CHAPTER 5 IV
CLASSIFICATION OP MARKET SYSTEMS
Classical economist» J.S, Mill has said on the most
debatable subject * value* in 1048 that, ’’Happily, there is
nothing in the laws of value which remains for the present
or any future writer to dear up; the theory of the subject
is complete
%
the only difficulty to be overcome is that of
so stating as to solve by anticipation the chief perplexities
which occur in applying it?....". t
However, after this
statement by Mill, value theory has not remain stagnant but
it has always been advancing with the (hanging economic
conditions.
Value of a product is not free from the conditions of
market structure.
Value is a domain of market structure and
the market structure has always been changing with the
1
Mill, J.S., Principles of Political Economy, (1048).
Reprints of Economic Classics, Augustus M.Kelley,
Hew York; 1961, p. 436. '
81
changing economic conditions.
A notion of market structure
implies a clear conception of what it is whose structure is
being assessed.
In practice, it can be identified by chara­
cteristics of different market systems.
The market
structure can be identified with the numbers of sellers and
buyers, buyers choice for sellers or products, sellers
influence on price, possibility of entry or exit, competitors*
goad sellers* ‘behaviour etc.
Since antiquity, a distinction between monopoly and
competitive market structures has been recognised.
Artistotle
had characterised ‘Monopoly* as a situation in which a single
trader engrossed the entire supply#
2
Adam Smith contrasting
price under monopoly to that of free competition.
^
Monopoly
is the market position where the highest price can be got
while the competition is the market situation where the
lowest price which the sellers can commonly afford to take
and at the same time continue their business.
The most important single step towards a modem theory
of how market structure matters was taken by Cournottfby) 1836. ^
He has perceived that a monopolist confronts the downt&Q&d
2.
3
Aristotle* Book I, 5» quoted by Eat well John (at ela. )
(edited by) in the New Ealgrave - A Dictionary of
Economics, Vol.XXX, Machmillan Press, London, 1987,
Seprinted 1988, p, 343.
Smith, Adam (1776), The Tlfealth of Nations, Qfasgow edn.
Oxford University Bress, 1976, Book I, Chapter VX.
82
slopping demand function for its product , and lie maximises
the profits* He has shown how market prices fall with
increasing number of competitors and<convertg) in the many
seller case towards ft zero .profit condition. He provided
the theory of oligopoly, that is market with only few
sellers.
4
Market structures also vary on the buyers’ side.
Market structure is of interest largely because of
the effect it is believed to have d sellers* (and buyers*)
*
behaviour.
'
/
■
The early motivation focussed on a disohotomy
between monopoly and competitive prices,
3
0- •
f
f
She market structure
affects sellers* behaviour as well as pricing behaviour.
It also affects the pace of technological innovations.
With
the increasing oligopolistic elements, product heterogeniety,
non-price competition and sellers* interdependence in the
field of production, the market structure has become too
complex and mess ay. Scherer says,
as in other domains
where market structure affects behaviour, the economist must
be resigned to living world of complex, messy, and still too
poorly understood relationships."
5
But challenges of such a
messy, complex and too poorly understood.relationships market
structure and sellers* as well as buyers* behaviour can never
compell economists to resign from the field.
44 Cournot, Augustin (1838) "Mathematical Principles of the
Theory of Wealth", English translation by Baeon, Nathaniel
T. New York; Macmillan, (1397), Reprinted 1927* Augustus
Kelley, Reprints of Economic Classics; New York, 1960.
5 Scherer, p.M.0980), Industrial Market Structure and Economic
Performance, Ilnd. Edn. Bostan SH ought cm Miffin, Quoted by
Eat well John (op.eit.), p. 343,
83
Eve® changing factors and conditions of economy and
increasing structural complexity of market systems make it
necessary to reanalyse the market structure.
She conditions
of market is a subject to change with time. New characteri­
stics enter in a market or new characteristics take place
of old ones or they mix with old ones aid create more complex
market
system.
Because economic institutions change and also
the light in which we see economic processes changes.
The old
meanings of the term change and the meanings are added all the
time.
It is not surprising that an ever changing economy
models which have been constructed for the explanation of
older forms of models may not fit for the new situations.
II
Meaning of Market
To economists market means any organisation where
buyers and sellers of a good or service are kept in close
touch with each other.
