BBA 1 Unit 3

Analysis of Markets
What is the concept of market?
market, a means by which the exchange of goods and services takes
place as a result of buyers and sellers being in contact with one another,
either directly or through mediating agents or institutions. Markets in the
most literal and immediate sense are places in which things are bought
and sold

What is the concept of market from economic sense?

In Economics, a market is referred to as an arrangement where buyers
and sellers come in close contact with each other whether it is directly or
indirectly to buy and sell goods. A market doesn't mean that buyers and
sellers should meet in a particular place.

What are the 4 types of markets?

The four main types of market structures are perfect competition,

monopolistic competition, oligopoly, and monopoly. These structures
 are defined by the number of sellers, the nature of products, and the ease
of entry and exit into the market.

1. Perfect Competition:
 Numerous small firms sell identical products.
 No single firm can influence market prices (price takers).
 Easy entry and exit for firms.
2. Monopolistic Competition:
 Many firms sell differentiated products (product differentiation).
 Some degree of market power, allowing firms to set prices within limits.
 Easy entry and exit for firms.
3. Oligopoly:
 A few large firms dominate the market.
 Significant barriers to entry for new firms.
 Firms may engage in strategic behavior, such as price wars or collusion.
4. Monopoly:
 A single firm controls the market.
 High barriers to entry (legal, technological, or natural).
 The firm can set prices and output levels.

In a perfectly competitive market, price and output determination are

driven by the interaction of market demand and supply. Individual firms
are price takers, meaning they cannot influence the market price, and
they produce where marginal cost equals price.

Elaboration:
 Price Determination:
The market price is established at the point where the aggregate
demand and supply curves intersect, known as the equilibrium
point. This price is then taken as given by all firms in the market.
 Firm's Output Decision:
Each firm, being a price taker, maximizes its profits by producing the
quantity where its marginal cost (MC) equals the market price
(P). Mathematically, this is represented as P = MC.
 Short-Run Equilibrium:
In the short run, a firm can earn normal, supernormal, or even make
losses. If the price is above the average total cost (ATC), the firm earns
profits; if it's below the ATC but above the average variable cost
(AVC), the firm continues to operate but makes losses; if the price is
below the AVC, the firm shuts down.
 Long-Run Equilibrium:
In the long run, firms can enter or exit the market. This process ensures
that no firm earns supernormal profits. Entry of new firms increases
supply, driving the price down, while exit of firms decreases supply,
raising the price.
 Efficient Resource Allocation:
Under perfect competition, resources are allocated efficiently, as firms
are producing at the lowest possible cost and consumers are receiving
goods at the lowest possible price.

What is meant by a monopoly?

A monopoly is a structure in which a single supplier produces and sells a
given product or service. If there is a single seller in a certain market and
there are no close substitutes for the product, then the market structure is
that of a "pure monopoly".
What is a monopoly example?
 Public utilities: gas, electric, water, cable TV, and local telephone
service companies, are often pure monopolies. 2. First Data Resources
(Western Union), Wham-O (Frisbees), and the DeBeers diamond
syndicate are examples of "near" monopolies.

Monopolistic competition is a market structure characterized by many

firms offering similar but differentiated products, where each firm has
some degree of control over its price and has low barriers to entry and
exit. This means that firms compete by differentiating their products,
rather than by simply lowering prices.

Key features of monopolistic competition:

 Many firms:
There are numerous firms in the industry, each with a relatively small
market share.
 Differentiated products:
Products are similar but not identical, with differences in features,
quality, branding, or location.
 Low barriers to entry and exit:
New firms can enter the market easily, and existing firms can exit
relatively quickly.
 Price setters:
Firms have some control over their prices, as they can differentiate
their products, but they are also price takers in the sense that they must
consider the prices of their competitors.
 Non-price competition:
Firms compete through branding, advertising, and other forms of non-
price competition.
Examples of monopolistic competition:
 Restaurants: Many restaurants offer similar food but differentiate
themselves through location, ambiance, service, and menu choices.
 Retail stores: Clothing stores, supermarkets, and other retail outlets offer
a wide variety of products, and each store differentiates itself through
branding, customer service, and store layout.
 Soft drinks: Coca-Cola, Pepsi, and other soft drink brands are similar in
their basic product, but they differentiate themselves through branding,
taste, and marketing.
Monopolistic competition vs. other market structures:
 Monopoly: A single firm controls the entire market.
 Oligopoly: A few large firms dominate the market.
 Perfect competition: Many firms sell identical products, and there are
no barriers to entry or exit.

What is monopolistic competition and an example?

Monopolistic competition exists when many companies offer

competitive products or services that are similar but not exact
 substitutes. Hair salons and clothing are examples of industries with
monopolistic competition.

What are the main features of monopolistic competition?

The main features of monopolistic competition are as 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.

What are the benefits of monopolistic competition?

The advantages of monopolistic competition include:
 a few barriers to entry;
 active business environment;
 customers can obtain a great variety of products and services since they
are differentiated;
 consumers are informed about goods and services available in the
market;
 higher quality of products;

What are the 4 types of market structure?

Economic market structures can be grouped into four categories: perfect
competition, monopolistic competition, oligopoly, and monopoly

What is a real life example of a monopoly?

A real-life example of a monopoly is a scenario where a single company
controls the supply of a product or service, and there are no close
substitutes, says Study.com. This can happen due to significant barriers
to entry, such as high infrastructure costs or legal restrictions. Examples
 include public utilities like electricity or water companies, or a
pharmaceutical company with a patent on a
drug. Historically, Investopedia says that monopolies like Standard Oil
in the US oil industry were broken up due to concerns about consumer
welfare and competition.

