Analyzing Market Structures and Competition

This assignment delves into the complexities of market structures, examining perfect competition, monopolistic competition, oligopoly, and monopoly. Students will analyze the characteristics of each structure, their impact on pricing strategies, output levels, and overall market efficiency. The assignment also explores real-world examples and theoretical models to illustrate the dynamics of competition in different market settings.

Running head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

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Table of Contents
a) Different forms of market structure..........................................................................................2
Monopoly market.........................................................................................................................2
Oligopoly market.........................................................................................................................4
Perfect Competition.....................................................................................................................6
Monopolistic Competition...........................................................................................................9
Resource allocation in different market structures....................................................................12
b) Negative Externalities...............................................................................................................12
Corrective measures of government..........................................................................................14
Case Study: Ground Level Water Scarcity in Agriculture; India..............................................15
Effect of externality in the competitive market.........................................................................18
Effect of Externality in Monopoly market.................................................................................19
References......................................................................................................................................20

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a) Different forms of market structure
Monopoly market
Monopoly represents a market condition where one seller is the sole supplier of a
commodity. The single seller remains unaffected with what other producers does and price and
output in the market is independent of decision related to other product. Example- Transportation
is a sector where government monopoly is found. Indian Railway system is an example of
monopoly market
Features of the market
 The main feature of a monopoly market is the presence of a single seller in the market. It
is the only firm present in the market. For a monopoly market firm and industry is
identical. The monopolist sells goods or service to a large number of buyers.
 Product sold by the monopolist does not have any closed substitutes. In the sense, the
monopolist sells a unique product to retain the market power. In this type of market
elasticity computed for related products or cross elasticity is zero and if not negligible
(Varian, 2014). .
 In the monopoly market no other seller is allowed to enter easily. Entry is strictly
restricted either naturally or with some imposed regulation.
 As the monopolist is the single seller in the market there is no form of intervention in the
price or output decision. No single buyers can influence this decision. Monopolist is the
price maker in the market.

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Short run
In the short run, the monopolist maximizes profit following two conditions. The first
order or necessary condition is that marginal revenue equalize with marginal cost (Toshimitsu,
2017). The second order or sufficient condition is that marginal cost curve cuts the marginal
revenue curve from below or slope of the marginal cost curve should be greater than that of the
marginal revenue curve. Here, the monopolist always earns a supernormal profit.
Figure 1: Monopoly market in the short run
(Source: As created by the author)
The downward sloping curves represent Average revenue (AR) or demand curve and
marginal revenue curve (MR). Short run equilibrium is at the intersection point of MR and short
run marginal cost (SMC) curve and the monopolist’s profit is described by the shaded region in
the figure.

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Long run
In the long run, with significantly long time span the monopolist expand his business and
corresponding plant size. The monopolist has option for whether to extend his plant up to the
optimum point or to operate at a suboptimal or level beyond the optimal. The optimal point is
defined as to reach the minimum point of long run average cost curve. Any point to the left of
minimum point of LAC is a point where plant capacity is not fully utilized whereas point to the
right represents production point where capacity is over utilized (Stiglitz & Rosengard, 2015).
Figure 2: Monopoly market in the long run with optimal plant size
(Source: as created by the author)
Oligopoly market
A market is said to be a oligopoly market if there are few sellers in the market selling
their product to the buyers. In the context of India automobile, cement, aluminum, steel are best
examples of oligopoly market.

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Feature of the market
 In the oligopoly market there is small number of seller (not less than 2). Because of the
presence of few sellers and large number of buyers each seller has a considerable large
share in the market. Therefore, concentration of market share among the few forms is a
key feature of this type of market.
 The sellers sell either a homogenous or differentiated products in the market. Product
differentiation is made increase the market share of respective sellers. If homogenous
product is sold then it is called pure oligopoly. In case of differentiated product it is
called differentiated oligopoly.
 The driving factor behind existence of few sellers in the market is the barriers to entry of
the new firms in the market. The entry barrier present in the form of patent rights,
ownership over some important raw materials, need for a large capital base or the like
(Feng, Li & Li, 2014).
 Other features of oligopolistic market include interdependence strategies or action among
the few firms, competition among the rival based on factors other than price.
Short run
One feature of the oligopoly market is that here the sellers face a kinked demand curve.
The reason for occurrence of the kink is the difference of elasticity in different part of the
elasticity (Hu et al., 2014). Short run equilibrium occurs at the point the marginal cost match
with the marginal revenue. In the short run oligopolistic firms generally maintain profit above
the normal profit as described in the diagram below.

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Figure 3: oligopoly market in the short run
(Source: As created by the Author)
The shaded region shows the profit of the oligopolistic firms.
Long run
Given restricted entry oligopolistic firms able to enjoy abnormally high profit even in the
long run. The mechanism depends on the specific structure of the oligopoly market (Case, Fair
& Oster, 2014)
Perfect Competition
Perfect competition is defined as a situation where large number of firms competes with
each other and there is a large number of buyers. It is difficult to find existence of perfect
competition. However, characteristic similar to perfect competition is found in Indian vegetables,
fruits and fish market.

