Table of Contents


Market


Market is the set of conditions or situation where buyers and sellers meet and conduct exchange transactions.

According to Benham, “any area where buyers and sellers of a commodity are in close touch with each other, either directly or indirectly, that the price obtainable in part of market affects the price paid in other part.”


Components of Market:

There are 4 main components of market, which are: -


1. Consumer – the buyer of the product is called consumer. The buyer is identified by the means of income, needs, taste and preferences.


2. Seller – there are manufacturers of products to be sold in the market. These manufacturers are called sellers when they ae selling the product in the market.

For eg.: there is a huge demand of motorcycles in the market, then there must be industries manufacturing motorcycles in the country.


3. Commodity – a market means buying and selling of a commodity. If a commodity does not exist, then there will be no market situation. Each commodity has a separate market, which mean each commodity has a separate set of buyers and sellers.


4. Price – if the commodity is to be bought and sold, there must be a price for the product. The exchange of products between buyers and sellers occur at a particular price and place.


Classification of Market:

Market can be classified on the following basis: -


1. On the basis of Area –

  1. National Market - When a commodity is demanded and supplied throughout the country is called national market. 
  2. International Market - When a commodity is demanded and supplied all over the world is called international market. 
  3. Regional Market - When a commodity is sold at particular locality. It is called a regional / local market.


2. On the basis of Nature of Transaction –

  1. Spot Exchange Market – in spot exchange market, there is physical exchange of goods on spot.
  2. Future Market – in case of future market, the transactions involved is of future exchange of goods.


3. On the basis of volume of business –

  1. Wholesale market - A wholesale market is a marketplace where goods are sold in large quantities to retailers, businesses, or other wholesalers, rather than directly to consumers. Wholesalers purchase products in bulk from manufacturers or producers and then sell them in smaller quantities to businesses or retailers that will resell them to the public. 
  2. Retail market - The retail market refers to the sector of the economy where goods and services are sold directly to consumers for personal or household use.


4. On the basis of time –

  1. Very short period market - Markets which deal in perishable goods like, fruits, milk, vegetables etc., are called as very short period market. In this kind of market, producer cannot make any changes in supply of a commodity. Here, supply remains constant. Price is determined on the basis of demand.
  2. Short Period Market - In this period supply can be changed to some extent by changing the variable factors of production.
  3. Long Period Market - In this period supply can be adjusted in accordance with change in demand. Both supply and demand can adjust to changes in market conditions. In this type of market, durable commodities that are generally non-perishable in nature are sold.


5. On the basis of Status of Seller –

  1. Primary Market – market wherein primary producers sell their agricultural products to wholesalers.
  2. Secondary Market – market wherein wholesalers sell products bought by them to the retailers.
  3. Terminal Market – market wherein retailers sell products to the consumer / end users.


6. On the basis of Regulation –

  1. Regulated Market - Regulated markets operate under government-imposed laws and policies that ensure fair competition, protect consumers, and maintain stability by controlling quality, price, and other factors.
  2. Unregulated Market - Unregulated markets are free markets where transactions are driven solely by the forces of supply and demand without government intervention. 


7. On the basis of Competition –

  1. Perfect Market - A perfect market is one in which the number of buyers and sellers is very large, all engaged in buying and selling homogeneous products without any restrictions, at a uniform price.
  2. Imperfect Market - In this market, competition is imperfect among the buyers and sellers. It is further divided into 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic competition.


We’ll discuss Perfect and Imperfect Competition in detail:


Perfect Competition –

Perfect Competition refers to the market situation where there are large number of buyers and sellers engaged on buying and selling homogenous products at a uniform price.


According to Leftwich, “perfect competition is the market in which there are many firms selling identical products with no firm large enough to influence the market price.”


Features:

Features of Perfect Competition are as follows: -


1. Large number of Buyers and Sellers –

  1. Quantity bought and sold by the buyer and the seller is so small that no single buyer or seller can influence the market price.
  2. Output of a single firm is only a small portion of the total output, and demand of a single buyer is only a small portion of the total demand.
  3. Hence, the market price has to be taken as given and unchangeable by any buyer or seller.


2. Homogenous Product –

  1. Products produced and sold by the producer are homogenous.
  2. They are standardised and identical.
  3. Products of various firms are more or like same. They are perfect substitutes to each other.


3. Free Entry and Exit –

  1. The firms in the perfect competition have the freedom to start or close their businesses.
  2. Under perfect competition, all firms earn normal profit. When new firms enter into production, extra profit earned by old firms will be shared with the new firms.
  3. If profit is less, then some firms will stop producing and consequently the profit of the remaining firms will rise.


4. Perfect Knowledge –

  1. In perfect competition, buyers and sellers are fully aware of the price that is being offered and expected, product quality and other relevant market factors.
  2. All the buyers are expected to know market price of the product. Hence, sellers can’t change the price.


5. No Transport Cost –

  1. The cost of moving goods between sellers and buyers is considered negligible or zero, ensuring a uniform price for a homogeneous product across the market.


6. Price Takers –

  1. Firms in a perfectly competitive market are price takers, meaning they must accept the market price determined by the forces of supply and demand.


7. Uniform Price –

  1. There is a single uniform price for the product in the market, determined by the overall demand and supply. 


Imperfect Competition –

Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario.


