The pricing power of a firm depends heavily on the market structure. In some markets, firms are price takers (perfect competition). In others, a single firm controls supply (monopoly) or a few big firms dominate (oligopoly). Understanding market structure helps managers decide pricing strategy, output level, and competitive moves.
This chapter is commonly asked as:
Market structure refers to the characteristics of a market that determine the level of competition and pricing power. It describes:
Important determinants:
Perfect competition is a market where many buyers and sellers trade a homogeneous product and no single firm can influence the market price.
Features:
Examples (approx.): agricultural commodity markets in ideal form.
Under perfect competition:
Profit-maximization condition (basic):
Monopoly is a market where there is only one seller of a product with no close substitutes.
Sources/causes of monopoly:
Monopolist is a price maker, but it cannot sell unlimited quantity at any price. It faces the market demand curve.
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Determinants of market structure (any four):
Thus, these factors decide competition and pricing power of firms.
Features of perfect competition (any five):
Hence, price is determined by market forces and individual firms accept it.
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The pricing power of a firm depends heavily on the market structure. In some markets, firms are price takers (perfect competition). In others, a single firm controls supply (monopoly) or a few big firms dominate (oligopoly). Understanding market structure helps managers decide pricing strategy, output level, and competitive moves.
This chapter is commonly asked as:
Market structure refers to the characteristics of a market that determine the level of competition and pricing power. It describes:
Important determinants:
Perfect competition is a market where many buyers and sellers trade a homogeneous product and no single firm can influence the market price.
Features:
Examples (approx.): agricultural commodity markets in ideal form.
Under perfect competition:
Profit-maximization condition (basic):
Monopoly is a market where there is only one seller of a product with no close substitutes.
Sources/causes of monopoly:
Monopolist is a price maker, but it cannot sell unlimited quantity at any price. It faces the market demand curve.
Pricing/output decision:
Monopoly may practice different pricing methods, including price discrimination (detailed later topic).
Monopolistic competition has many sellers, but products are differentiated (brand, quality, features).
Features:
Examples: restaurants, branded clothing, cosmetics (approx.).
Oligopoly is a market dominated by a few large firms.
Features:
Examples: telecom, airlines, cement, automobiles (approx.).
In oligopoly, prices often remain stable (rigid) because:
This idea is represented by the kinked demand curve concept (basic mention):
When price changes are risky, firms compete through:
This is common in monopolistic competition and oligopoly.
Market structure affects:
Perfect competition: Market price → Firm chooses Q where P=MC
Monopoly: Firm chooses Q where MR=MC → Sets price from demand curve
Oligopoly: Interdependence → price rigidity / strategy
Monopolistic competition: Differentiation → some price control + advertising
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Thus, pricing power increases as competition decreases.