Post on 30-May-2018
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IN CRITICAL MOMENTS EVEN THE VERY POWERFUL
HAVE NEED OF THE WEAKEST
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MARKETS
is a situation where buyers and
sellers come in contact with each other for
buying and selling goods and services at a
particular price at a point of time.
Two Parties
Commodity or Services
Price
Time
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Market as per competition
Pure or Perfect competition
Imperfect competition
(1) Monopolistic Competition
(2) OligopolyDuopoly
Monopoly
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Market as per competitionMarket as per competition
Perfect
Competition
Imperfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly Duopoly
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Perfect Competition
Large number of buyers and sellers
Homogeneous products
Firm is a pricetaker
Free Entry and Exit
Prefect Knowledge
Prefect mobility of factors of production.
No transport cost
Examples: Vegetable market, Agricultural market
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Price Determination under PC
Price (Rs) Quantity DD Quantity SS Equilibrium
2 900 00 SS
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Revenue Relationship under PC
Price (Rs.) Quantity TR MR
10 1 10 10
10 2 20 10
10 3 30 10
10 4 40 10
10 5 50 10
10 6 60 10
10 7 70 10
10 8 80 10
10 9 90 10
10 10 100 10
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SSDD
10
400
E DD=AR=MR
Ep=Infinity
FirmIndustry
Price-Output Determination under Perfect
Competition
Quantity Demanded and
Supplied
00
10
Output
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SR- Price Output determination
under Perfect Competition
X
Y
oOutput
R
evenue
&
Costs
AR=MR=DD
MC
F E
Qo Q1
P
MR>MC
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SR- Price Determination under
Perfect Competition
MC
AC
AR=MR=DD
EP
sR
Abnormal profits
Qo Output X
Y
Reven
ueandC
ost s
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SR- Price Determination under
Perfect Competition
AR=MR=DD
MC
AC
EP
output X
Y
o
Revenuea
nd
Cost s
Q
Break-even point
Normal Profits
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SR- Price Determination under
Perfect Competition
X
Y
output
R
evenue a
nd
Cost
o
AR=MR=DD
MCAC
E
Q
P
R S
Super normal Profits
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LR- Price Determination under
Perfect Competition
LMC
LAC
E
P
outputX
Y
AR=MR=DDReven
ue
andCost s
Qo
Normal profits
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Monopoly Competition
One Seller many buyers
Single product
Firm is a Price makerBarriers to Entry
Price DiscriminationExamples: Railways, Bajaj Autoricksaw
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SR- Price Determination in Monopoly
MR
AR=DD
Qo
s
P
R
E
T
MCAC
output
R
evenueand C
ost s
X
Y
Supernormal
Profits
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X
Y
E
Q
sP
TR
MC
AC
AR=DD
MR
R
evenueand C
ost s
o
Abnormal
Profits
SR- Price Determination in
Monopoly
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X
Y
o
AR=DD
MR
MC
AC
E
Q
P s
output
R
even
ueandC
ost s
Normal Profits
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LR- Price Determination under
Monopoly
Under Monopoly the firm
continues to earn Super-
normal profits during long-run
as there is barrier to entry.
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LR- Price Determination in Monopoly
MR
AR=DD
Qo
s
PR
E
T
LMCLAC
output
R
evenueand C
ost s
X
Y
Supernormal
Profits
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Price discrimination
..it is charging different prices to
different customers for the same
product.Price discrimination is Possible:--
Legal Sanction
Nature of commodityGeographical Barriers
Ignorance of Buyers
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Price discrimination is profitable:--
If the elasticity is different in
different markets. The monopolistwill charge a higher price in an
inelastic market and low price in an
elastic market.
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AR=DDa
MRaMRb
AR=DDb
AMR
AR=DD
MC
N
N
Ea Eb E
Pb
a
Price Discrimination under Monopoly
Sub-Market -A
Inelastic
Sub Market B
Elastic
Total Market
Qa Qb Q
Comparison of Price and output
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Comparison of Price and output
in between Perfect Competition
and Monopoly
AR=MR=DD
MR
E2
E1
S
P1
P2
Q2 Q1 output
Rev
enue
and
costs
ACMC
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Dumping
.When a monopolist charges a higher
price in the home market and lower
price in the international market.
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Monopolistic Competition
Many buyers & Sellers
Heterogeneous products
Firm is a price makerFree Entry and Exit
High selling cost
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SR-Price Determination under
Monopolistic
In short-run the situation of firm is
same as monopoly. It can earn
Normal Profits Supernormal Profits or
Abnormal Profits or losses
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LR- Price Determination under
Monopolistic
Under Monopolistic
competition the firm earnsnormal profits during long
run due to free entry and
exit.
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X
Y
o
AR=DD
MR
LMC
LAC
E
Q
P s
output
R
even
ueandC
ost s
Normal Profits
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Oligopoly Competition
Few sellers and many buyersHomogenous Pure oligopoly
HeterogeneousImperfect oligopoly
Firm is a Price-Searcher
Barriers to entry
Interdependency of sellers
Price rigidity
High selling cost
Example: Automobile, Mobiles, Communicationnetwork, steel, cement etc
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Duopoly Competition
The Simplest form ofoligopoly.