The essential for a market is that
all buyers and sellers should be in constant touch with each
other# either they are in the same building or at the same
place or are able to contact each other by any medium of
communication from distant places.
84
The concept of the market is very familiar since
early days in economic literature.
As Cournot writ is, "It
is well Mown that hy market economists mean, not a certain
place ushers purchases and sales are carried oh, hut the entire territory of which the parts are so united hy the relations of
unrestricted commerce that prices there take the same level
throughout, with ease and rapidly."
6
The more wider and clear meaning of the market was
given hy Jevons, "Originally* a market was a public place in a
town where provisions and other objectives were exposed for
sale* hut the word has been generalised so as to mean any
body of persons who are in intimate business relations and
carry on extensive transactions in any commodities.
A great
city may contain as many markets as there are important branches
of trade and these markets may or may not he located..-...♦ But
the idea of locality is not necessary. The traders may he
spread over a whole town, or region, or a country and yet form
a market, if they are hy means of fairs, meetings,. published
prise lists, the most office or otherwise, jn close oommuniea7
tion with each other."
Buyers and sellers may he scattered over the whole
- world and instead of actually meeting together in a local
6 Cournot, A. Cop.cit). pp. 51-52.
7 Jevons, W.S.1871, The Theory of Political Economy, Londons
Macmillan, %ioted by Dewett, K.K. (1946), Modem Economic
Theory, Syamlal Trusts Kew Delhi, 1969, p. 211i
i
85
market place they may deal with one another by telephone,
telegram, cable or letters.
The dealers may consist wholly or
in part of brokers or agents acting on instructions from
clients far away.
j
Broker or agents may buy or sell at a
particular place on behalf of their clients i.e. sellers or
i
buyers, spread over a wide region or a country or abroad. In
this connection let us see a more concept of the market. wfe
must therefore define a market as y/any area oeer which buyers
ana sellers are in such close touch with one another,
either
i
directly or through dealers that the price obtainable in the
j
part of the market effect the prices paid in other parts'1.
8
Working of the market i.e. direct or indirect , contact
■'
i
of buyers and sellers results in the same price of a good in
market at a period of time.
The same price will rule through­
out the market and if price changes in one part of the market,
it must be (hanged similarly in all parts.
III
Classification of Market
Market can be classified on the bssis of (1) area,
C2) products and C3) nature of competition|looal regional
P
I
national and international markets are classified on the
|
basis of area.
Market is also inown on the basis of product
!i
which is being sold and bought, viz., Groundnut market, ground
8 Berth am, Fredric (1S38), Economics, Londons Is sac Bit man,
3rd Edn., 1955, Eeprinted 1957, p. 167.
i
86
oil market, deoiled cake market, capital-stock market, cloth
market etc*
Groundnut oil market is particularly a regional
market densely spread over Gujarat State. (Chough the groundnut
oil market is thinly spread over the net ion,
it is densly
spread over the State because of some pattern of consumers
choice, availability of raw material, concentration of
producing and trading units end allied facilities, govern­
mental restrictions, transport cost etc* have made the
groundnut oil market broadly limited to the State boundaries.
More important is the discussion on classification of
markets on the basis of nature of competition or nature of
sellers behaviour obtaining therein is called Market Systems,
i.e* perfect competition, monopoly, oligopoly, monopolistic
competition etc,
(There are other types of market classified on different
basis sudi as organised or unorganised market, perfect and
imperfect market etc, but it has very little analytical
relevance here*
Perfect and Imperfect Market
& market is said to be perfect when all the potential
sellers and buyers are promptly aware of the prices at which
transactions take place and all the offers made by sellers
and buyers.
Under such a condition the price of a commodity
will tend to be the same all over the market.
The prevelenee
of the same price for the same commodity at the same time is
the essential characteristic of a perfect market.
Here price
includes the cost of transport, import or local duties and
some other relevant expenses for supplying the products from
one place to other*
A market is imperfect when some "buyers and sellers both
are not aware of the offers being made by others i,e.
ignorance regarding the price of a produets among different
sellers and buyers.
Different prices come to prevail for the
same commodity at the same time in an imperfect market.
Imperfect market conditions prevail not only because of ignorance
of market position, but also under some other conditions.
