Forms of Market and Price Discrimination

 

What is a Market?

To understand the nature and scope of economics of Market and Price Determination, we have got an idea of what is market in terms of economics and commerce. Basically, a market is a mechanism or an arrangement in which the buyers and the sellers are involved. The buyers and the sellers of a commodity or service come into contact with one another and complete the act of sale and/or purchase on mutual agreements by the exchange of money. 

Forms of Market

Broadly categorising, there are two forms of market namely:

• Perfect competition 
• Imperfect competition 

Perfect Competition 

A perfectly competitive market is that type or form of market where there are a large number of buyers and sellers who are selling and buying identical products at a uniform price. There is free entry and exit of firms and the absence of government control.

Since the price under perfect competition remains constant, AR and MR curves coincide with each other and become equal and parallel to the X-axis. 

Features Of Perfect Competition

There are various features of perfect competition:

• Very large number of buyers and sellers 
• Homogeneous or identical products 
• Free entry and exit of firms in the market 
• Perfect mobility
• Perfect knowledge 
• A perfectly elastic demand curve
• No transportation cost involved 

Monopoly Market 

A monopoly market is that form of market structure where there is a single seller and a large number of buyers for a product or service. There is an absence of close substitutes to the products or service. A monopoly firm is regarded as an industry itself and hence can set price to its maximum advantage. 

Under a monopoly market structure, the AR curve or the demand curve is downward sloping from left to right and is less elastic than that of a monopolistic market structure. Hence, in order to increase demand, the firm has to reduce the price. 

Features of Monopoly Market 

Here are some features of a monopoly market structure:

• Single seller and a large number of buyers 
• Restrictions on the entry and exit of new firms into the industry
• Full control over price 
• Absence of close substitutes in the market 
• Price discrimination 
• Price maker 
• Downward sloping less elastic demand curve

Monopolistic Market

A monopolistic market structure is a form of market structure where there are a large number of buyers and sellers and where the sellers sell differentiated products but not identical or homogenous. 

Under the monopolistic market structure, the AR (demand) curve is sloping downward from left to right.  Also, the AR curve is more elastic and flatter than that of the AR curve under a monopoly market structure. Hence, when there is any change in price, the change in demand will be relatively more under a monopolistic market structure. 

Features Of Monopolistic Market 

These are the features of a monopolistic market structure:

• A large number of buyers and sellers 
• Selling costs which include the cost of advertisement and sales promotion
• Product differentiation which means that the products of different producers or sellers are different on the basis of price, colour, taste, packaging, size, shape and etc. 
• Free entry and exit of firms 
• Partial control over price 
• Lack of perfect knowledge 
• Imperfect mobility as factors of production and products are not perfectly mobile 
• An elastic and downward sloping demand curve 

Oligopoly Market 

An oligopoly market is that type of market structure in which there are a few large firms or sellers who compete with each other or against each other and have interdependence in their decision making. 

On the basis of production, an oligopoly market structure can be categorised into two categories:

• Collusive oligopoly: Where all the firms decide to avoid competition and determine the price and quantity of output.
• Non- collusive oligopoly: Where all firms determine the price and quantity of output on the basis of the action and reaction of the competing and rival firms in the market.

On the basis of product differentiation, an oligopoly market structure can be further categorised into two categories:

• Perfect Oligopoly: It refers to a perfect or pure oligopoly when the firms deal with homogeneous products.
• Imperfect Oligopoly: Where the oligopoly is said to be imperfect because the firms deal in heterogeneous products. 

Features of Oligopoly Market

These are the features of a monopolistic market structure:

• Few but large sellers 
• The firms produce homogeneous or differentiated products 
• Price rigidity 
• Demand cannot be determined under oligopoly as the demand curve is a kinked demand curve
• All the firms are interdependent with respect to price determination

Some Important Terms

• Equilibrium Price: An equilibrium price is that price at which the market demand is equal to the market supply of a commodity or service.
• Market Equilibrium: A market equilibrium is that state where market demand is equal to the market supply and when there is no excess demand and excess supply in the market.