What is Market? Meaning and Forms of Market- Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly.

What is a market? Ordinarily, an individual would answer this question pointing to a shopping complex. But, for a student of economics or commerce, this is not an appropriate answer. In economic the concept of a market has a special meaning. Market refers to a mechanism or an arrangement that facilitates the sale and purchase of goods. This arrangement could simply be through telephone communication, on the internet or even through the electronic mail. We all are familiar with teleshopping which is marketing without any shopping complex.

In economics, the market does not refer to any shopping complex or mall. It refers to a mechanism or an arrangement that facilitates contact between the buyers and the sellers for the sale and purchase of goods and services.


In the light of this definition, the size of the market is not to be viewed as the size of some geographical area where sale and purchase of goods are conducted. Instead,  it is to be viewed in terms of the volume or value of sale and purchase of goods and services. Thus, the size of market expands when the volume or the value of the sale and purchase expands.
Note- An Industry is a group of firms producing a particular product.

 
FORMS OF MARKET

Depending on the degree of competition or number of firms in the market, a market is often described as one of the following forms:

1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly

Let's see the various forms of markets in details:-

1. Perfect Competition: Perfect competition is said to exist when there is a large number of sellers and buyers and engaged in the sale and purchase of a commodity, and no individual buyer and seller has any control over the price of the product. A price of the product is determined by the forces of market supply and market demand.
Features of Perfect Competition and its Implications:

• Large Number of Small Buyers and Sellers of a Commodity: A perfectly competitive market is dominated by large numbers of small buyers and sellers of a commodity. What does it mean? It means that there is no such buyer and seller in the market whose purchase or sale is so large as to impact the total sale or purchase in the market. Each buyer/seller has only a fractional share in the market demand/supply. Since price is determined by the forces of market demand and market supply, no individual buyer and seller has any control on it. Each buyer and seller has to accept the price as it is in the market. Therefore, it is said that a firm under perfect competition is a price taker, not a price maker. 
• Homogeneous Product: All sellers sell identical units of a product. Accordingly, buyers have no reason to prefer the product of one seller compared to that of the other. Accordingly, uniform price prevails in the market. There is absolutely no price discrimination.
• Perfect Knowledge: Buyers and sellers are fully aware of the prevailing price in the market. They are also aware of the fact that homogeneous product is being sold in the market. 
• Free Entry and Exit of the Firms: A firm can enter or leave the industry any time. In order to analyse the implications of this feature we need to focus on the short period and long period situations. Because of free entry and exit, firms in the long run, earn only normal profits (TR = TC) or (AR = AC). 
• Free Decision Making: There is no agreement between the sellers regarding production quantity and price. Nor is there any restriction regarding the sale and purchase of any commodity. All firms are free to take their own decisions. 
• Perfect Mobility: Factors of production are perfectly mobile. They will move to that industry where they get the best price. 
• No Extra Transport Cost: For one price to prevail throughout the market, it is essential that there is no extra transport cost for the consumers while buying a commodity from different sellers. 

(2). Monopoly: A monopoly is a form of market in which there is a single seller of a product or services with no close substitution. For example- Railways in India are a monopoly industry of the Government of India. Since there is only one producer of a product or service in the market, the distinction between firm and industry disappears.
Main features of Monopoly:

• One Seller and Large Number of Buyers: Under monopoly, there is a single producer of a commodity. He may be alone or there may be a group of partners or a joint stock company or a state. However, there is a large number of buyers of the product.
• Restriction on the Entry of New Firms: Under monopoly, there is some restriction on the entry of new firms into the monopoly industry. 
• No Close Substitution: A monopoly firm produces a commodity that has no close substitution. For Example- There is no close substitute of railways as a 'bulk carrier'. 
• Full Control over Price: Being a single seller of the product, a monopolist has full control over its price. A monopolist thus a price maker. He can fix whatever price he wishes to fix for his products. 
• Price Discrimination: A monopolist may charge different price from different buyers for the same goods. It is called price discrimination. 

