Chapter 07: Market

7.1 Meaning of Market:

Market is generally understood to mean a particular place or locality where goods are sold and
purchased. However, in economics, by the term market, we do not mean any specific place or
locality in which goods are bought and sold.
Prof. Chapman says, “Economically interpreted, the term MARKET refers not to a
place but to a commodity or commodities the buyer and sellers of which compete with one
another.
In the words of Cournot, a French economist, “Economists understand by the term
market not any particular marketplace in which things are bought and sold but the whole of
any region in which buyers and sellers are in such free intercourse with one another that the
price of the same good tends to equality easily and quickly.”
Thus, the essentials of a market are:
(a) Commodity which is dealt with;
(b) The existence of buyers and sellers;
(c) A place, be it a particular region, a country or the entire world; and
(d) Such communication between buyers and sellers that only one price should prevail
for the same commodity at the same time.
7.2 Types/ Classification of Market: There are basically four types of market in economics:
1. Perfect Competition
2. Oligopoly
3. Monopoly
4. Monopolistic Competition
7.2.1 Perfect Competition: A market situation where a large number of buyers and
sellers deal in a homogeneous product at a fixed price set by the market is known as Perfect
Competition. Homogeneous goods are goods of similar shape, size, quality, etc. In other words,
in a perfectly competitive market, the sellers sell homogeneous products at a fixed price
determined by the industry and not by a single firm. In the real world, perfect competition does
not exist; however, the closest example of a perfect competition market is agricultural goods
sold by farmers. Goods like wheat, sugarcane, etc., are homogeneous, and the market
influences their price. The significant features of the Perfect Competition Market are as
follows:

Page 1 of 5
  Large Number of Buyers and Sellers: There are so many buyers and sellers in the
market that no single buyer or seller can influence the market price. Each participant is
a price taker.
 Homogeneous Products: The products offered by different sellers are identical or
perfectly substitutable. Buyers have no preference for one seller’s product over
another’s.
 Free Entry and Exit: Firms can freely enter or exit the market without any significant
barriers. This ensures that firms can respond to changes in market conditions by
adjusting their level of production.
 Perfect Information: All participants have complete and perfect information about
prices, product quality, and other relevant factors. This allows them to make informed
decisions.
 No Price Control: Firms cannot influence the market price; the forces of supply and
demand determine the price. Individual firms accept the market price as given.
 Profit Maximization: Firms aim to maximize their profits by adjusting their output
levels based on the marginal cost of production and the market price.
 No Externalities: There are no external costs or benefits that affect third parties outside
the market. All costs and benefits are reflected in the market price.
7.2.2 Oligopoly: An oligopoly is a market form with a few firms, none of which can
hold the others back from having a critical impact. The fixation or concentration proportion
estimates the piece of the market share of the biggest firms. For example, commercial air travel,
auto industries, cable television, etc.
7.2.3 Monopoly: Monopoly is a completely opposite form of market and is derived
from two Greek words, Monos (meaning single) and Polus (meaning seller). A market situation
where there is only one seller in the market selling a product with no close substitutes is known
as Monopoly. For example, Indian Railways. In a monopoly market, there are various
restrictions on the entry of new firms and exit of existing firms. Also, there is a chance of price
discrimination in a monopoly market. The major features of a monopoly market are:
 Single Seller: There is only one firm that supplies the entire market. This firm is the
sole producer of the good or service.
 No Close Substitutes: The product offered by the monopoly has no close
substitutes. Consumers have no alternative products to switch to, which gives the
monopolist significant market power.