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Features of the market
 There are infinite numbers of sellers in the market
 The sellers sell a homogenous product ( Mas-Colell, 2014).
 Firms are allowed to freely enter or exit the market.
 Other features of perfect competition are- all the agents have complete information in the
market, factors are perfectly mobile in the market, no government intervention and
absence of advertise cost.
Short run
In short, run perfectly competitive firm can enjoy either a supernormal profit or normal
profit or loss in the market. The short run condition for profit maximization is same as for other
market structure. That is MR = MC. However, in the perfectly competitive market as firms are
price taker unlike monopolist who is a price maker MR is equal to price. Therefore short run
equilibrium condition become P=MC (Lucas & Moll, 2014).
Figure 4: Short run Economic profit of the competitive firm
(Source: As created by the author)

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Figure 5: Short run equilibrium of competitive firm with normal profit
(Source: As created by the author)
Figure 6: Short run economic loss in competitive market
(Source: as created by the Author)
Long run
Whatever be the case in short run, in the long run all the firms in the industry earns only
normal (Kirzner, 2015). In short run, if there is a economic profit then m ore firms enter in the

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market increasing the supply in the market. This reduces price and hence profit. In times of loss
firm leave the market reducing the supply and hence an increase in price and so is the profit.
Figure 7: Long run equilibrium in perfectly competitive market
(Source: as created by Author)
Monopolistic Competition
It is the combination of two extreme market condition- monopoly and perfect
competition. There are competitions between different brands of same products where the brand
owners retain monopoly over its own brand (Nikaido, 2015). A real example of monopolistic
competition is between two famous soft drink brands Pepsi and Coke.
Feature of the market
 Like perfect competition there is large number of sellers competing for market share
 Different sellers sell a other similar but differentiated product. Product differentiation is
an distinguishing feature of this form of market
 There are no restrictions on the entry and exit of the firm.

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 Advertising expenditure is important in this form of market.
Short run
In the short run monopolistically competitive firms can enjoy either an economic profit
or incur economic loss (Assenza et al., 2015). The firm takes the equilibrium decision based on
the usual profit maximization condition. Both the situation of economic profit and economic loss
is described below
Figure 8: short run economic profit
(Source: as created by the author)
Profit in the short run = (Price -average Total Cost) * Quantity

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Figure 9: monopolistic competition with economic loss
(Source: as created by the Author)
Economic loss= (Average Total Cost – Price) * quantity
Long run
In the long run the monopolistic firm ends with only a normal profit. Given free entry
and exit of the super normal profit or loss in the short run reduces to economic and normal profit.
The mechanism is same as described for the perfectly competitive firms. However, unlike
competitive firm, here firms do not operate at the minimum point of long run average total cost.
As a result there remains excess capacity in the market (Parenti, Ushchev& Thisse, 2017).

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Figure 10: long run condition in monopolistically competitive firms
(Source: As created by the author)
Resource allocation in different market structures
Resources are most efficiently allocated in the presence of perfect competition. In every
form of imperfect market resources are either underutilized or over utilized. Like in the
monopoly market if the monopolist does not expand its plant till the minimum point of LAC then
the plant is considered as a suboptimal one. In the monopolistic competition firms never operate
at the minimum point of LAC leading to excess capacity. Similarly, in the oligopoly market
given high concentration of market share each have some market power and never explore all the
resources.
b) Negative Externalities
Externality refers to external effects of an activity on the third party who does not
directly or indirectly related to that activity. The benefit or costs of such external effects are not

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considered in the market value of that goods or services. If it is a benefit then the effect is called
positive externalities and when it harm or impose an external cost then it is termed as negative
externality.
Negative externality is a situation when producer pay less than the actual cost incurred in
the production activity. The extra cost is the cost to the society and in most of the time business
house remains unaccounted for such cost. Social cost of an activity is greater than the individual
cost and thus needs a much broader prospect (Cherry et al., 2013). In time of making any
exchange decision, a typical buyer considers the benefits and costs at the margin. In times of
negative externality, marginal cost goes much beyond the private marginal cost. In case of
unregulated market, the intensity of negative externalities increases. The actual director of such
activity does not take the responsibility of the additional cost and gently pass it to the society.
Because of underestimation of cost producers are able to produce a higher amount of good than
social optimal level.
Social cost = Private cost + External cost
A common example of negative externality is the pollution from increasing
industrialization. Different factories operating in different region causes pollution by emission of
smokes, harmful gases and substance, dust particles, waste water and other kinds of pollutants
(Carraro, Katsoulacos & Xepapadeas, 2013). For example, lot of pollutants mix with air and
ground from the operation of thermal power plants. The direct effect is the air and land pollution
of local areas. Breathing in the polluted air causes diseases like asthma, different allergy and
respiratory problems. Besides, land pollution reduces fertility of soil and affects the living
organism in the soil.

