loss.
 If AR < AVC, the firm will stop
production
Equilibrium of the Firm in the Long Run

 In the above figure, OQ is

equilibrium quantity. At this level of
output, average revenue and
average cost both equals to
QS, and hence the firm is making
only normal profits.
 At this point, since the average cost
is minimum, the average cost and
marginal cost will be identical, and
hence, the long run equilibrium
conditions for a firm ling will be:
 MR = LMC = LAC = AR =
Price
Equilibrium of the Firm in the Long Run (cont…)

 In a perfectly competitive market there is no restriction on the

entry or exit of the firms.
 The inefficient ones who undergo losses would either shut down
or would try to improve their efficiency.
 On the other hand, profit-earning firms will attract new firms to
be established.
 With the entry of new producers, total supply of the commodity
may increase as a result, price per unit will fall. Consequently, the
profit will vanish and all the firms will simply break-even. This
situation is known as that of long run equilibrium of
firm and industry in a perfect market.
 In the long run, all the firms only break even, that is, the
firms can earn only normal profits. This is because as the no-
loss-no-profit situation at which the firm's AR = AC.
Monopoly

 Monopoly is a market situation in which there is only one seller of

a product with barriers to entry of others.
 The product has no close substitutes.
 The cross elasticity of demand with every other product is very
low.
 This means that no other firms produce a similar product.
Monopolist can sell his commodity at any price he likes.
 He has the control over price. However, a monopolist can
certainly fix the price at which he will sell his commodity, but he
cannot, at the same time, determine the amount of commodity
that purchasers will buy.
 Price Determined Under Monopoly

 The twin conditions for

equilibriums in a monopoly
market are:
 MC = MR
 MC curve must cut MR curve
from below
 The figure aside shows that
MC curve cuts MR curve at E
that means at E, equilibrium
price is OP and equilibrium
output is 0Q
Monopoly Price during Short-Run
 Super-Normal Profit: In the short
run, SAC and SMC are the short-run
average and marginal cost curves, and
AVC is the average variable cost curve
of the firm.
 D = AR is the demand curve whose
corresponding marginal revenue curve
is MR.
 The short-run monopoly equilibrium
is at point E where the SMC curve cuts
the MR curve from below.
 The monopolist sells OM output at
MP Price. The price MP, being above
the short-run average cost MA, the
monopolist earns AP profit per unit of
output. Thus total monopoly profits
are AP x CA = the area CAPB.
 Normal Profit: In figure above,
the short-run equilibrium of the
monopolist is shown when he earns
only normal profit .
 The equality of SMC curve and MR
curve at point E determines OM
output which is sold at OB= MP
Price.
 Since the SAC curve is tangent to the
AR curve at this level of output, the
monopolist earns normal profit.
 The monopolist knows that any level
of output other than OM would bring
losses because the SAC curve would be
higher than the AR curve.
Minimum Loss: Figure above shows a
short-run situation in which the monopolist
incurs losses.
As usual, the equilibrium point E is
determined by the equation SMC = MR.
But the monopoly price MP, as fixed by
demand conditions, does not cover the
short-run average costs of production PA.
It just covers the average variable costs
MP, represented by the tangency of the
demand curve D and the AVC curve at
point P.PA is thus per unit loss which the
monopolist incurs. Total losses are equal to
BP x PA= BPAC.
In this figure, P is the shut down point
for the firm. If the market demand
conditions lower the price from MP
downwards, the monopolistic firm will
temporarily stop production. The firm will
close down.
Monopoly Price during Long-Run
 The long run equilibrium of the monopoly firm is attained at that level of
output where its marginal cost equals the marginal revenue.
 Monopoly firm in the long run gets abnormal profit. It is so because
the new firms are not allowed to enter the market.
 Monopoly firm does not suffer loss in the long run, because all cost in the
long-run is variable and these must be recovered.
 In case, a monopoly firm fails to recover the variable cost in the long run, it
would better stop production and quit the markets.
 In the figure above, firm's
equilibrium is attained at point M,
where the firm's LMC intersects MR.
At equilibrium price OK, the firm
produces OQ output.
 Since the output level OQ firm's
average revenue is more than its
average cost, it gets profit PR per unit,
total profit being equal to the shaded
area KLRP.
Price Discrimination
 Price discrimination means charging different prices from different customers
or for different units of the same product.
 According to Joan Robinson, "The act of selling the same article, product
under a single control, at different prices to different buyers is known as price
discrimination."
 The family doctor in your neighborhood charges higher fees from a rich patient
compared to the fees charged from a poor patient even though both are
suffering from viral fever.
 Electricity companies sell electricity at a cheaper rate for home consumption in
rural areas than for industrial use.
Conditions for Price Discrimination
 Market Imperfections Price discrimination is possible when there is some degree of
market imperfection. The individual seller is able to divide and keep his market into
separate parts only if it is imperfect
 Agreement among Rival Sellers: Price discrimination also takes place when the
seller of a commodity is a monopolist or when rivals enter into an agreement for the sale
of the product at different prices to different customers.
 Geographical or Tariff Barriers: Discrimination may occur on geographical
grounds. The monopolist may discriminate between home and foreign buyers by selling
at a lower price in the foreign market than in the domestic market.
 Differentiated Products: Discrimination is possible when buyers need the same
service in connection with differentiated products. Railways charge different rates for
the transport of coal and copper.
 Ignorance of Buyers: Discrimination also occurs when small manufacturers sell
goods made to order. They charge different rates to different buyers depending upon the
intensity of their demand for the product.
Price-Output Determination under Price Discrimination

