The following points highlight the three main market situations.
The situations are: 1. Perfect Competition 2. Imperfect Competition 3. Monopoly.
Market Situation # 1. Perfect Competition:
A perfect competitive market is one in which the number of buyers and sellers is very large, all are enjoyed in buying and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of the market at a time.
In Other words it can be said—”A market is said to be perfect when all the potential buyers and sellers are promptly aware of the prices at which the transaction take place. Under such conditions the price of the commodity will tend to be equal everywhere.”
In this connection Mrs. Joan Robinson has said:
“Perfect Competition prevails when the demand for the output of each producer is perfectly elastic.”
According to Boulding:
“A competitive market may be defined as a large number of buyers and sellers, all engaged in the purchase and sale of identically similar commodities who are in close contact with one another and who buy and sell freely among themselves.
Conditions Essential for Perfect Competition:
The following characteristics or conditions are essential for the existence of perfect competition:
1. Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole. The demand of an individual buyer relative to the total demand is so small that he cannot influence the price of the product by his individual action.
2. Homogeneity of Products:
Each firm should produce and sell a homogeneous product so that no buyer has any preference for the product of any individual seller over others. This is possible only if units of the same product produced by different sellers are perfect substitutes.
3. Perfect Knowledge of the Market:
Buyers and sellers must possess complete knowledge about the price of which goods are being bought and sold and of the prices at which others are prepared to buy and sell. They should also have perfect knowledge of the place where the transactions are being carried on.
4. Absence of Price Control or any Artificial Restrictions:
There should be complete openness in buying and selling of goods. Sellers are free to sell their goods to any buyer and the buyers are free to buy from any seller. In other-words there should be no discrimination on the part of buyers and sellers. Here prices are liable to change freely in response to demand-supply conditions.
5. Free Entry and Exit of Firms:
The firms should be free to enter or leave the industry. It means that whenever the industry is earning handsome profits, attracted by these gains some new firms enter the industry. In the case of loss by the industry some firms leave it. This connection is very true in the long-rim when all firms must earn normal profits.
6. Perfect Mobility of the Factors of Production and Goods:
There should be perfect mobility of goods and factors between industries. Goods should be free to move to those places where they can fetch the highest price. Factors can also move from a low paid to a high paid industry.
7. Independent Relationship between Buyers and Sellers:
In perfect competition there should not be any attachment between sellers and purchasers in the market. It means that the sellers should not show pick and choose method in accepting the price of the commodity. In perfect competition the price of the goods is one and one only. If we will see from close we will find that in real life “Perfect Competition is a pure myth.”
Market Structure # 2. Imperfect Competition:
In real life, perfect competition or even pure competition are seldom met with. On the other-hand it is imperfect competition which is the rule and perfect competition is the exception.
Mrs. Joan Robinson has also written that in real life imperfect competition situation is to be seen.
According to Prof. Lerner – “Imperfect competition obtains when the seller is confronted with a falling demand curve for his product.”
As Prof. J. K. Mehta has stated – “It has been more fully realised that every case of exchange is a case of what may be called partial monopoly and partial monopoly is looked at from the other side a case of imperfect competition. There is a blending of both competition element and monopoly element in each situation.” From the above definition we can understand that the situation of imperfect competition is in between perfect competition situation and monopoly situation. In this market, the price of any commodity cannot be one. There will be always difference.
Characteristics of Imperfect Competition:
Following are the characteristics of Imperfect Competition:
1. Small Number of Buyers and Sellers:
Under imperfect competition the number of buyers and sellers are small and they do business and charge prices independently.
2. Difference in the Quality and Shape of the Goods:
In this type of market different quality and shape of the goods are found because on shape, size and quality they can charge different prices of the commodity.
3. More Expense on Advertisement:
In imperfect competition sellers do advertisement in their own way just to draw attention of the customers and to attract them towards their goods. Expense on advertisement increases.
4. Difference in Price:
In imperfect situation one and only one price will not be found out. There will be difference in price. If a customer is attracted towards a particular brand of goods, seller do not hesitate in charging more price, for that commodity.
5. Product Differentiation:
Here you will find product differentiation. Same type of goods in different shape, different packing, marketing and indifferent quality. Customers pay price according to the different trade-marks which the producer uses for their own product.
6. High Transport Cost:
Sellers pay high transport cost just to suit their business. They carry goods by paying more charges where they expect to earn more price and more profit.
7. Lack of Knowledge on the Part of Consumers:
In imperfect competition one seller is quite unaware regarding the price which the other seller is charging for the same quality and for the same goods. Therefore, different prices are realised from customers in this type of market.
Market Structure # 3. Monopoly:
Essential Conditions of Monopoly:
Essential conditions of Monopoly are as follows:
1. Single Seller:
For monopoly there should be one seller in the market. Monopolist may be either one person or one firm-industry. None else is the rival of monopolist.
2. Absence of Close Substitutes:
The commodity which a monopolist is producing, there should be no close substitute of it. The monopolist must be free to determine the price of the commodity produced. The quantity to be produced and the price to be fixed both are in the hands of the monopolist. He should decide regarding the both.
3. Barriers to the Entry of New-Firm:
There should be strict barrier over the entry of new firm in the process of production.
4. Full Control Over Supply of Commodity:
The monopolist must have full control over the supply of the commodity in the market.
Kinds of Monopoly:
There are four kinds of Monopoly.
They are as follows:
1. Natural Monopoly.
2. Social Monopoly.
3. Legal Monopoly.
4. Industrial Monopoly.
1. Natural Monopoly:
When monopoly is established due to natural cause, then it is called natural monopoly.
Mica production in India and Nickel production in Canada are examples of natural Monopoly.
2. Social Monopoly:
When Government in any particular area gives the right of doing business to any one business man or business institution, then it is called social monopoly.
To supply water or to generate electricity or to install telephone exchange the right is given to any man or institution, it is called social monopoly.
3. Legal Monopoly:
When right is given to anybody under certain law prevalent to do certain work, then it is called legal monopoly.
Patent rights or copy rights etc. are good examples of legal monopoly.
4. Industrial Monopoly:
When in any organisation an entrepreneur because of his personal efforts and able organisational ability starts producing more goods in comparison to other producers and in price determination he plays an important role, then the position which he acquires in production field is called industrial monopoly.