Chapter 6
Non-competitive Markets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions
‘I’ ‘M’ Perfect Competition
In order to examine the difference in the equilibrium resulting from a monopoly
in the commodity market as