 Suppose there are two markets to which a price-discriminating monopolist has

to sell his product market A and market B. Both markets have different price
elasticity’s, demand is more elastic in market B than in Market A.
 Figure illustrates price and output determination under price discrimination.
The monopolist sells his product in two markets, A and B.
 Market A has high elastic demand for the product and market B has low
elastic demand.
 Accordingly, the demand curve in market A is Da and its corresponding
marginal revenue curve is MR, and in market B the corresponding curves are
Db and MRb.
 Panel 3 in above figure shows AMR, the total marginal revenue curve drawn by
the lateral summation of the MRa and MRb curves, and MC is the marginal cost
curve. The point of intersection between the AMR and MC curves at E
determines the equilibrium level of output OM.
 The monopolist divides this output between the two markets by equating the
marginal cost ME with the marginal revenue of each market.
 To equal the marginal Cost MC with MRa and MRb draw a line EA parallel to the
horizontal axis. It cuts MRa at E1 and MRb at E2 which become equilibrium points
for the sale of output in each market. Thus the quantity sold in the market A is OM1
and in market B it is OM2 so that OM1+OM2 equal the total output OM.
 The price in the highly elastic (foreign) market is M1P1, and in the less elastic
(domestic) market M2P2.
 We may conclude that under price discrimination the monopolist sells his product
in two separate markets with different elasticity’s of demand so that he maximizes
his profits when, he sells more at a lower price in the foreign market with elastic
demand and sells less at higher price in domestic market with less elastic demand.
Conditions for Equilibrium
a. He equates MC with AMR (aggregate marginal revenue). Thus condition one is
MC = AMR.
b. The profit in each market is maximized by equating MC to the corresponding
MR of each market, i.e., MC = MRa = MRb.
Imperfect competition/monopolistic competition

 In real world neither perfect competition nor monopoly exits. Infact, almost
every market seems to exhibit characteristics of both perfect
competition and monopoly.
 It refers to a market situation where there are many firms selling a
differentiated product."There is competition which is keen, though
not perfect, among many firms making very similar products".
 No firm can have any perceptible influence on the price-output policies of the
other sellers nor can it be influenced much by their actions. Thus,
monopolistic competition refers to competition among a large
number of sellers producing close but not perfect substitutes for
each other.
 Features of Monopolistic Competition

