Chapter VII & VIIIChapter VII & VIII

CompetitionCompetition

Dr. Gopalakrishna B.V.,Dr. Gopalakrishna B.V.,

Faculty in MBA,Faculty in MBA,

SDM, MangaloreSDM, Mangalore

In the traditional sense, the market means a In the traditional sense, the market means a particular place or locality where buyers & sellers particular place or locality where buyers & sellers meet together and deals with their business meet together and deals with their business transactiontransaction. .

For example, For example, Bombay market, Delhi market, Bombay market, Delhi market, Calcutta market, Bangalore market, Mangalore Calcutta market, Bangalore market, Mangalore market & Mysore market market & Mysore market etc.etc.

But in economics, the term market, it is not a But in economics, the term market, it is not a particular place/locality where goods are bought and particular place/locality where goods are bought and sold.sold.

Buyers and sellers can contact through personally by Buyers and sellers can contact through personally by the way of the way of exchange of letters, telegrams, telephones exchange of letters, telegrams, telephones and internet (e-mail & other waysand internet (e-mail & other ways) etc.) etc.

For example trade between America and India.For example trade between America and India.

Classification of Market

Area Time Commodities Competition

Local

Regional

National

International

Market Period

Short Period

Long Period

Very Long Period

Bullion Market

Share Market

Money Market

Capital Market

Perfect Competition

ImperfectCompetition

Monopoly

Duopoly

Oligopoly

MonopolisticCompetition

Forms of Market CompetitionForms of Market Competition

Models ofModels ofCompetitionCompetition

Number ofNumber ofbuyersbuyers

Number ofNumber ofsellerssellers

Nature ofNature ofproductsproducts

Barriers toBarriers toentry andentry and

exitexit

PerfectPerfectcompetitioncompetition

Very largeVery large Very largeVery largeIdenticalIdenticalproductsproducts

NoneNone

MonopolyMonopoly Very largeVery large OneOneSingleSingle

productproductVery largeVery large

MonopolisticMonopolisticcompetitioncompetition

Very largeVery large LargeLargeMinimumMinimumdifferencesdifferences

NoneNone

OligopolyOligopoly Very largeVery large Very fewVery fewLargeLarge

differencesdifferencesLargeLarge

Classification of Market StructureClassification of Market Structure

1. Perfect Competition 1. Perfect Competition market, where there is a large number of market, where there is a large number of producers (firms) producing a homogeneous producers (firms) producing a homogeneous product, homogeneous price existence.product, homogeneous price existence.2. Imperfect competition2. Imperfect competitionIt is an important market category where in It is an important market category where in individual firms exercise control over the price of individual firms exercise control over the price of commodity.commodity.

Imperfect competition has several sub-markets Imperfect competition has several sub-markets

1)1) Monopolistic competitionMonopolistic competition2)2) Pure OligopolyPure Oligopoly3)3) Differentiated OligopolyDifferentiated Oligopoly4)4) Monopoly Monopoly

Perfect competitive marketPerfect competitive market Perfect competition refers to a market situation in Perfect competition refers to a market situation in

which there are which there are large number of buyers & sellers of large number of buyers & sellers of homogeneous productshomogeneous products..

The price of the product is The price of the product is determined by industry determined by industry with the forces of demand and supplywith the forces of demand and supply..

Homogeneous price & commodities is special Homogeneous price & commodities is special characterstics of perfect competition market.characterstics of perfect competition market.

All the firms in the perfect competition is the All the firms in the perfect competition is the price price taker (price receiver) rather than price makers.taker (price receiver) rather than price makers.

Thus, perfect competition in a market structure Thus, perfect competition in a market structure characterised by the characterised by the complete absence of rivalry complete absence of rivalry among individual firmsamong individual firms..

Features of perfect competitive marketFeatures of perfect competitive market

1)1) Large number of buyers and sellers existedLarge number of buyers and sellers existed

2)2) Homogeneous productHomogeneous product

3)3) Free entry and exist of firms in the Free entry and exist of firms in the industryindustry

4)4) Perfect knowledge about marketPerfect knowledge about market

5)5) Perfect mobility of factors of productionPerfect mobility of factors of production

6)6) Absence of government regulationAbsence of government regulation

7)7) Absence of transport costAbsence of transport cost

1. Large Number of buyers and sellers existed1. Large Number of buyers and sellers existed There will be a There will be a large number of buyers and sellers existed large number of buyers and sellers existed

in the market.in the market. Any Any single firms in the industry cannot influences on single firms in the industry cannot influences on

prices prices of commodity – they are of commodity – they are price taker not a price price taker not a price makersmakers – it is like a drop of water put into sea. – it is like a drop of water put into sea.