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Figure 11: Market with negative externality
(Source: as created by Author)
The figure above describe the market condition in the presence if negative externality. S1
and D is the market supply and demand curve. S1 also represents the marginal cost of
production. O is the market equilibrium point leading to market outcome of Q1. However,
assumption is made about the presence of negative externality and thus social marginal cost
differs from the private marginal cost. The social marginal cost is above the private marginal cost
and is denoted as S. Socially optimum output is Q as obtained from the intersection of demand
and social marginal cost curve.
Corrective measures of government
With negative externality since social optimum is less than the market optimum
government needs to intervene to correct the externality and achieve the optimum output.

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Government intervention can take different forms such as direct regulation by law, imposition of
piguvian tax and other provisioning measure of the government.
Law
Controlling pollution by direct regulation is known as the command and control. There
are different laws to correct pollution such as automobile emission law, emission law, hazardous
material treatment law and many others. Once government imposes law, everybody is bound to
obey the law.
Piguvian tax
The aim here is to impose a tax on the polluter. Tax increases the private cost. If it is less
costly for the individual to reduce the pollution than paying tax then the individual considers
reducing the pollution. Exercise duty on vehicle emission is an example of this kind of tax (Iossa
& Martimort, 2015).
Arranging provisions
Government provisioning means giving some facilities to the society. Here assistance is
given in terms of building hospitals, allowing special grants or arranging package program.
However, these are not very effective solution to the externality problem because it does not hit
the problem source.
Case Study: Ground Level Water Scarcity in Agriculture; India
In the case study, the effect of intensive farming in Indian agriculture on the ground water
level is taken for consideration. Indian agriculture is considered as dependent on monsoon season
and rainwater is the main source of water supply here. However, irrigation supplements rain

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water and hence have a important role for the concerned sector. Study shows, irrigated land in
India supplies 70% of food grain (Tripathi, Mishra & Verma, 2016). Percentage of ground water
used for irrigation is 60%. This leads to over exploitation of ground water resulting in a drastic
reduction in the water level.
Negative Externality
Agriculture product marketing causes depletion of water resources. A related
consequence is poor environment condition. Short-term impact of large-scale irrigation is
increasing harvesting of food and cash crops that benefit the economy. In the long-run, over
utilization of ground water results in scarcity of the water resources. Data reveals irrigation
blocks that cause massive exploitation of water resources are increasing at a rapid rate of 5.5%
per year. This is the reason for considering scarcity of water as a negative externality generated
from agricultural activity. It has an adverse impact on the agricultural production, profitability
and future productivity.

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Ground water situation in India
Table 1: Ground Water Resources of India, (Million hectare meters per annum)
(Source: Zaveri et al., 2014)
From the above table it is seen that the availability of ground water is very less in
comparison to its demand.
Government initiatives
To counter the situation government uses its command and control power. However,
given the vast size of the country it is not possible to tackle the situation by the means of strict
regulation. Therefore, government has also undertaken some additional policy initiatives to
conserve water resources. To reduce the use of ground water emphasis has been given on use of
rain water for harvesting and other related purposes (Carlton & Perloff, 2015 ). Watershed
programs are arranged to spread awareness.

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Effect of externality in the competitive market
Figure 12: Negative externality in the competitive market
(Source: as created by the Author)
The competitive firm’s output is Qc. The socially optimum output level is Qs. In
the presence of externality the competitive firm produces a higher output and
hence led to a greater amount of deadweight loss shown by the shaded region
(Wang & Tan, 2017).

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Effect of Externality in Monopoly market
Figure 13: Monopoly market with negative externality
(Source: as created by the Author)
Opposite is the case for a monopoly firm. Here, market equilibrium quantity is less than
the socially desirable outcome. Therefore, it can b e said that with externality monopoly market
is superior to a competitive one because its output is closer to desirable social output (Dunne et
al., 2013). This results in a much smaller deadweight loss shown by the shaded region.

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References
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competition: Some insights from the lab. Journal of Economic Dynamics and Control, 50,
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Carraro, C., Katsoulacos, Y., & Xepapadeas, A. (Eds.). (2013). Environmental policy and market
structure (Vol. 4). Springer Science & Business Media.
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Cherry, T. L., Kallbekken, S., Kroll, S., & McEvoy, D. M. (2013). Cooperation in and out of
markets: An experimental comparison of public good games and markets with
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Feng, Y., Li, B., & Li, B. (2014). Price competition in an oligopoly market with multiple iaas
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partnerships. Journal of Public Economic Theory, 17(1), 4-48.

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Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.
Lucas Jr, R. E., & Moll, B. (2014). Knowledge growth and the allocation of time. Journal of
Political Economy, 122(1), 1-51.
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Decisions of Monopoly. Modern Economy, 8(06), 806.

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Zaveri, E., Grogan, D. S., Fisher-Vanden, K., Frolking, S., Lammers, R. B., Wrenn, D. H., ... &
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