Transcript Monopolistic Competition: The Chamberlin Model

Factors Determining Market
Structure:
1.No. of independent sellers (large, few, two,
one)
2.Seller Concentration (Non-existent, low,
medium, high)
3.Product Differentiation (Homogeneous and
perfect substitutes), close substitutes, slightly
differentiated, having no substitutes)
4.Condition of Entry (Free, Difficult but not
impossible, impossible or prohibited by law)
Models of Market Structure
•
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1.Perfect Competition
2.Imperfect Competition
-Monopolistic Competition
-Oligopoly
-Duopoly
3.Monopoly
The Limiting Cases of Market
Structure:
• Perfect Competition and Monopoly
Perfect Competition: Ideal Form of
Market Structure
Characteristic Features:
•
Many sellers and buyers
•
Seller concentration is non- existent
•
Products are homogeneous/ are perfect substitutes
•
Entry and exit is free
•
Buyers- sellers are fully informed
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Perfect factor mobility between firms and industries
•
There is no scope for uncertainties in the future as the
buyers and the sellers have perfect foresight about the
future changes in prices and output
• Under perfect competition, every individual
seller and buyer is a price taker and not a
price maker.
• AR and MR are constant and equal at all
levels of output and AR=MR
• Position of individual firms horizontal
demand or AR curve is determined by the
market equilibrium price
• Market equilibrium price is the price at
which total market demand = total market
supply
In most free market economies,
PC is an exception and not the
rule.
Majority firms operate under
conditions
of
oligopoly
or
monopolistic competition
PC shows what the ideal market
structure can be
It serves as a reference point or
benchmark
We come to know how imperfect
markets in the real word are !
Monopoly
• Monopoly means a market where a single
firm controls the entire supply of a product
which has no close substitutes.
• Distinction between firm and industry is
irrelevant in the case of monopoly
• It has power to control price of its products
• If demand is the same, firm can rise the
price as much as it wishes by reducing out
put
• Monopolist is price maker
What gives monopoly power ?
1. Being the only producer
+
2. Unavailability of close substitutes
Learner Index
It is used to measure monopoly power
Monopoly power of a firm = (P-MC)/ P
Where
P = Price
MC = Marginal Cost
Under PC, Monopoly power of a firm is zero
because P = MC
Criteria for determining existence of
monopoly:
1. Largest producers controls at least 75 %
of total output
2. Large Number of firms contribute to the
remaining 25 % output
3. Whether any of the minor firms supply
around 10 % of output
Monopolistic Competition: The
Chamberlin Model
M C is a form of market structure in which
many firms supply products that are slightly
differentiated from the point of view of
buyers.
Products are close but not perfect substitutes
because buyers do not regard them as
identical
Each firm is sole producer of a brand/product
It is a monopolist in this sense
But as various brands are close substitutes,
these producers are involved in keen
competition
Product differentiation is real or imaginary
Real differentiation
Eg. Differences in quality such as shape,
colour, flavour, packing, after sale service etc.
Imaginary differences
Eg. Buyers are made to imagine that such
differences exist and are important for ex., a
detergent with lemon, toothpaste with salt, AC with
bio-filter etc.
Due to product differentiation each firm has some
degree of control over price
Buyers develop brand loyalty
Basic characteristics of Mon Comp.
1. Large no of buyers and sellers
2. Seller concentration is insignificant
3. Entry and exit are free
4. There is P D
•Supernormal profits attract new firms.
•No. of firms goes up
•No. of brands goes up
•Market share of each firm decline
Cartels
When oligopoly firms find it advantageous to
co-ordinate their behaviour through explicit
agreement, cartels are formed
Cartels become possible as number of firms is
small
Cartels decide on common price policy to
avoid rivalry
For successful cartels cost conditions of firms
have to be similar
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