Market Types

BY MANU SINGLA csc

INTRODUCTION

A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established.

For a market to be competitive, there must be more than a single buyer or seller. It has been suggested that two people may trade, but it takes at least three persons to have a market, so that there is competition on at least one of its two sides.[1] However, competitive markets rely on much larger numbers of both buyers and sellers. A market with single seller and multiple buyers is a monopoly. A market with a single buyer and multiple sellers is a monopsony. These are the extremes of imperfect competition.

Markets vary in form, scale (volume and geographic reach), location, and types of participants, as well as the types of goods and services traded. Examples include:

•           internet markets

•           Ad hoc auction markets

•           Markets for intermediate goods used in production of other goods and services

•           Labor markets

•           International currency and commodity markets

In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price. This influence is a major study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. There are two roles in markets, buyers and sellers. The market facilitates trade and enables the distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated and priced. A market emerges more or less spontaneously or is constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods.

Perfect competition market

In economics, a perfect market is defined by several conditions, collectively called perfect competition. Among these conditions are

•           Perfect market information

•           No participant with market power to set prices

•           No barriers to entry or exit

•           Equal access to production technology

The mathematical theory is called general equilibrium theory. On the assumption of Perfect Competition, and some technical assumptions about the shapes of supply and demand curves, it is possible to prove that a market will reach an equilibrium in which supply for every product or service, including labor, equals demand at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.[1]

Share and foreign exchange markets are commonly said to be the most similar to the perfect market. The real estate market is an example of a very imperfect market. Note that the conditions for Perfect Competition mean that a perfect market cannot be unregulated, since these preconditions for market function cannot at the same time be products of the market, yet must be provided somehow.

Another characteristics of a Perfect Market is normal profits, just enough to induce enough participants to stay in the market to satisfy customer demand. The least efficient producer may have very small profits, and be unable, for example, to pay dividends to shareholders, while more efficient producers have larger profits.

This attribute of perfect markets has profound political and economic implications, as many participants assume or are taught that the purpose of the market is to enable participants to maximize profits. It is not. The purpose of the market is to efficiently allocate resources and to maximize the welfare of consumers and producers alike.

 Basic structural characteristics:-

Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific characteristics may include:

•           Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.

•           Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market.

•           Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions.

•           Perfect information - Prices and quality of products are assumed to be known to all consumers and producers.[1]

•           Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility).[1]

•           Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.

•           Homogeneous products – The characteristics of any given market good or service do not vary across suppliers.

•           Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry.[2]

 

Imperfect competition market

In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied. It is a market structure that does not meet the conditions of perfect competition. [1]

Forms of imperfect competition include:

•           Oligopoly, in which there are few sellers of a good.

•           Monopolistic competition, in which there are many sellers producing highly differentiated goods.

•           Monopsony, in which there is only one buyer of a good.

There may also be imperfect competition due to a time lag in a market. An example is the “jobless recovery”. There are many growth opportunities available after a recession, but it takes time for employers to react, leading to high unemployment. High unemployment decreases wages, which makes hiring more attractive, but it takes time for new jobs to be created.

1.)OLIGOPOLY:-

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists).[citation needed] Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants

Characteristics of oligopoly:

Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs.[1]

Ability to set price: Oligopolies are price setters rather than price takers.[1]

Number of firms: "Few" – a "handful" of sellers.[2] There are so few firms that the actions of one firm can influence the actions of the other firms.[4]

Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).[3]

2.)Monopolistic competition:-

It is a type imperfect competition such that of one or two producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.[1]

Monopolistically competitive markets have the following characteristics:

•           There are many producers and many consumers in the market, and no business has total control over the market price.

•           Consumers perceive that there are non-price differences among the competitors' products.

•           There are few barriers to entry and exit.[4]

•           Producers have a degree of control over price.

3.)Monopsony:-

In economics, a monopsony is a market form in which only one buyer faces many sellers. As the only or majority purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyer.

A monopsony is a market condition where multiple sellers, [the majority of sellers in that market] all have to sell to the same individual buyer because that buyer is buying a significant portion of the entire market. This gives the buyer the advantage because the buyer can keep asking each seller to match or undercut the competing sellers prices, thus driving down the prices of the products in that market.

Monopoly market

A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity.  Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.[2] The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is business entity that has significant market power, that is, the power, to charge high prices.[3] Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).[4]

Monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition. (See also Bertrand, Cournot or Stackelberg equilibria, market power, market share, market concentration, Monopoly profit, industrial economics). Sometimes governments decide legally that a given company is a monopoly that doesn't serve the best interests of the market and/or consumers. Governments may force such companies to divide into smaller independent corporations as was the case of United States v. AT&T, or alter its behavior as was the case of United States v. Microsoft, to protect consumers.

Monopolies can be established by a government, form naturally, or form by mergers. A monopoly is said to be coercive when the monopoly actively prohibits competitors by using practices (such as underselling) which derive from its market or political influence (see Chainstore paradox). There is often debate of whether market restrictions are in the best long-term interest of present and future consumers.

In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly of a market is not illegal in itself, however certain categories of behavior can, when a business is dominant, be considered abusive and therefore incur legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies, but they rarely provide market power. The government may also reserve the venture for itself, thus forming a government monopoly.

Characteristics of monopoly:-

•           Profit Maximiser: Maximizes profits.

•           Price Maker: Decides the price of the good or product to be sold.

•           High Barriers to Entry: Other sellers are unable to enter the market of the monopoly.

•           Single seller: In a monopoly there is one seller of the good which produces all the output.[5] Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.

•           Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.