The price of the product is determined by the collective The price of the product is determined by the collective forces of industry demand and industry supplyforces of industry demand and industry supply..

2. Homogeneous Product2. Homogeneous Product Commodities produced by all the firms is Commodities produced by all the firms is homogenous and homogenous and

identicalidentical in all respects. in all respects. There is no changes in terms of There is no changes in terms of quality, size, fragrence etc quality, size, fragrence etc

between the firms.between the firms. No. one firms No. one firms influences prices either increase/decrease influences prices either increase/decrease in in

the market.the market.

3. Free entry and exists3. Free entry and exists There are There are no barrier to entry or exit from the no barrier to entry or exit from the

industryindustry. Entry or exit may take time but firms have . Entry or exit may take time but firms have freedom of movement in and out of the industryfreedom of movement in and out of the industry..

If the industry earns abnormal profits, new firms will If the industry earns abnormal profits, new firms will enter the industry enter the industry and compete away the excess and compete away the excess profits.profits.

Similarly, Similarly, if the firms in the industry are incurring if the firms in the industry are incurring losses some of them will leave the industry losses some of them will leave the industry which will which will reduce the supply of the industry and will thus raise reduce the supply of the industry and will thus raise the price and wipe away the losses.the price and wipe away the losses.

The The firms have full liberty to choose either to firms have full liberty to choose either to continue or go out of the industry.continue or go out of the industry.

4. Perfect knowledge 4. Perfect knowledge It is also assumed that It is also assumed that all sellers and buyers have complete all sellers and buyers have complete

knowledge of the conditions of the marketknowledge of the conditions of the market.. This knowledge refers not only to the prevailing conditions This knowledge refers not only to the prevailing conditions

in the in the current period but in all future periods current period but in all future periods as well.as well. Information is free and costlessInformation is free and costless. Under these conditions . Under these conditions

uncertainty about future development in the market is ruled uncertainty about future development in the market is ruled out.out.

5. Perfect mobility of factors of production5. Perfect mobility of factors of production The factors of production are The factors of production are free to move from one firm free to move from one firm

to another throughout the economyto another throughout the economy.. It is also assumed that It is also assumed that workers can move between different workers can move between different

jobsjobs.. Raw-materials & other factors are not monopolised & Raw-materials & other factors are not monopolised &

labour is not unionised. labour is not unionised. In short, there is perfect competition in the factor market.In short, there is perfect competition in the factor market.

6. Absence of government regulation6. Absence of government regulation There is no government intervention in the form of tariffs, There is no government intervention in the form of tariffs,

subsidies, relationship of production or demand.subsidies, relationship of production or demand. If these assumptions are fulfilled, it is called pure If these assumptions are fulfilled, it is called pure

competition which requires the fulfillment of some more competition which requires the fulfillment of some more condition.condition.

7. Absence of transport cost7. Absence of transport cost In a perfectly competitive market, it is assumed that there In a perfectly competitive market, it is assumed that there

are no transport cost.are no transport cost.

Price and Output DeterminationPrice and Output Determination

Price under perfect competition is determined by the Price under perfect competition is determined by the interaction of the two forces – interaction of the two forces – demand and supplydemand and supply..

Though individuals cannot change the price, but Though individuals cannot change the price, but aggregate forces of demand and supply can change.aggregate forces of demand and supply can change.

Demand side – marginal utility of commodity to the Demand side – marginal utility of commodity to the buyersbuyers

Supply side – cost of production – producersSupply side – cost of production – producers The interaction of demand and supply is called the The interaction of demand and supply is called the

equilibrium price.equilibrium price. Equilibrium price is that price at which quantity Equilibrium price is that price at which quantity

demanded is equal to the quantity supplied at give price – demanded is equal to the quantity supplied at give price – both buyers and sellers satisfiedboth buyers and sellers satisfied

Equilibrium between demand and supplyEquilibrium between demand and supply

Price of Price of commoditiescommodities

DemandDemand SupplySupply Pressure Pressure on priceon price

55 1212 11

Excess Excess DemandDemand

1010 1010 22

1515 0808 44

2020 0606 66 EquilibriumEquilibrium

2525 0404 88

Excess Excess SupplySupply

3030 0202 1010

3535 0101 1212

14

Price and Output DeterminationPrice and Output Determination

Elements of time – price theoryElements of time – price theory Alfred MarshallAlfred Marshall was the first economists to was the first economists to

introduced “introduced “Time FactorTime Factor” – price ” – price determination.determination.

