Introductory Economics

Classification s of Market

Classifications of Markets

Classification of markets as per degree of competition:

Market Structure	No. of firms or producers or sellers	Degree of product differentiation	Firm’s degree of control over price	Part of economy where prevalent
Perfect competition	Many sellers	Homogenous product	No control over price	Farm commodities
Imperfect competition
Monopoly	One seller	Product with no close substitutes	Considerable control over price	Railways, posts, electricity etc.
Pure Oligopoly	Few sellers	Homogenous product	Some control over price	Steel, chemicals, etc.
Differentiated Oligopoly	Few sellers	Differentiated product	Some control over price	Automobiles, computers, etc.
Monopolistic competition	Many sellers	Differentiated product	Some control over price	Retail trade

Basis of Market Classification:
The principal basis of market classification as per degree of competition is:

1) Number of buyers and sellers
2) Nature of the commodity
3) Degree of price control
4) Knowledge of the market
5) Mobility of factors

Market Classification: On the basis of degree of competition the market is classified into Perfect Competition and Imperfect Competition.

Perfect competition: Perfect competition is a form of market where there is large number of buyers and sellers of a commodity. Homogenous product is sold with no control over price by an individual firm.

Characteristics of perfect competition:
Following are the characteristics of the perfect competition:

1. Large Number of Buyers and Sellers: Perfectly competitive market is comprised by the presence of large number of buyers and sellers. Though a firm (seller) is large, but its supply is only a small part of the total quantity offered for the sale in the market. Similarly, each buyer’s demands is relatively small to the market demand. Since no seller or buyer is large influence the market price, they take the market price as a given parameter beyond their control. The economic agents (sellers and buyers) are the price takers and quantity adjusters. There is no rivalry among buyers and sellers. The demand curve of a firm in the perfectly competitive market is infinitely elastic implying that the firm can sell any amount of output at the prevailing market price.

2. Homogeneous Product: The commodity transacted in perfectly competitive market is identical. There is no way to differentiate the goods produced by the different firms. The buyers have no preference of the commodity supplied by sellers and the sellers have no preference among the buyers.

3. Free Entry and Exit of Firms: There is no barrier on the entry and exit of the firms form the industry. A firm can leave the industry if it cannot withstand losses.

4. No Government Regulations: Government does not place any restriction, on price, output, entry of the firms, etc. There is no government intervention in the market.

5. Perfect Mobility of Resources: the factors of production can move from one firm to another. Workers can move from one job to another and from one place to another. The owners of man made and natural resources are free to use them in those economic activities where they get higher returns. There exists perfect competition in the markets of factors of production.

6. Perfect Knowledge: It is assumed that all economic agents (sellers and buyers) have complete knowledge of the conditions prevailing in the market. Both buyers and sellers are aware of the nature of product and prevailing market price. Therefore, no buyer will offer a price higher than the prevailing one and no seller is willing to sell the product at the price, lower that the prevailing one. As a result, single price for the product prevails in the market.

The concept of pure competition is distinguished from that of perfect competition. The pure competition relaxes the assumptions of perfect mobility of resources and perfect knowledge. The first four characteristics are common to both perfect competition and pure competition. Markets for the various farm commodities can be cited as an example for perfect competition.

Imperfect competition:
Imperfect competition is a market in which firms can appreciably affect the market price of the product. It implies that imperfect competition; the individual sellers have some degree of control over prices of the products. In imperfect competition intense rivalry exists among the firms. Under imperfect competition, market is classified into:

• Monopoly
• Oligopoly
• Monopolistic competition

Monopoly:
It is that market situation in which there is a single seller of a product with no close substitutes in the market. There are legal, natural and technical barriers to the entry of new firm in the monopoly market.

Characteristics of monopoly:
Following are the characteristics of monopoly:

1. One Seller and Large Number of Buyers: Under monopoly, there should be a single producer of the commodity. He may be alone, or there may be a group of partners or a joint stock company. Thus, there is only one firm under monopoly. But the buyers of the product are in large number. Consequently, no buyers can influence the price of the product.

2. Restrictions on the Entry of the New Forms: Under monopoly, there are some restrictions on the entry of new firms into monopoly industry. As for instance, there are patent rights or exclusive control over technique or raw material.

3. No Close Substitutes: A monopoly firm produces a commodity that has no close substitutes.

4. Full Control over Prices: Since firm alone produces the commodity in the market, a monopolist has full control over its price. A monopolist thus, is price maker. He can fix whatever price he wishes to fix for his product.

5. Possibility of Price Discrimination: Many a time, a monopolist charges different prices form different consumers. It is called price discrimination. Price discrimination refers to the practice by a seller of charging different prices from different buyers for the same good.” In monopoly, there is a possibility of price discrimination.