1. Forms of Markets
SMPS , Phagi
Features of Perfect Competition
Large number of buyersand sellers:In perfectcompetition,the buyersand sellersare large enough,
that no individual can influence the price and the output ofthe industry. ... Free Entry and Exit: Under
the perfectcompetition,the firmsare free to enteror exitthe industry.
2. Agricultural markets are examplesofnearly perfectcompetitionas well.Imagine shoppingat your
local farmers' market: there are numerous farmers, sellingthe same fruits, vegetablesandherbs.You
can easilyfindout the pricesfor the goods,but theyare usually all about the same.
3. 1. Large number of buyers and sellers
2. Homogenous product is produced by every firm
3. Free entry and exit of firms
4. Zero advertising cost
5. Consumers have perfect knowledge about the market and are well
aware of any changes in the market. Consumers indulge in rational
6. All the factors of production, viz. labour, capital, etc, have
perfect mobility in the market and are not hindered by any
market factors or market forces.
7. No government intervention
8. No transportation costs
9. Each firm earns normal profits and no firms can earn
10. Every firm is a price taker. It takes the price as decided by
the forces of demand and supply. No firm can influence the
price of the product.
In a Monopoly Market Structure, there is only one firm prevailing in a
particular industry. However, from a regulatory view, monopoly
power exists when a single firm controls 25% or more of a particular
4. market. For example, Indian Railway, De Beers is known to have a
monopoly in the diamond industry.
A Natural Monopoly Market Structure is the result of natural
advantages like a strategic location or an abundance of mineral
resources. For example, many Gulf countries have a monopoly in
crude oil exploration because of abundant naturally occurring oil
Characteristics of a Monopoly Market Structure
1. A Lack of Substitutes
One firm producing a good without close substitutes. The product is
often unique. Ex: When Apple started producing the iPad, it arguably
had a monopoly over the tablet market.
2. Barriers to Entry
There are significant barriers to entry set up by the monopolist. If new
firms enter the industry, the monopolist will not have complete
control of a firm on the supply. These barriers imply that under a
monopoly there is no differ-ence between a firm and an industry.
There are no close competitors in the market for that product.
4. Price Maker
The monopolist decides the price of the product, since it has the
market power. This makes the monopolist a price maker.
While a monopolist can maintain supernormal profits in the long run,
it doesn’t necessarily make profits. A monopolist can be a loss making
5. or revenue maximizing too. This is not possible under perfect
competition. If abnormal profits are available in the long run, other
firms will enter the competition with the result abnormal profits will
Advantages of a Monopoly
1. Stability of prices
In a monopoly market structure the prices are pretty stable. This is
because there is only one firm involved in the market that sets the
prices since there is no competing product. In other types of market
structures prices are not stable and tend to be elastic as a result of the
2. Economies of Scale
Since there is a single seller in the market it leads to economics of
scale because big scale production which lowers the cost per unit for
the seller. The seller may pass this benefit down to the consumer in
terms of a lower price.
3. Research and Development
Since the monopolist is making abnormal or supernormal profits, the
firm can invest that money into research and development.
Customers may get better a quality product at reduced price leading
to enhanced consumer surplus and satisfaction.
Disadvantages of a Monopoly
1. Higher prices
The monopolist could set a very high price for the product leading to
exploitation of consumers as they have no option but to buy it from
seller due to the lack of competition in the market.
6. 2. Price discrimination
Monopolists can sometimes use price discrimination, where they
charge different prices on the same product for different consumers.
This depends on market conditions.
3. Inferior goods and services
The lack of competition may cause the monopoly firm to produce
inferior goods and services because they know the goods will sell.
7. Monopolistic Competition refers to the market situation in which there is a keen competition,
but neither perfect nor pure, among a group of a large number of small producers or
suppliers having some degree of monopoly because of the differentiation of their products.
Thus, we can say that monopolistic competition (or imperfect competition) is a mixture of
competition and a certain degree of monopoly, on the basis of a correct appraisal of the
The main features of monopolistic competition are as under:
1. Large Number of Buyers and Sellers:
There are large number of firms but not as large as under perfect competition.
That means each firm can control its price-output policy to some extent. It is assumed that
any price-output policy of a firm will not get reaction from otherfirms that means each firm
follows the independent price policy.
2. Free Entry and Exit of Firms:
Like perfect competition, under monopolistic competition also, the firms can enter or exit
freely. The firms will enter when the existing firms are making super-normal profits. With the
entry of new firms, the supply would increase which would reduce the price and hence the
existing firms will be left only with normal profits. Similarly, if the existing firms are
sustaining losses, some of the marginal firms will exit. It will reduce the supply due to which
price would rise and the existing firms will be left only with normal profit.
3. Product Differentiation:
8. Another feature of the monopolistic competition is the product differentiation. Product
differentiation refers to a situation when the buyers of the product differentiate the product
with other. Basically, the products of different firms are not altogether different; they are
slightly different from others. Although each firm producing differentiated product has the
monopoly of its own product, yet he has to face the competition. This product differentiation
may be real or imaginary. Real differences are like design, material used, skill etc. whereas
imaginary differences are through advertising, trade mark and so on.
4. Selling Cost:
Another feature of the monopolisticcompetition is that every firm tries to promote its
product by different types of expenditures. Advertisement is the most important constituent
of the selling cost which affects demand as well as cost of the product. The main purpose of
the monopolist is to earn maximum profits; therefore, he adjusts this type of expenditure
5. Lack of Perfect Knowledge:
The buyers and sellers do not have perfect knowledge of the market. There are innumerable
products each being a close substitute of the other. The buyers do not know about all these
products, their qualities and prices.
Therefore, so many buyers purchase a product out of a few varieties which are offered for
sale near the home. Sometimes a buyer knows about a particular commodity where it is
available at low price. But he is unable to go there due to lack of time or he is too lethargic to
go or he is unable to find proper conveyance. Likewise, the seller does not know the exact
preference of buyers and is, therefore, unable to get advantage out of the situation.
6. Less Mobility:
Under monopolistic competition both the factors of production as well as goods and services
are not perfectly mobile.
7. More Elastic Demand:
Under monopolistic competition, demand curve is more elastic. In order to sell more, the
firms must reduce its price.