Examples of Monopolies:
 Public Utilities:
In many areas, there's only one company providing electricity, water, or
sewage services, making them natural monopolies due to the high
infrastructure costs involved.
 Pharmaceutical Patents:
A company with a patent on a new drug has a temporary monopoly on
producing and selling that drug, as other companies can't legally do so
until the patent expires.
 Cable and Internet Providers:
In some areas, a single company might provide cable television or
internet services, particularly if they own the infrastructure.
 Historical Examples:
Standard Oil, controlled by John D. Rockefeller, was a historical
monopoly that eventually faced antitrust action.
 IRCTC and Coal India:
Smallcase mentions IRCTC controls railway ticketing in India, and
Coal India dominates coal production, making them examples of
monopoly stocks.
Key Characteristics of a Monopoly:
 Single Seller: Only one firm provides the product or service.
 No Close Substitutes: Consumers have limited or no alternatives for the
product or service.
 Barriers to Entry: Significant obstacles prevent other companies from
entering the market.
 Market Power: The monopolist can influence prices and supply, as they
have control over the market.

A monopolistic competitive industry has the following features:

 Many firms.
 Freedom of entry and exit.
 Firms produce differentiated products.
 Firms have price inelastic demand; they are price makers because
the good is highly differentiated
 Firms make normal profits in the long run but could make
supernormal profits in the short term
 Firms are allocatively and productively inefficient.
Diagram monopolistic competition short run
 In
the short run, the diagram for monopolistic competition is the same as
for a monopoly.
The firm maximises profit where MR=MC. This is at output Q1 and
price P1, leading to supernormal profit

Monopolistic competition long run

 D
emand curve shifts to the left due to new firms entering the market.
In the long-run, supernormal profit encourages new firms to enter. This
reduces demand for existing firms and leads to normal profit. I

Efficiency of firms in monopolistic competition

Examples of monopolistic competition

 Restaurants – restaurants compete on quality of food as much as

price. Product differentiation is a key element of the business.
There are relatively low barriers to entry in setting up a new
restaurant.
 Hairdressers. A service which will give firms a reputation for the
quality of their hair-cutting.
  Clothing. Designer label clothes are about the brand and product
differentiation
 TV programmes – globalisation has increased the diversity of tv
programmes from networks around the world. Consumers can
choose between domestic channels but also imports from other
countries and new services, such as Netflix.
Limitations of the model of monopolistic competition

 Some firms will be better at brand differentiation and therefore, in

the real world, they will be able to make supernormal profit.
 New firms will not be seen as a close substitute.
 There is considerable overlap with oligopoly – except the model of
monopolistic competition assumes no barriers to entry. In the real
world, there are likely to be at least some barriers to entry
 If a firm has strong brand loyalty and product differentiation – this
itself becomes a barrier to entry. A new firm can’t easily capture
the brand loyalty.
 Many industries, we may describe as monopolistically competitive
are very profitable, so the assumption of normal profits is too
simplistic.

Key difference with monopoly

In monopolistic competition there are no barriers to entry. Therefore in
long run, the market will be competitive, with firms making normal
profit.

Key difference with perfect competition

In Monopolistic competition, firms do produce differentiated products,
therefore, they are not price takers (perfectly elastic demand). They have
inelastic demand.

New trade theory and monopolistic competition

New trade theory places importance on the model of monopolistic

competition for explaining trends in trade patterns. New trade theory
 suggests that a key element of product development is the drive for
product differentiation – creating strong brands and new features for
products. Therefore, specialisation doesn’t need to be based on
traditional theories of comparative advantage, but we can have countries
both importing and exporting the same good. For example, we import
Italian fashion labels and export British fashion labels. To consumers,
the importance is the choice of goods.

Oligopoly
An oligopoly is a market structure dominated by a few large
firms. These firms have significant influence over prices and market
conditions, often leading to limited competition and potential
collusion. Essentially, it's a market where a small number of companies
control a large portion of the industry.

Here's a more detailed look:

 Characteristics:
 Few Dominant Firms: A small number of companies control the majority
of the market.
 Barriers to Entry: It's difficult for new companies to enter the market due
to factors like high initial investment costs, established brands, or
regulations.
 Interdependence: The actions of one firm can significantly affect the
others, leading to strategic decision-making and potential cooperation or
rivalry.
 Potential for Collusion: Firms may cooperate (explicitly or tacitly) to set
prices or limit output, which can lead to higher prices for consumers.
 Examples:
The car industry, airline industry, and telecommunications industry are
often cited as examples of oligopolies.
 Impact on Consumers:
 Oligopolies can lead to higher prices, limited product choice, and
reduced innovation compared to more competitive markets.

 Compared to Monopoly and Perfect Competition:

Oligopoly sits between monopoly (one firm) and perfect competition
(many firms with no barriers to entry).
What are the 4 characteristics of oligopoly?

The most important characteristics of oligopoly are interdependence,

product differentiation, high barriers to entry, uncertainty, and price
setters. As there are a few firms that have a relatively large portion of the
market share, one firm's action impacts other firms. This means that
firms are interdependent.
What are the six types of oligopoly?
Types of oligopolies
 Perfect and imperfect oligopolies. Perfect and imperfect oligopolies are
often distinguished by the nature of the goods firms produce or trade
in. ...
 Open and closed oligopolies. ...
 Collusive oligopolies. ...
 Partial and full oligopoly. ...
 Tight and loose oligopoly.