We will now examine the problem of determining price and output levels in alternative market structures. Market structures are categorized in terms of number of firms or the number of sellers present in the market and whether we are considering a homogeneous or differentiable commodity. We will consider four types of market structures:
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:
How do firms make pricing and production decisions?
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
A large number of independent sellers
Standardized homogeneous product
All sellers are price takers
Free entry and exit
Perfect factor mobility
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...
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