Imperfect market appears mainly under two circumstances,
(1) where the standard price does not prevail in the market
at a time because of ignorance of price, quality, cost etc.
Here the situation of bilateral monopoly will be created where
price is being determined separately for each bargain,
Price
shall be determined on the basis of bargaining power of two
parties and shall be different for each case.
The lowest
price, generally, shall be offered by seller as per his cost,
Buyer shall be ready to pay the maximum price as per his
eagerness of buying and usefulness of the product, (2) Some
differences in prices are created because of place and
location, as well as negligence regarding prices.
Sellers
88
dealing and relations with buyers create a little diffexnces
in prices for the same goods at the same time,
Sudh imperfe­
ctions are mainly created due to sellers* location and
- 'V /
consumers* attitudes.
9
imperfections.
Mill has discussed such type of
v
Price discrimination
is also one kind of market imper-
4
feet ion.
tion.
Monopoly power is necessary for price discrimina­
te
Sub-classification of price discrimination
are
(i) place-wise, (ii) time-wise; (iii) person-wise.
Mis.
Robinson and Prof. Pigou has given two extreme kinds of price
dis crimination.
. Mrs. Robinson has given the example of full Price
a,
Discrimination
where a seller tries to sell every individual
buyer the same goods at different price, or Kilhuyers will
be divided in subgroups of the same elasticities of demand
10
Prof. Pigou has divided separate units of the commodity
between the different buyers.
Monopolist charges a separate
price for each separate unit of output.
Prof, Pigou has
described sudi a discriminatory position " dis crimination of
the first degree".
11
9 Mill, J»S, (Op.cit. ).
10 Robinson, Joan (1933), Economics of Imperfect Competition,
London § Macmillan, 1959, p* 196,
11 Pigou, A.C. (1920), Economics of Welfare, London i
Macmillan, 5961, p, 279.
4
89
The act of selling the same article at different prices
K
-
’
‘
V
•
to different buyers is known as price discrimination.
But if
the quality or quantity or impression of a goods is different ,
the difference in price can not he considered as price
djas crimination.
*
Perfection or imperfection of the market is not related
to particular market system, hut with the condition of
perfection or imperfection of the market.
As Prof, Chamberlin
says, '‘Since all actual markets, whether purely or monopolist!cally competitive, are more or less imperfect.
mean that all markets are imperfect.
12
This does not
Some markets are very
close to perfect market while some are more or less imperfect.
The kind of market has no direct relation wi;/th the
particular market system.
Generally a product produced in the
conditions of perfect competition, its as change conditions f
i.e. market conditions shall he perfect at wholesale level,
hut the product market at retail level may he imperfect. Goods
produced under monopolistic competitive market system or
monopoly, the market conditions of selling shall he such so
that the products shall he sold at the same price hy different
sellers, hence the market can he regarded as perfect market.
If such a products produced under monopolistic competitive
or heterogeneous oligopoly or monopoly, is sold hy different
12
Chamberlin, E.H*,(1957)» Towards a More General Theory of
Y&lue, Oxford University Eress, New York, Second Printing,
1966, p. 232.
.
90
sellers with little price differences, the market can be
considered imperfect. This creates the imperfect market, not
imperfect competition. Thus, it can be said that market and
market systems are different things. Mjlchlup has rightly said
that "The notion of the ‘perfect market* should be separated
from those of perfect polypoly and perfect £Lipgoly.“
13
Vague and confused terminological use have been done
by many authors and even economists regarding perfect market.
According to Boulding the criterion of a perfect market is the
case of perfect elasticity of the “individual demand curve'*
for the firm, but this “perfect market“ is one of the three
conditions of “perfect competition'*, yet at other places he
says, perfect competition when he means nothing more than the
demand curve is horizontal.
14
Meyers denotes the conditions
resulting in perfect elasticity of demand as seal by the
individual seller by the term pure competition, while a
'perfect market* is something else, which together with free
mobility of the factor of production makes for perfect
competition.
15
To fenham perfect competition is the same
thing as to Mrs. Sobinson, but the perfect market is something
else; it means availability of complete information on prices
and prices offers and the possibility that any buyer can deal
13 Machlup, Fritz, (1952), 2he Economies of Sellers* Competition,
BaltimoresJohn Hopkins, 1964, p* 116.
