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MARKET ANALYSIS By: Prof. VaniDhawan
Introduction to Market Analysis • A market analysis studies the attractiveness and the dynamics of a special market within a special industry. • It is also known as a documented investigation of a market that is used to inform a firm's planning activities, particularly around decisions of inventory and purchase, work force expansion/contraction, purchases of capital equipment, promotional activities, and many other aspects of a company. • Through the dimensions of market like its size, trends, growth rate, profitability, cost structure, distribution channels, key success factors etc…………………….the strengths, weaknesses, opportunities and threats (SWOT) of a company can be identified.
Meaning of Market • Market is place where buyers and sellers are brought into contact with each other directly or indirectly, to sell and buy commodities. • According to Benham, “Market is a area over which buyers and sellers are in close touch with one another, either directly or through dealers, that the price obtainable in one part of the market affects the prices paid in other parts.”
Market Morphology • To analyze and understand the economic dimensions of decision making like production and pricing, markets may be characterized on the basis of following parameters:: • Nature of competition :: number, size and distribution of sellers in the market. • Nature of product :: whether it is homogeneous or differentiated. • Number and size of buyers :: whether it is large or small and their preferences about the products. • Freedom to enter into or exit from the market.
1. Market Based on Area Local Markets Regional Markets National Markets International Markets
2. Market Based on Time Elements Very short period markets Short period markets Long period markets Very long period markets
3. Market Based on Competition PERFECT COMPETITION:: • Perfect Competition is a market structure where there is a perfect degree of competition and single price prevails. • The closest representation of perfectly competitive markets in real life is the agricultural markets, street food vendors, free software developers etc…….
Features of Perfect Competition Under perfect competition, every participant is a price taker………..no one is in the position to influence it. • Large number of sellers. • Large number of buyers. • Product homogeneity. • Free entry and exit of firms. • Perfect Knowledge of market conditions. • Zero Advertisement Cost • Perfect mobility of factors of production. • Government non-intervention. • Non-existence of transport cost.
Conditions of Equilibrium under Perfect Competition • Marginal revenue (MR) must be equal to its Marginal cost (MC). • Marginal cost curve must cut the marginal revenue curve from below at the equilibrium output. MC R R’ Revenue & Cost AR=MR O N M Output
Equilibrium of the Firm in Short Run Profits incurred by the Firm: When SAC is below the equilibrium point. Profit per unit of output = AR - AC Profits
Cont…………. Losses incurred by the Firm: When SAC is above the equilibrium point. AR < AC Losses
Equilibrium of the Firm in Long Run Condition: Price = Marginal Cost = Average Cost In long run, Equilibrium established at the minimum point of LAC. Optimum capacity
Equilibrium of the Industry in Short Run Two Conditions : • The short run quantity demanded and quantity supplied must be equal. • All firms in the industry should be in equilibrium whether they are making profits or losses.
Equilibrium of the Industry in Long Run Three Conditions : • The short run quantity demanded and quantity supplied must be equal. • All firms in the industry should be in equilibrium. • There should be no tendency for the firms to enter into or leave the industry.
Equilibrium Price Determination under Perfect Competition • In perfect Competition, the equilibrium price is determined when both quantity demanded and quantity supplied are equal.
Case Let :: Does Perfect competition Exist ? • The street food/fruits and vegetable market somewhat reflects the same conditions prevalent in any other sector, viz, many sellers selling homogenous products with little or no variations in the product’s nature, consumers/sellers possessing perfect information of the product in question and relatively few barriers to entry or exit. However the scenario of perfect competition in the street food/fruits and vegetable market is slightly more as compared to being present in other sectors due to advertising and branding efforts being used in other sectors to differentiate the product. The street vendors do not have any transaction costs as they do not advertise or brand their products. Moreover, consumers are not dedicated to any particular vendor and can negotiate the price to a large extent. Questions: • Do you agree with the analysis in the case that street food/fruits and vegetable market is more similar to perfect competition like condition? • What other characteristics of perfect competition can be seen in the street vendors of such items?
IMPERFECT COMPETITION • Imperfect competition is the general term for competitive markets that do not match the criteria of perfect competition. They are competitive, but they are imperfect. It covers all forms of market structures ranging from highly competitive to less competitive in nature. • - By economist Robinson
1. MONOPOLY(One Seller) Monopoly is a market structure in which a single firm makes up the entire market. FEATURES: • Price makers. • Sole seller of its product. • Complete absence of competition. • No close substitute for product. • Ability to influence the market price of its product.