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Forms of Oligopoly
Non-Collusive Oligopoly Collusive Oligopoly
Cournots ModelBertnards ModelStackelbergs ModelChamberlins Model
Sweezys Kinked DemandModel
Cartels
Price Leadership
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Collusive Oligopoly
1. Cartels aiming at Profit
Maximization
2. Market-Sharing Cartels
1. Low- Cost Firms
2. Dominant Firm
3. Barometric
CartelsPrice Leadership
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Collusive Oligopoly
One way of avoiding the uncertainty
arising from oligopolistic interdependence
is to enter into collusive agreements.Cartels and Price Leadership are the two
types of Collusive Oligopoly. Both forms
generally imply tacit (secret) agreements,since open collusive action is commonly
illegal in most countries at present.
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Collusive Oligopoly
Although direct agreements among theoligopolistic are the most obvious
examples of collusion, in the modern
business world trade associations,professional organizations and similar
institutions usually perform many of the
activities and achieve in a legal or indirectway the goals of direct collusive
agreements.
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Cartels Cartels imply direct (although secret)
agreements among the competing firms.
1. Cartels aiming at Joint-Profit Maximisation:
Here the firms are looking at maximisation
of the industry profit. The firms appoint a
central agency to which they delegate the
authority to decide not only the total quantity
and the price at which it must be sold so as toattain maximum group profit, but the
allocation of production among the members
of the cartel...
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Cartels conti.
and the distribution of the maximum joint profitamong the participating members. In practice
cartels rarely achieve maximum joint profits on
account of various reasons like mistakes in
estimation of market demand, MC, slow
process of cartel negotiations, the bluffing
attitude of some member, free of Government
interference, they wish to have a good publicimage, free of entry and keeping freedom
regarding design and selling activities.
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Cartel
2. Market Sharing Cartels:
This form of collusion is more commonin practice because it is more popular. Thefirms agree to share the market, but a
considerable degree of freedom concerningthe style of their output, their selling activitiesand other decisions.
There are two basic methods ofsharing the market:
a. Non-price Competition and
b. Determination of Quotas.
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Cartels
a. Non-Price Competition Agreements:
In this form of loose cartel the memberfirms agree on a common price, at which eachof them can sell at any quantity demanded.
The price is set by bargaining must be suchas to allow some profits to all members. Thefirms agree not to sell at a price below thecartel price, but compete on a non-pricebasis. They are free to vary the style of theirproduct and/or their selling activities such acartel is more unstable and may lead to a
price-war with only the fittest surviving.
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Cartels
b. Sharing of market by Agreement and Quotas:
The second method for sharing the market is theagreement on quotas i.e., agreement on the quantitythat each member may sell at the agreed price (orprices). These quotas may be decided on the basis of
past levels of sales, and/or the basis of productivecapacity. A major factor here becomes the bargainingpower and skill. Another popular method of sharingthe market is the definition of the region in which eachfirm is allowed to sell. In this case, of geographical
sharing of the market, the price as well as the stylemay differ. However, even a regional split of themarket is inherently unstable as the low-cost firmsalways have the incentive to reach out to adjacentmarkets.
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Price Leadership
In this form of coordinated behaviour ofoligopolist one firm sets the price and othersfollow it. Because it is advantageous to them orbecause they prefer to avoid uncertainity about
their competitors reaction even if it impliesdeparture of the followers from their profitmaximising position. Price leadership iswidespread in the business world. It may be
practiced either by explicit agreement orinformally. In nearly all cases, price leadershipis tacit, open collusive agreement are illegal inmost countries.
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Price Leadership
Price leadership is more widespread thancartels, because it allows the members
complete freedom regarding their product and
selling activities as compared to a completecartel. If the product is homogeneous and the
firms are highly concentrated in a location, the
price will be identical. However, if the product is
differentiated prices will differ, but the directionof their change will be the same, while the
same price differentials will broadly be kept.
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Price Leadership
1. Price Leadership by a low-cost firm.
2. Price Leadership by a large (Dominant) Firm:
This refers to the firm having the
considerable share of the total market.
3. Barometric Price Leadership:
The firm chosen as the leader is considered
as a barometer, reflecting the changes in economic
environment. Usually it is a firm which from pastbehaviour has established a reputation of a good
forecaster of economic changes. A firm belonging to
another industry may also be chosen as the barometric
leader.
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Paul Sweezys Kinked Demand
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Paul Sweezy s Kinked Demand
Curve
DD
dd
P
QoX
Output
Price
Y
P1
E1
Diff b t th M k t
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Difference between the Markets
Features Perfect
Competition
Monopoly Monopolistic Oligopoly
Buyers &
Sellers
Product
Price
Entry &
Exit
DemandCurve