14 BCnlding, N.E.C 1941), Economic Analysis, New YorkSHarper,
3rd Edn. 1955, pp. 41<M3.
15 Benharn, Fredrie, op.cit, pp. 207-B.
91 j
with any seller* and -vice-versa. 16
The condition of horizontal
demand cufve is termed ‘pure competition* by Chamberlin, who
states that there may be pare competition in an imperfect
market,
He refers to the wheat market said the individual
wheat farmers, and he states that ‘This market, though a very, j
imperfect one, is purely competitive.*1 17 The 5 inp erfactions*
of this market for Chamberlin lies in the imperfect knowledge ;
of the future on the part of sellers and buyers of; wheat from !
its normal prices
To others the wheat market is one of the examples of
a perfect market because of its organisation which ;secures
\
a maximum of inter-communication and mobility, resulting in
simultaneous uniformity and intertemporal flexibility of
prices.
The notion of perfect market, thus, is confused
with perfect competition.
A few economists who have carefully distinguished between
perfect competition and perfect market are Schumpeter
Machlup.
18
'
and
According to Machlup, "Perfection of the market
refers to the intersections within a group of sellers and
buyers.
Perfection of the market is some quality of the
mechanics or organisation of the market.
There are several
qualities of a market which may deserve to be isolated as
16 Benham, Predrie* op.cit, pp. 207-8,
17 Chamberlifc* E.H, (1953), Monopolistic CompetitiCn,
(Offord University PresssGambridge, Mass; U.S.A., 1958,
P. 5.
.
18 Schumpeter* Joseph* A. (1939)* Business Cycles, McGraw Hills
lew York* pp. 46 and.60,
92
useful abstractions for the theoretical description of the
market mechanism”. 19 Machlup has listed five main criteria
with many sub concepts to illustrate the notion of Perfect
Market.
A.
20
A perfect market is one that secures Ci) uniformity
and (ii) flexibility of price.
(i) Standardized commodity Ci.e. one of which any specimen
is perfectly substitutable for any other specimen) cannot be
sold at different prices at the same time; but must sell at a
uniform price (subject to differentials for transportation
costs to different parts of the market),
(ii) This uniform
price must sensitively reflect any changes in market demand
and supply*
B.
A perfect market is one that secures prompt attainment
of equilibrium of supply and demand* so that effective
supply will be completely cleared and no effective demand
will be left unsatisfied.
In a perfect market, equilibrium
will be promptly restored through changes of the market prices
and excess demand will be eliminated through a price increases
an excess supply through a price decline.
19 Machlup, Pritz., op.oit., ppa 116-117.
20 Ibid. pp. 117-118.
0.
A perfect market is one in which three institutional
conditions are fulfilled, conditions which pertain to Ci)
knowledge, (ii) accessibility, and Ciii) absence of restri­
ctions*
Expressed briefest form, (i) all buyers and sellers
have complete knowledge of price and price offers, (ii) every
buyer may buy from any seller and every seller may sell to
any buyer and (iii) no restrictions are imposed upon sellers
or buyers as to the prices which. they may accept or as to
quantities for which they may contract.
D.
No individual seller or buyer is big enough to exert
any perceptible influence upon the market, i.e. upon other
seller or buyers.
E.
Every individual seller or buyer acts on the assumption
that he can sell or buy at the market price any quantity he
cares to sell or buy,
respectively.
That is to say, every
seller regards his own selling possibilities, as infinitely
elastic.
;
Thus market conditions are related only to trading or
exchange level of product in question., while market systems
are related to pro duct i cm and selling conditions both.
IV
Classification of Market System
Number of firms and nature of products i.e. homogeneous
or heterogeneous are the known, and old criteria of elassificat
tion of market systems.
Elasticity and cross elastibitieefof
94
products are also important criteria for classification.
Seller’s behaviour also is a useful tool for such classifica­
tion.
Brice falter and Price Maker
Scitowsky has given the norms of classification of
market system on the basis of the firm's role as price maker
or price taker.
21
If the film behaves like a 'price maker'»
it will be considered a monopolists. If the firm behaves
like 'price taker', it will be considered as working under
perfect competition.
The firm acts as a price taker is merely
the quantity adjuster.
Terms 'price taker* and 'price maker*
were originally suggested by Profess or A*P. lerner while Pfcof.