TYPES OF MONOPOLY • Perfect Monopoly. • Imperfect Monopoly. • Legal Monopoly. • Private Monopoly. • Public Monopoly. • Joint Monopoly. • Natural Monopoly. • Technological Monopoly. • Discriminating Monopoly.
Cont………… 1. Perfect Monopoly • It is also called as absolute monopoly. There is absolutely zero level of competition. Such monopoly is practically very rare. 2. Imperfect Monopoly • It is also called as relative monopoly or simple or limited monopoly. It refers to a single seller market having no close substitute. So, there is fear of competition to some extent e.g. Mobile telcom industry is having competition from fixed landline phone service industry (e.g. MTNL, BSNL). 3. Legal Monopoly • When monopoly exists on account of trade marks, patents, copy rights, statutory regulation of government etc., it is called legal monopoly. Music industry is an example of legal monopoly.
Cont………… 4. Private Monopoly • When production is owned, controlled and managed by the individual, or private body or private organization, it is called private monopoly. e.g. Tata, Reliance, Bajaj, etc. groups in India. Such type of monopoly is profit oriented. 5. Public Monopoly • When production is owned, controlled and managed by government, it is called public monopoly. For example: Railways, Defence, etc. 6. Joint Monopoly • A number of business firms acquire monopoly position through amalgamation, syndicates, etc, it becomes joint monopoly. e.g. Actually, pizza making firm and burger making firm are competitors of each other in fast food industry. But when they combine their business, that leads to reduction in competition. They can enjoy monopoly power in market.
Cont………… 7. Natural Monopoly • It emerges as a result of natural advantages like good location, abundant mineral resources, etc. e.g. Gulf countries are having monopoly in crude oil exploration activities because of plenty of natural oil resources. 8. Technological Monopoly • It emerges as a result of economies of large scale production, use of capital goods, new production methods, etc. E.g. engineering goods industry, automobile industry, software industry, etc. 9. Discriminating Monopoly • Such a monopoly firm charges different price to different customers for the same product. It prevails in more than one market.
Short Run Equilibrium under Monopoly Two Conditions: MR = MC MC curve cuts MR curve from below.
Short Run Equilibrium under Monopoly If the demand and cost situations are not favorable for the concern, then they incur losses.
Long Run Equilibrium under Monopoly Business concerns can change their plant size to earn maximum profits and Q is the Equilibrium point where LMR & LMC intersects.
Case Study :: Is it possible to monopolize in the modern network age ? A case of Microsoft
2. DUOPOLY(Two Sellers) A situation in which two companies own all or nearly all of the market for a given type of product or service.
3. OLIGOPOLY (Few Sellers) Oligopoly is a market situation in which there are a few sellers either engaged in selling either homogeneous or differentiated products.
Assumptions under Oligopoly • There is an established market price at which all the sellers are satisfied. • Each seller’s attitude depends on the attitude of his rivals. • MC curve passes through the dotted portion of MR curve so that changes in marginal cost do not affect price & output. • An attempt of every seller to push up his sales by reducing the price will be counter-acted by other sellers. • If the seller raises the price, others will not follow him rather they will stick to the prevailing price.
Determination of Equilibrium under Oligopoly Economist: Paul Sweezy has introduced the “Kinked Demand Curve” to determine the Equilibrium in oligopoly market situation.
4. MONOPOLISTIC COMPETITION(Many Sellers) Monopolistic competition is a market structure in which there are many firms producing similar but not identical products. For example: Toothpaste brands, restaurants, soft drinks etc.
FEATURES OF MONOPOLISTIC COMPETITION • Existence of Many firms. • Product differentiation. • Large number of buyers. • Free entry and exit of firms. • Selling costs. • Imperfect knowledge. • The group. • Absence of inter-dependence.
Long Run Equilibrium under Monopolistic Competition Profits are normal when: AR = AC MR = MC
PRICE DISCRIMINATION • It is also known as the Discriminating Monopoly. • It is the practice of discriminating among buyers on the basis of the price charged for the same good or service. • According to Joe s. Bain, “Price Discrimination refers strictly to the practice by a seller of charging of different prices from different buyers for the same product.” • For Example :: Different binding of the same book, an amount of different seats in a aircraft or a train etc.