Page 2 of 5
  High Barriers to Entry: Significant barriers prevent new firms from entering the market.
These barriers can be legal (patents, licenses), technological (high startup costs, unique
technology), or resource-based (control over a key resource).
 Price Maker: The monopolist has substantial control over the price of the product.
Unlike in perfect competition, the monopoly can influence the market price by adjusting
the level of output.
 Profit Maximization: The monopolist maximizes profits by setting a price where
marginal revenue equals marginal cost (MR = MC). This often results in higher prices
and lower output compared to competitive markets.
 Price Discrimination: The monopolist may practice price discrimination, charging
different prices to different consumers based on their willingness to pay. This can lead
to increased profits.
 Lack of Economic Efficiency: Monopoly markets are often less efficient than
competitive markets. They can lead to allocative inefficiency (where resources are not
used in the most valued way) and productive inefficiency (where goods are not
produced at the lowest possible cost).
7.2.4 Monopolistic competition: Monopolistic competition portrays an industry where many
firms offer their services and products that are comparative (however somewhat flawed)
substitutes. Obstructions or barriers to exit and entry in monopolistic competitive industries are
low, and the choices made by any firm don’t explicitly influence those of its rivals. The
monopolistic competition is firmly identified with the business technique of brand separation
and differentiation. For example, hairdressers, restaurant businesses, hotels, and pubs.

7.3 Price Discrimination: Price discrimination is when a seller sells a specific commodity or
service to different buyers at different prices for reasons not concerning differences in costs.
For example,
 A local physician charges more to rich patients than poor patients for the same service.
 Electricity companies sell electricity at a cheaper rate in rural areas than in urban areas.
These are examples of price discrimination. In a monopoly, the seller adopts this method of
pricing to earn abnormal profits. It is important to remember that price discrimination cannot
persist under perfect competition since the seller has no control over the market price of the
product/service. It requires an element of monopoly to allow him to influence the price.
7.3.1 Conditions for Price Discrimination:
Price discrimination is possible under the following conditions:

Page 3 of 5
  The seller must have some control over the supply of his product. Such monopoly
power is necessary to discriminate the price.
 The seller should be able to divide the market into at least two sub-markets (or more).
 The price elasticity of the product must be different in different markets. Therefore, the
monopolist can set a high price for those buyers whose price elasticity of demand for
the product is less than 1. In simple words, even if the seller increases the price, such
buyers do not reduce the purchase volume.
 Buyers from the low-priced market should not be able to sell the product to buyers from
the high-priced market.
Hence, we can conclude that a monopolist who employs price discrimination charges a higher
price from the market with inelastic demand. On the other hand, the market, which is more
responsive, is charged less.

7.3.2 Types of price discrimination:

There are three types of price discrimination that you can encounter: first-degree, second-
degree, and third-degree. These degrees of price discrimination sometimes go by other names:
personalized pricing, product versioning or menu pricing, and group pricing, respectively.
1. First-degree price discrimination: First-degree price discrimination, or perfect price
discrimination, happens when a business charges the maximum possible price for each unit.
Since prices vary for each unit, the company selling will collect all consumer surplus, or
economic surplus, for itself. In many industries, a company will commit first-degree price
discrimination by determining the amount each customer is willing to pay for a specific product
and selling that product for that exact price. This can be done using market research strategies
in addition to using budgeting and forecasting software.
2. Second-degree price discrimination: Second-degree price discrimination, otherwise
known as product versioning or menu pricing, happens when a company charges a different
price for varying quantities consumed, such as offering a discount on products purchased in
bulk. Simply put, firms price their products in line with how much they can sell.
It doesn't take much work to draw in customers and divide them up into niche markets, making
this second-degree price discrimination incredibly straightforward to implement. This tactic is
utilized by warehouse stores or by phone companies that charge extra for usage above a certain
monthly cap.

Page 4 of 5
3. Third-degree price discrimination: Third-degree price discrimination, or group pricing, is
when a company charges a different price to specific customer segments such as students,
military personnel, or older adults. This is the most common type of price discrimination.
Third-degree price discrimination helps companies minimize excess profits by adjusting prices
based on individual customers' willingness to pay. Last-minute travelers often encounter third-
degree price discrimination in the tourism and travel industry.

Page 5 of 5