(3). Monopolistic Competition: It is a form of a market in which there are many sellers of the product, but the product of each seller is somewhat different from that of the other. Thus, there are many sellers, selling a differentiated product. Product differentiation is generally achieved through trademark or brand name. For example- Firms producing different brands of toothpaste such as Colgate, Sensodyne, Close-up, Pepsodent, etc. The monopolistic competition combines the features of monopoly and perfect competition. 

Main features of Monopolistic Competition:

• Large Number of Buyers and Sellers: Under perfect competition, there is a large number of buyers and sellers. Also, the size of each firm is small. Each firm has a limited share of the market. 
• Product Differentiation: It is a distinct feature of monopolistic competition. A product is often differentiated by way of trademark and brand names. The differentiated products are a close substitute of each other, like Colgate toothpaste and Close-up toothpaste. Because of product differentiation, each firm can decide its price policy independently. So that each firm has a partial control over the price of its product. 
• Free Entry and Exit of Firms: Firms are free to enter the industry or leave it. However, new firms have no absolute freedom of entry into the industry. Products of some firms may be legally patented. New firms cannot produce those products. For example- No rival firm can produce and sell a patented item like Woodland shoes.
• Selling Cost: Each firm has to incur selling cost to promote its products and to increase its sale. Selling expenditure such as advertisement etc. This is because there is a large number of close substitute in the market.
• Less Mobility: There is no perfect mobility of factors, goods and services.
• Lack of Perfect Knowledge: Sellers and buyers of products do not have perfect knowledge about the market price. Because of product differentiation, it is not possible to compare the price of different products. 
• Non-Price Competition: Firms may compete with one another without changing price of their product. For example- If you buy one packet of 'Surf' you may get one glass tumbler free with it; and on the purchase of one packet of 'Rin', you may get one stainless steel teaspoon free. Thus, the firms compete by offering gifts to the buyers rather than by cutting the price of their product. 
• More can be sold only at Lower Price: Under monopolistic competition, a firm can sell more of the products by lowering the price. Accordingly, firm's demand curve under monopolistic competition slopes downwards. 

(4). Oligopoly: It is a form of market in which there are a few big sellers of a commodity and a large number of buyers. Each seller has a significant share of the market. There is a high degree of interdependence among the sellers regarding their price and output policy. Because there are only a few sellers, price and output decision of one seller significantly impacts the price and output decision of other sellers in the market. Accordingly, there is severe cut-throat competition in the market. For example- There are only a few auto producers in the Indian market. Maruti Suzuki, Tata, Fiat, Ford, Honda are some well-known brand names.

Main features of Oligopoly:

• A few firms: A few firms, but large in size, dominate the market for a commodity. Each firm commands a significant share of the market and can impact the market price of the product.
• Large Number of Buyers: There is a large number of buyers of a commodity. The number is so large that no individual buyer can impact the market price of the product. 
• Difficult Entry: There are various barriers to the entry of new firms. These barriers are almost similar to those of monopoly. Entry of new firms is extremely difficult.  
• High Degree of Interdependence: There is a high degree of interdependence between the firms. Price and output policy of one firm significantly impacts the price and output policy of rival firms in the market. For example- if GM Motors reduce the price of its cars, Ford Motors may also do the same. 
• Not Possible to Determine Firm's Demand Curve: It is not possible to determine firms demand curve under Oligopoly. Simply because it is not possible to predict change in price. 
• Cartel Formation: With a view to avoiding competition, firms may form a cartel. It is formal agreement among the firms to avoid competition. It is a situation of collusive oligopoly. 
• Non-Price Competition: Under oligopoly, firms tend to avoid price competition. For example- In India, both Coke and Pepsi drinks sell at the same price. However, in order to enhance its share of the market, each firm tries to resort to non-price competition. For example- Coke and Pepsi sponsor different sports, also offer lucrative schemes etc.