Unit 8 Nature of markets and Pricing of Products I
Structure 8.1 Introduction Objectives 8.2 Meaning of market and market structure 8.3 Kinds of markets 8.4 Perfect competition 8.5 Monopoly 8.6 Monopolistic competition 8.7 Oligopoly 8.8 Duopoly 8.9 Bilateral monopoly 8.10 Monopsony 8.11 Duopsony 8.12 Oligopsony 8.13 Industry analysis 8.14 Summary 8.15 Terminal Questions 8.16 Answer
Efficiency of management lies in its capacity to analyze the market. Study of demand and supply, its determinants, elasticity of demand and supply, market equilibrium, basic concepts of production function, revenue analysis, pricing policies and pricing methods help in analyzing the market in a more pragmatic manner. Knowledge of market structure and different kinds of markets is of utmost importance to a business manager in taking right decision and planning business activities efficiently. Learning Objectives: After studying this unit, you should be able to 1. Analyze the market with respect to a competitive situation 2. Differentiate between different types of market structures 3. Explain how firms under different market situations maximize their out put. 4. Make realistic estimates of profit maximization 5. Examine how Price discrimination can be applied 6. Know the working of oligopoly in practice Sikkim Manipal University Page No. 193
8.2 Meaning of Market and Market Structure
Market in economics does not refer to a place or places but to a commodity and also to buyers and sellers of that commodity who are in competition with one another e.g., the cotton market may not be confined to a particular place, but may cover the entire country and, in fact, even the entire world. Buyers and sellers of cotton may be spread all over the world. Market situation varies in their structure. Market structure refers to economically significant features of a market, which affect the behavior, and working of firms in the industry. It tells us how a market is built up and what its basic features are. According to Pappas and Hirschey, “Market structure refers to the number and size distribution of buyers and sellers in the market for a good or service”. It indicates a set of market characteristics that determine the nature of market in which a firm operates. Different market structures affect the behavior of sellers and buyers in different manners. The chief characteristics are as follows – 1. The number and size distribution of sellers A market may consist of a large, very large or a few sellers. There may be a few big firms with huge investments or a large number of small firms with limited investments. Thus, the operating size of the firm may be large or small in a market. The number and size of sellers influence the working of a market. 2. The number and size distribution of buyers In a market, there may be large number of buyers. Similarly, a market may consist of many small buyers or only a few buyers. The total number of buyers exercises their influence on the nature of transactions in the market 3. Product differentiation Products sold in the market may be homogeneous, or have substitutes, close substitutes or remote substitutes. A firm may deliberately differentiate its product with that of the products of other firms by adopting several techniques. 4. Condition of entry and exit In case of a few market situations, new firms may enter the industry or old firms may leave the industry at their own free will and wish. In case of other markets, there will be deliberate entry barriers. Sikkim Manipal University Page No. 194
Thus, the characteristics of market structure give us information about the nature of working of different markets. Thus in common parlance, market refers to a place where sellers and buyers meet for the purpose of exchanges of goods, but in the language of economics it has a wider meaning. It refers to a...