 Large Number of Sellers: In a monopolistically competitive market there are a large

number of sellers who individually have a small share in the market. Unlike
perfect competition, these large numbers of firms do not produce perfect substitutes. Instead,
they produce and sell products which are close substitutes of each other. This makes the
competition among firms real and tough.
 Product Differentiation: In a monopolistic competitive market, the products of different
sellers are differentiated on the basis of brands. These brands are generally so much advertised
that a consumer starts associating the brand with a particular manufacturer and a type of brand
loyalty is developed. Product differentiation gives rise to an element of monopoly to the
producer over the competing product.
 Freedom of Entry & Exit: New firms are free to enter into the market and existing firms
are free to quit it.
 Independent Behavior: In monopolistic competition, every firm has independent
policy. Since the number of sellers is large, none controls a major portion of the
total output. No seller by changing its price-output policy can have effect other sales and in
turn be influenced by them.
 Product Groups: There is no any 'industry' under monopolistic competition but a 'group' of
firms producing similar products. Each firm produces a distinct product and is itself an
industry. cars, cigarettes, etc.
Price-Output Determination under Monopolistic Competition
 Equilibrium of a Firm: In a monopolistically competitive market since the product is
differentiated between firms, firm does not face a perfectly elastic demand for
its products. Each firm is a price maker and is in a position to determine
price of its own product. As such, the firm is faced with a downward sloping
demand curve for its product. Generally, the less differentiated the product is from
its competitors, the more elastic this curve will be.
 Conditions for the Equilibrium of an individual firm: The conditions for price-
output determination and equilibrium of an individual firm may be stated as follows:
a. MC = MR
b. MC curve must cut MR curve from below
Short-Run Equilibrium of the Industry

 Super-normal Profit: In
figure 1 the short-run
marginal cost curve (SMC)
cuts the MR curve at E. This
equilibrium point establishes
the price QA (= OP) and
output OQ. As a result, the
firm earns supernormal
profit represented by the area
PABC.
 Normal Profit: Figure 2
indicates the same
equilibrium points of price
and output. But in this case,
the firm just covers the
short-run average unit
cost as represented by
the tangency of demand
curve D and the short-run
average unit cost curve SAC
at A. It earns normal profit.
 Minimum Loss : Figure 3 shows
a situation where the firm is not
able to cover its short run average
unit cost and therefore incur losses.
Price set by the equality of SMC
and MR curves at point E is QA
which covers only the average
variable cost.
 The tangency of the demand curve
D and the average variable cost
AVC at A makes it a shutdown
point. If the firm lowers the price
below 01 have to stop further
production. However, at this price
the firm will incur losses equal 'to
the area CRAP during the short-
run in the hope of lowering its costs
in the long-run.
Long Run Equilibrium of the Industry

