ECONOMIC THEORY - MARKET THEORY

Oligopoly

Oligopoly is a form of market where there is domination of a limited number of suppliers and sellers called Oligopolists. In reality, it is the Oligopoly market which exists, having a high degree of market concentration. This indicates that a huge percentage of the Oligopolymarket is occupied by the leading commercial firms of a country. These firms require strategic planning to consider the reactions of other participants existing in the market. This is precisely why an oligopolistic market is subject to greater risk of connivances.

Different theories about Oligopoly Pricing:

4 main theories involved with oligopoly pricing are as follows:

The prices and profits associated with the concept of Oligopoly is impossible to determine, owing to problems arising in modeling mutual prices and output decisions

The oligopolistic business houses join hands in charging the monopoly prices and incur monopoly profits

Oligopoly prices and profits exist between the monopoly and competitive endpoints of the scale

Commercial oligopoly firms compete on the prices in an effort to equalize both the factors like in the competitive industrial sectors.

Distinct features of an oligopolistic market:

An oligopolistic market comprises a handful of firms, engaged in selling analogous products

All oligopolistic markets increase mutual dependence among the firms involved in similar competition. It also prepares businessmen to accept the outcomes arising from rivalries with respect to alterations in the production and prices of goods.

In near future, an oligopolistic market is likely to impose restrictions on admission, in an attempt to incur abnormal profits.

Each of the business houses involved with this market produces branded goods

Relevance of the competition between prices and non-prices:

Price Competition deals with offering discounts on the prices of a particular product or a series of products, in an attempt to generate more market demand of those products. On the other hand, Non-price Competition concentrates on several other strategies to boost up the market shares.

Price leadership: Oligopolistic market

The dominance of one firm in the oligopolistic market results in price leadership. Firmshaving less market shares only follow the prices fixed by leaders.

Oligopolistic competition: Effects

Oligopolistic competition in most cases leads to collaboration of the businessfirms on issues like raising the prices of various goods and subdue production process.

Under other given market conditions, the competition between the sellers acquires a violent form, on the grounds of lowering the prices and increasing the production.

Collaboration of various firms also brings about stabilization in the unsteady markets.

ECONOMIC THEORY - MARKET THEORY

Monopoly

The concept of Monopoly deals with a steady market condition where only one good or service provider exists, to rule the industrial sector single-handedly, without undergoing any sectoral competition. The characteristic features of the Theory of Monopoly are:

Absence of feasible products acting as replacements or substitutes Lack of competition on the economic levels, with respect to the availability of goods or services Monopolists are basically price-makers of their own products

Multiple forms of Monopoly:

Monopoly is a commercial term. Its various forms are: Government Monopoly: These monopolies are solely reserved by the government, for it to venture independently and all alone.

Government-granted Monopoly or Legal Monopoly: It is usually granted by the government of a country. Sanctioned on the state levels, this monopoly encourages investment in enterprising commercial endeavors.

Contemporary views on the Theory of Monopoly:

The modern concepts on the Theory of Monopoly says that if a monopoly is not safeguarded from competitions by restrictions on government levels, it not only subject to possible competitions but is prone to exploit the consumers and earn huge profits.

General assumptions about the monopoly model:

Similarity in the price levels for all buyers
Necessity of multiple purchasers
Necessity for asymmetric data

Process of price fixing in monopoly:

A monopolist is a price maker as opposed to price taker in perfect competition. The price is a single one and is fixed at a point where the Marginal Cost (MC) is equivalent to the Marginal Revenue (MR).

Natural Monopoly:

The concept of Natural Monopoly gives birth to a condition where long-term and descending marginal cost characterizes the production all through the pertinent output range. Under such circumstance, a laissez-faire policy results in the rise of single sellers.

ECONOMIC THEORY - MARKET THEORY

Monopolistic Competition

The concept of Monopolistic Competition is concerned with the common form of a market and its competitions. Monopolistic Competition is present in various industrial sectors such as apparels, restaurants, footwear, food and in the service sectors as well.

Monopolistically competitive markets: Distinctive featuresIn a monopolistically competitive market, there is abundance of both producers and consumers.

The purchasing preferences of the customers are clearly expressed in a monopolisticaly competitive market.

To survive in a monopolistically competitive market, each seller tries to distinguish his products from that of other competitors, for increasing their saleabilities.

The entry and exit to a monopolistically competitive market is subject to certain restrictions.

Here, the producers are endowed with considerable power to regulate the market prices.

Monopolistic competitive market is essentially heterogeneous in nature.

Such market leads to the rise of non-price competitions.

At equilibrium, firms reach a zero economic profit situation where no firm enters or exits the industry. A positive profit will imply increase in the number of firms in the industry, and vice versa is the case for negative profit. This allow the firms to exert substantial influence over the existing market by increasing the prices and not losing any consumer.

The production of goods in a monopolistically competitive market never act as ideal substitutes, but as close substitutes .

Equilibrium in the long-run monopolistic competitive market:

Let us suppose that Firm A formulates a strategy to reap higher profits. The monopolistic competitive Firm B duplicates this strategy. As a result, there is a decline in the price level. In the long-run, the price will reduce to the level where economic profit is zero. Long-run equilibrium will be acquired at this point.

Drawbacks of the monopolistic competitive markets:

Monopolistic competitive markets are inefficient in handling the cost of the regulating prices of each sold good. This is because the output of the concerned firms involves substantial production costs.

Such markets are known for extensive promotions of advertisements for the sake of developing brand names, making the consumers unnecessarily spendthrifts. Moreover, this also increases the expenditure on unnecessary advertising-related activities .

ECONOMIC THEORY - MARKET THEORY

Theory of Perfect Competition

The Theory of Perfect Competition deals with a hypothetical form of the market, where the power of influencing the marketprices rests neither with the manufacturers nor the consumers. The standard definition of efficiency in economics believes that the Theory of Prefect Competition will end in a totally efficient result.

Assumptions guiding the Theory of Perfect Competition:

The concept of Perfect Competition is based on certain hypotheses as mentioned and described below:

Atomicity:

A market which is atomistic in nature, has several small producers and consumers. Here, the business houses act as the price-takers and not price-makers.

Free information Availability:

Both the customers and business firms must be well-acquainted with the actual prices expounded by all the commercial organizations of a country, to direct their activities uniformly on the right track.

Homogeneity:

In the Theory of Perfect Competition, both the commodities and the services act as the ideal substitutes of the commodities themselves under the existing market condition, making no distinction among the finished products produced by the competing firms.

Free entry:

All the commercial firms enjoy complete liberty with respect to entering or departing the market as per their whims.

Equality with respect to accessibility:

All firms have equal and simultaneous access to the available resources and the technologies involved in the methods of production.

Following are the behavioral assumptions of Perfect Competition Theory:

All the producers work towards the only aim of boosting up their profits. There is a constant effort on the part of the consumers to increase their utility levels.

Concepts related to the Theory of Perfect Competition:

The Shutdown Point:

It acts as the terminating point of the production for the business firms. This concept is applicable only when a business house in undergoing tremendous loses and needs to close down its manufacturing units. The loss is incurred when the Total Cost (TC) surpasses the Total Revenue (TR), when the Total Revenue is equal to the Total Variable Cost (TVC). Under such circumstances, a firm should shut down since it is unable to pay even the fixed costs.

Break even point:

It is the price at which the economic profit equals zero.

Benefits of the Perfect Competition Theory:

Both productive and allocative efficiencies exist side by side in an ideal competitive market. It facilitates an individual commercial firm to incur maximum profit within minimum time period.