\
Eegnar Frisch had used the terms 'price adjuster* and 'quantity
adjuster* in Norvegian.
22
He has given the term 'trade at set
term* which is known as monopolistic behaviour of a firm*
Competition among price makers
called monopolistic or
imperfect competition. Those who accept the set prices are
in the position of perfectly competitive market.
On the basis
of the above logic he has classified the market structure &£
under s -
23
Glassification of Market Structure by Soitovskys
21
Scitovsky, Tibor 0951)* Welfare and Competition, Bichard
IrwinsChioago, Illinois* pp. 16-25.
22
23
Ibid. p. 20.
Ibid. p. 25.
95
1S Bargainings
AS (1)
Isolated bargaining
(2)
Collective bargaining
(3)
Bilateral monopoly
Bs Competitive bargaining
2s grade at set termss
AS
Free competition (Monopolistic or Imperfect Competition)
Bs Restricted Competition.
t1) Simple restricted competition
(2)
Oligopoly
(3) Collective monopoly
(4) Single monopoly
3s Perfect competition s Erie® taking behavious
Scitovslsy has also given the idea of asymetrical market
situation where a market system prevails at producer level
and other at consumer/buying level, viiich shall be discussed
latter on in this chapter.
!•
i
Cross KLasticityS
As per Bishop's opinion, the use of cross elasticities
to characterise first by Nicholas Ealdor for market
96
classification.A principal advantage of the elasticity
and cross elasticity technique of market classification is its
flexibility in characterising market relationship that are
asymmetrical, either because the firms do not constitute well
defined group or because the firms differ greatly in size.
Triffin had also classified the market system on the
basis of cross elasticity of demand. He had given three types
25
of market systems.
1) General category. Homogeneous competition;
Duopoly, oligopoly and pure competition.
2) Heterogeneous competitions
Small and big group i.e. monopolistic competition
and oligopoly.
3) Dure monopoly.
He has in fact givens the equations of cross elastici­
ties for different types of markets.
24
Kaldor, Hiciholas, “Mrs. Robinson's "Economics of
Imperfect Competition", Economies (Hew Series), Aug.,
1934 and “Market Imperfection and Excess Capacity'!,
Economies (Hew Series) Peb. 1935, Quoted by Bishop,
R.L., in “Elasticities, cross elasticities, and Market
Relationships", American Economic Review, December,
1952, p. 779«
25
1 riffin, Robert C1940), Monopolistic Competition and
General Equilibrium fheory, Cambridge $ Harvard
University Dress, 1971, p. 104.
97,
Co-efficient of Gross .Elasticity by Triffin
26
(1) Isolated Selling i.e. pure monopoly
Co-efficient
■■ ■ |...
(zero)
(2 ) Heterogeneous competition
B.
Co-efficient —J-
Finite-value
J
P
(3) Homogeneous competitions
Co-efficient __i
=
©
(Infinite)
i
Here, q. is quantity of sale vyhich is placed on the
place of total revenue,
i
B is price, and
i, j...... are different firms.
s.i
j - % ,
is co-efficient of cross elasticity of demand,
a1
p3
i.e. influence of a change in j*s price upon i*s sales.
26
Ibid.
98
Market Classification by Triffins
U
2$
Isolated selling is monopoly i.e. pure monopoly.
Het erogeneous compet it ions
(a) Oligopolistic as circular.
Cb) Konoligopolistic or atomistic monopolistic
competition.
Homogeneous competitions
(a) Oligopolistic (pure oligopoly)
Cb) Hon-oligopolistic i.e. atomistic pure or perfect
competition.
Prof. Triffin had illustrated above market systems in
27
figure as below.
27
Ibid. p. 105
99
lAiffin'j ULmtfoutio* o-p
1*IcOi{<l&At SySferni1
|
isoltdtd
stl/inj
0M
se-ll(
1
<L
f
0)
A o Vh « £ < h
4*
- - -
tSaH-c£-r.~ "T/vi-pFi'V) (ie^eAJt'
l^l« vujpeli-i-h'c Co
~TkeJ<h>f- Cccr^k/Jotpii ■ .^iciUjr^J
[ p i jm/iJ1- ”
14- ‘ 1 1
'vnd
(7&y^A*-j DpUt(iLMu^l
f/tHAS. ‘)Gj'JI, P-[of.-]
100
(1)
Isolated selling - the curve is horizontal where qi
independent of pj.