Imperfect Competition is further divided into 4 categories: -


1. Monopoly (only one seller) –

Monopoly is a market condition in which there is a single seller.

There are no close substitutes of the commodity. There are barriers to entry.


Features:

Features of monopoly are as follows: -


  1. In monopoly, there is a sole producer with large number of buyers.
  2. There is no close substitute for a product produced by monopoly and hence, buyers have no alternative or choice.
  3. There is complete absence of competition.
  4. Monopolist is a price maker since there is no rival. He can fix the price according to him. He also charges different price to different consumers.
  5. There is only one firm which constitutes the industry. There is no difference between firm and industry under monopoly.
  6. Monopolist has complete control over the supply and hence, he can fix the price and quantity of output to be sold in the market.


Anti-Monopoly Law –

  1. It aims to promote fair competition and prevent the concentration of market power.
  2. It prohibits practices like price fixing, collusion and monopolistic behaviour to safeguard consumers and maintain a competitive marketplace.
  3. Federal trade commission in US enforce such laws.
  4. In India, Competition Commission of India (CCI) is the regulatory body responsible for enforcing such laws to prevent unfair monopoly.


2. Monopolistic Competition (many sellers with highly differentiated product) –

Monopolistic competition exists when many companies offer competing products or services that are similar but not perfect substitutes. The barriers to entry in a monopolistically competitive industry are low and the decisions of any one firm don't directly affect its competitors. Competing companies differentiate themselves based on pricing and marketing decisions.


Features:

Features of Monopolistic Competition are as follows: -


a. There are many firms producing products but these are not as big as perfect competition –

  1. Each firm contributes small portion of total output and have limited control over price control.


b. Independent price policy is followed by the firms –

  1. Firms are producing substitute products as such each determining price, taking into consideration only cost of production and demand.


c. Product Differentiation –

  1. Firms produce products which are similar but not identical.
  2. Each firm tries to differentiate its product from other rival products in way or the other; with distinct marketing strategies, brand names, and different quality levels. 


d. Low barriers to entry –

  1. A single firm doesn't monopolize the market in monopolistic competition. Multiple companies can enter the market and all can compete for market share.
  2. If existing firms earn supernatural profit, it attracts entry of other firms in the market.
  3. If existing firms incur losses, it leaves market.


e. Selling Cost is an important feature in monopolistic competition –

  1. Expenses incurred in advertisements and other selling medium is known as Selling Cost.
  2. Most important form of selling cost is advertisement cost, undertaken by firms to popularise brand market.


f. Both buyers and sellers and do not have perfect knowledge of market –

  1. Large number of products and each being close substitute to the other, buyers are unable to choose the right product.
  2. Similarly, the sellers don’t know exact preferences of the buyers and hence, are unable to get the expected demand for their product.


g. Demand Elasticity –

  1. Demand is highly elastic in monopolistic competition and very responsive to price changes.
  2. Consumers will change from one brand name to another for items like laundry detergent based solely on price increases.


3. Oligopoly (few sellers of goods) –

It is defined as competition among the few. Pure oligopoly includes firms selling homogenous or close substitute goods.

It is a state of limited competition, in which a market is shared by a small number of producers or sellers.


Features:

Features of oligopoly are as follows: -


a. Few sellers – there are few sellers, either of homogenous or differentiated product.


b. Interdependence – the firms depend on each other for fixing the price and determining output.


c. Uncertainty – As the number of firms is less, any change in price and output by one firm will affect the rival firm also. This interdependence of firms creates uncertainty in the market. The demand curve and revenue curve of each firm changes because of action taken by the other firms. The other firms may or may not respond to these changes.


d. High cross elasticity – firms under oligopoly market produce products are close substitutes and therefore, have high cross elasticity. There is always fear of retaliation by rivals.


e. Elements of monopoly –

  1. Each firm controls large share in the market and produces differentiated product.
  2. Firms enjoy monopoly powers in determining price to the extent of differentiation.


f. Rigid Pricing – firms under oligopoly market stick to their own price. If a firms reduces price of its commodity, it will be followed by other firms, resulting in price war. Therefore, to avoid such situations, firms stick to their own price.


g. Kinked Demand Curve – only firms in oligopoly market have kinked demand curve, due to price rigidity.


4. Duopoly (2 major suppliers) –

A market situation in which two suppliers dominate the market for a commodity or service.

For eg.: Visa and MasterCard (Credit Card Market); Coca-Cola and Pepsi (soft drink industry); Airbus and Boeing (commercial air flights); Android and Apple (mobile phones industry) etc.


Features:

Features of duopoly are as follows: -


a. Two dominant firms – there is presence of only two firms with significant market share.


b. Strategic Interdependence - Decisions made by one firm directly affect the other, leading to strategic interactions and reactions. 


c. Limited Competition - Compared to more competitive markets, duopolies have fewer players, resulting in less competition. 


d.Price Interdependence – One firm's pricing decisions influence the other, and they may react by adjusting their own prices.


e. High Barriers to Entry - It's difficult for new firms to enter a duopoly market due to the dominance of the existing two. 


f. Product Differentiation - Firms may differentiate their products through features, branding, or other means to gain a competitive edge.