 If the firms in a monopolistically competitive

industry earn super-normal profits in the
short-run, there will be an incentive for new
firms to enter the industry.
 As more firms enter, profits per firm will go
on decreasing as the total demand for the
product will be shared among a larger number
of firms. This will happen till all the profits are
wiped away and all the firms earn only normal
profits.
 Thus in the long-run all the firms will earn
only normal profits. In the figure aside, all
firms are in long-run equilibrium at point E
where (1) LMC = MR, and (2) LMC cuts MR
from below and the LAC curve is tangent to
the D/AR curve at point A.
 Since price QA = LAC at point A, each firms
'is` earning normal profits and no firm has the
tendency to enter or leave the industry.
Oligopoly
 Oligopoly is situation where a few large firms compete against each
other and there is an element of interdependence the decision
making of these firms. Each firm in the oligopoly recognizes this
interdependence. Any decision one firm makes (be it on price, product or
promotion) will affect the trade of the competitors and to results in
countermoves.
 In other words, Oligopoly is a market situation in which there are a few (but
more than two) firms selling homogenous or differentiated but close substitute
products.Thus, there can be two kinds of oligopoly:
 Oligopoly with product differentiation, and
 Oligopoly without product differentiation. It is also known as 'competition
among a few'.
Characteristics of Oligopoly Market
 Interdependence: The most important feature of oligopoly is interdependence in
decision-making of the few firms which comprise the industry.
 Importance of Advertising and Selling Costs: A direct effect of
interdependence of oligopolists is that the various firms have to employ various
aggressive and defensive marketing weapons to gain a greater share in the market or
to maintain their share.
 Indeterminate Demand Curve: Because of interdependence of the firms in
oligopoly and because of inability a particular firm to predict the behavior of other
firms, the demand curve facing an oligopolistic firm loses its definiteness and
determinateness.
 Competition and Combination: In oligopoly the competition is not perfect
there may be fierce, violent, cruel and cut throat competition on the one hand. But
on the other hand, oligopolist realizes the disadvantage of competition and rivalry.
Therefore, the oligopolist firms may work out some policy of collusion to avoid
harmful competition.
Price determination under Oligopoly
 There is no definite theory of price-output determination under oligopoly. The
reason being that there is interdependence in the decision-behavior of oligopolistic
firms and the uncertainty about the reaction patterns of rival firms the demand
curve of each firm is Uncertain. Due to interdependence in the behavior of firms
and uncertain reaction patterns, there can be a variety of behavior patterns:
a. Rivals may decide to co-operate in the pursuit of their objectives
b. They may fight each other to increase their market shares
c. Agreements may be of wide variety.
 Therefore, a large variety of models about price-output determination under
oligopoly have been developed by economists depending upon assumptions about
group behavior of oligopolist firms.
a. Non-collusive oligopoly model of Sweezy (Kinked Demand Curve)
b. Collusive oligopoly model.
Kinked Demand Curve
Assumptions
 The kinked demand curve hypothesis of price rigidity is based on the following
assumptions:
 There are few firms in the oligopolistic industry.
 The product produced by one firm is a close substitute for the other firms.
 The product is of the same quality.There is no product differentiation.
 There are no advertising expenditures.
 There is an established or prevailing market price for the product at which ail the sellers
are satisfied.
 The Prevailing price level is MP
and the firm produces and sells
output OM, Now the upper
segment dP of the demand curve
dD is relatively elastic and lower
segment PD is Fr relatively
inelastic. This difference in
elasticity's is due to the particular
competitive reaction pattern
assumed by the kinked demand
Curve hypothesis.
 Each oligopolist believes that if he
lowers the price below the
prevailing level; its competitors
will follow him and will
accordingly lower prices, whereas
if he raises the price above the
prevailing level, its competitors
will not follow its increase in price.
Pricing under collusion (Collusive Oligopoly)
 When competing firms make some kind of agreement about pricing and output
they are said to collude. The agreements may be formal or facet but formal or
open agreements are illegal in most countries. The agreement between
oligopolists is generally tacit or secret. When firms enter into collusive
agreement, collusive oligopoly comes into existence collusion can be of two
types:
 Perfect collusion (Cartels)
 Imperfect collusion (Price leadership)
Perfect Collusion (Cartels)
 When rival oligopolists enter into price competition with each other they will
drive the market price down to the level of production cost. There is, therefore,
a strong incentive for the oligopolists to collude, raise price and restrict output.
 Collusion is just the opposite of competition. It means that the firms co-operate
with each other in taking joint actions to keep their bargaining position stronger
against the consumer.
 Perfect collusion primarily consists of cartel arrangements. A cartel is an
explicit agreement among independent firms on subjects like prices, output,
market sharing, etc. The desire of the firms to have large joint profits gives
impulse to form cartels.
 There are mainly two types of cartels:
a. Centralized cartels
b. Market-sharing cartels.
 Centralized Cartels: Under centralized cartel system the price and output
decisions for the whole industry as well as of every firm are taken by central
Cartel Board so as to achieve maximum joint profits. Cartel board fixes the
output quota of each member firm.
 Total profits are distributed among the firms according to prior agreement.
 The total output of the industry and price are determined in such a way that the
total cost of production is minimum.
 In this figure, AR (D) and CMR
are demand curve and marginal
revenue curve of the industry. EMC
is combined marginal cost curve.
 The industry is in equilibrium at E
point where EMC cuts CMR and
equilibrium output is QC. Thus
equilibrium price is OP.
 Now the question is how the output
quota of each firm is determined.
Each firm will be asked to produce
that much output at which MC of
each firm is equal to the MC of
total equilibrium output. The
marginal cost of each firm will be
equal.
Market Sharing Cartel
 Market Sharing by Non-price Competition: Here firms agree to sell at
an agreed uniform price. But member firms are free to produce and sell that
quantity at which they maximize their individual profits. Firms are also free to
change the design of their product and other method, except price, to promote
sales.
 Market Sharing by Quota: The oligopolistic firms may agree not only to sell
at a uniform price but also about the quota of output produced by each firm. If
products and costs of different firms are perfectly identical then price and
output quota of each is determined in such a way that joint profits are
maximum, i.e., monopoly solution will emerge. In cases of differences in the
cost of production, the quota of different firms is decided by bargaining
between firms on the basis of past sales of firms or productive capacity of firms.
Imperfect Collusion (Price Leadership)
 In an oligopolistic 'situation, there are more than two or a few sellers who are
able to exercise monopolistic influence.
 In such a market situation, we generally find that there exists what is called the
'price leadership'.
 Under price leadership, one firm assumes the role of a price leader and fixes
the price of the product for the entire industry.
 The other firms in the industry simply follow the price leader and accept the
price fixed by him and adjust their output to this price.
 The price leader is generally a very large or a dominant firm or a firm with the
lowest cost of production.
Types of Price Leadership