He divided time period into three ways –He divided time period into three ways –1.1. Market PeriodMarket Period

2.2. Short Period andShort Period and

3.3. Long PeriodLong Period

1. Market Period1. Market Period Market period are also called as very short period.Market period are also called as very short period. The supply of a commodity is almost fixed and the The supply of a commodity is almost fixed and the

demand will play a decisive role in determining the demand will play a decisive role in determining the price of products.price of products.

This market period may be an hour, a day, or few This market period may be an hour, a day, or few days or even a few weeks – depends on nature of days or even a few weeks – depends on nature of commodities.commodities.

Types of commodities are –Types of commodities are –1.1. Perishable commoditiesPerishable commodities

2.2. Non-perishable commoditiesNon-perishable commodities

Perishable commoditiesPerishable commodities

Fish, milk, vegetables, flowers, meat and butters etc Fish, milk, vegetables, flowers, meat and butters etc are perishable commodities. Supply is limited in the are perishable commodities. Supply is limited in the existing stocks.existing stocks.

The fundamental features of this period – supply of The fundamental features of this period – supply of the commodity is absolutely fixed and therefore, the the commodity is absolutely fixed and therefore, the supply curve of each firm will be a vertical straight supply curve of each firm will be a vertical straight line.line.

Demand factors more important than supply in Demand factors more important than supply in determining price.determining price.

Perishable commoditiesPerishable commodities

O X

Y

M

S

P

P1

P2

D

D

D1

D2

D2

D2

Price

Quantities

Non-perishable/Durable commoditiesNon-perishable/Durable commodities

Durable goods are those which can be Durable goods are those which can be reproduced or those can be stored. Like reproduced or those can be stored. Like perishable goods, the supply of durable perishable goods, the supply of durable goods is not vertical throughout the length.goods is not vertical throughout the length.

Firms selling such goods have a minimum Firms selling such goods have a minimum reserve price – they will not sell goods at reserve price – they will not sell goods at less than reserve price – wheat, soap & oil less than reserve price – wheat, soap & oil etc.etc.

Factors affecting Reserve PriceFactors affecting Reserve Price1.1. Price in future Price in future – if seller expects that a high price will prevail in future.– if seller expects that a high price will prevail in future.

2.2. Liquidity preference Liquidity preference – if the seller is in urgent need of money his – if the seller is in urgent need of money his reserve price will be low & vice-versa.reserve price will be low & vice-versa.

3.3. Future cost of production Future cost of production – if the seller expects that in future the cost – if the seller expects that in future the cost of production will fall, his reserve price will be lower & vice-versa.of production will fall, his reserve price will be lower & vice-versa.

4.4. Storage Expenses – if the seller finds that the storage expenses are Storage Expenses – if the seller finds that the storage expenses are higher & the time for which the stocks have to be held are longer, his higher & the time for which the stocks have to be held are longer, his reserve price will be lower & vice-versa.reserve price will be lower & vice-versa.

5.5. Durability of commodity Durability of commodity – more durable commodity is higher will be – more durable commodity is higher will be the reserved price.the reserved price.

6.6. 6. Future demand 6. Future demand Future demand of a commodity also influences the reserve price of the Future demand of a commodity also influences the reserve price of the

producer.producer. If the producer expects a higher demand in future, his reserve price will also If the producer expects a higher demand in future, his reserve price will also

be higher.be higher.

Short period – Price determinationShort period – Price determination Short period refers to that period in which supply can Short period refers to that period in which supply can

be adjusted to a be adjusted to a limited extentlimited extent.. StiglerStigler in his word short period is a period in which the in his word short period is a period in which the

rate of production, change by change in variable with rate of production, change by change in variable with existence of fixed inputs. existence of fixed inputs.

In short period fixed factors – machinery, plant, In short period fixed factors – machinery, plant, building etc cannot be altered and variable factors may building etc cannot be altered and variable factors may be increased or decreased according to the change in be increased or decreased according to the change in demand.demand.

In short period, price is determined by the interaction of In short period, price is determined by the interaction of two forces – demand and supply.two forces – demand and supply.

Demand factors were more dominated factors in short Demand factors were more dominated factors in short period.period.

Short period price determinationShort period price determination

Out put

Pri

ce

P1

P2

P E

E2

E1

S

S

D

D

D1

D1

M M1

Long period price determinationLong period price determination

Long period is a period of many years 5, 10, Long period is a period of many years 5, 10, 15 20 & above.15 20 & above.

In this period supply conditions are fully able In this period supply conditions are fully able to meet the new demand conditions.to meet the new demand conditions.

In the long run no fixed & variable factors all In the long run no fixed & variable factors all the factors treated as variable factors.the factors treated as variable factors.

New plants/new firms can enter into the New plants/new firms can enter into the market & old firms can leave the market.market & old firms can leave the market.