2. Pure Monopoly
Market classifications from the buyer’s angle are,
A bilateral monopoly is a situation where a single seller confronts a single buyer.
Answers to two questions are sought throughout the analysis:
1.How do firms make pricing and production decisions?
2.What are the social welfare implications of those decisions?
Homogeneous Vs Differentiable Commodity
A product is homogeneous if all units of the product offered for sale are of the same quality at least in the eyes of the buyer. When an industry produces a homogeneous product, each firm produces a commodity which is identical to that produced by every other firm in the industry. Hence, as long as firms charge the same price, buyers are indifferent about the firm they actually buy the good from. Differentiated products are imperfect substitutes and buyers are particular about the source of the good.
Characteristics of Pure Competition
1.A large number of independent sellers
2.Standardized homogeneous product
3. All sellers are price takers
4.Free entry and exit
5.Perfect factor mobility
6.Perfect knowledge about market conditions
These are extremely restrictive assumptions and may be hard to replicate in real life. Closest approximations are the agricultural product market (grains), stock market etc. However, the pure competition model is extremely useful in predicting real world situations in terms of economic efficiency and optimal allocation of resources.
Pure Competition is characterized by...