 Price Leadership of Dominant Firm: Under this type of price leadership, it is found
that there is generally one firm among the firms operating in the industry, which
produces the bulk of the product of the industry: By virtue of this position, it is able to
dominate the entire market. It sets the price and the other firms simply accept this price.
 Barometric Price Leadership: Under this type of price leadership, an old,
experienced and the largest firm assumes the role of a leader, but undertakes also to
protect the interests of all firms instead of merely promoting its own interest. In a way it
acts as the custodian of firms operating in the industry. It fixes a price which is found to
be suitable for all the firms in the industry.
 Exploitative or Aggressive Price Leadership: in this case, one big firm comes to
establish its supremacy in the market by following aggressive price policies. This firm
compels other firms to follow it and accept the price fixed by it.
 Price output Determination under Price Leadership
Assumptions:
 There are only two firms A & B and firm A has a lower cost of production than B.
 The product of the firms is homogenous or identical so that the consumers are indifferent as
between the firms.
 Both A and B have equal share in the market I;e they are facing the same demand.
 Suppose there are two organizations, A and B producing identical products where organization
A has a lower cost of the production than organization B. Therefore, consumers are indifferent
between these two organizations due to identical products. This implies that both the
organizations would face same demand curve, which further represents equal market share.
 In Figure-4, DD is the demand curve of both the organizations and MR is their marginal
revenue. MCa and MCb are the marginal cost curves of organization A and B respectively. As
stated earlier, the cost of production of organization A is less than B, thus, MCa is drawn below
MCb.
 Let us first start the discussion of price leadership with the case of organization A. The profits
of organization A would be maximized at a point where MR intersects MCa. At this point, the
output of organization A would be OQ with the price level OP. On the other hand, the profits
of organization B would be maximized at a point where MR intersects MCb with output OQ1
and price OP1.
 In such a case, the price of organization B is more as compared to organization A. However,
both the organizations have to charge the same price as products are homogeneous. In this
case, organization A is the price leader and organization B is the follower.
 Thus, organization A will dictate the price to organization B. Both the organizations will
follow the same output, OQ and price OP. However, the profits earned by organization B are
less than A, as it has to produce at price OP which is less than its profit maximizing price,
OP1. In addition, the organization B also has high costs of production that leads to lower
profits at price OP1.