(2) Homogeneous selling % - the curve is vertical where qi
falling to 0 (zero) for any cut in Pj.
(3)
Heterogeneous competition - tine curve has positive
slope where qi varying same direction in Pj..
The figure of market structure based on cross elasti28
city is revised as below.
qi
heterogeneous
competition
•
.1
i
i
isolated
selling
!
/
1
r
homogeneous
competition
1
1
!
1
0
A
i
** B
Pj
(Figure fy.2 )
In both the figures (fy. 1 and 1^2) Pi is supposed to
remain, invariant, so that the modes of competition are
characterized with relation to some levels of both Pi and
v
.
.
In Figure ^.2 there are two critical points, A and B in the i
relationship between the two prices.
Between these limits,
heterogeneous competition prevails between two sellers i and j.
28
Ibid. p. 106.
10.1
^Tk*'i ff
i (l \*A t/uto
9
f
Sylt&W - - * ~ C ^ O
ffo^fojuslnc Co'^yjftiHvyi <vn^
deAie^J £^m6#M(ma*? T/^L^Ay. Ccvwit,AXcfyL^
•
tf}/,
/>•
[ p/^M/iA ~ ^ • -2L
]
Uw*ai?^
102
Ihen I'j is raised beyond B, i becomes an isolated seller with
relation in j, when it is cat below A, j becomes an isolated
seller with relation to i» who in fact, would have ceased to
sell at all.
As per Triffin's classification his coefficient of
interdependence measures the relative share of monopoly and
competition in the situation of the sellers, since it ranges
from infinity under pure competition to zero under pure
monopoly.
Co-efficient of cross elasticity could be entitled
to consideration as an universal index of the degree of
competition,
Thus, Triffin has presented the general categories
of (1) pure monopoly (also called Isolated selling) (2) hete­
rogeneous competition and (3) homogeneous cimpetition, with
co-efficient of zero? a finite value and infinity, respectively.
This is supplemented by a ‘circular test* for oligopoly in
the last two categories.
But there is a limitation in this
criteria of co-efficient of cross elasticity.
Hie co­
efficient approaches zero, not only under isolated selling,
but also under heterogeneous competition vdth large numbers.
This later being interpreted as usual to mean that the price
adjustment of any seller has a negligible effect upon any
other.
It has a value of zero under homogeneous competition
with large numbers, since it is a familiar aspect of pure
competition that no one seller can have any substantial effect
upon the sales of any other.
103
Bishop has described five types of market systems.
1S
29
Pure competition where many other producers of perfect
substsittes, with no member of the group producing more
or small fraction of total output of all.
2t
Pure oligopoly inhere at least one other and at most
few other producers of perfect substitutes, with each firm
producing a substantial fraction of the total output.
3s
Differentiated competition (atomistic heterogeniety)
inhere many other producers of relatively dose but important
substitutes, with each firm production a small fraction of the
combined output,
45
Differentiated oligopoly inhere at least one other or
at most few other producers of relatively dose but imperfect
substitutes with each firm producing a substantial fraction
of the combined output,
5s
Pure monopoly inhere no other producers of even
relatively dose substitutes, with the ith firm producing
only a small pait of the whole conomy*s output.
"Market Classification" says Bishop, thus, depends
primarily on two basic considerations s
(1) the degree of substitutability of products, and
29
Bishop, R.L., "Elasticities, Cross elasticities and
Market Relationships", American Economic Review,
December, 1952, prj. 779*803.
104
(2) the a^epm&'&ace versus the interdependence of the
. 30
business decisionns of pairs of firms”.
Old fashioned criteria was Numbers and size which was
useful only when heterogeneity was absent.
Bishop had illustrated the classification of market
structure on the
basis of degree of substitutability of
31
products and interdependence of firms.
Glassification of Market Structure by R.L. Bishop
Nature of the product
Numbers or
‘Numbers equivalent*
of other suppliers
Near Homogeneous
- Bii - cc
Significantly
Differentiated
- Bii / os (signi­
ficantly).
Bii
Bji
large
Near pure
competition
Significantly
differentiated
competition or
pure monopoly
Bii
" Bji
Small
Near pure
oligopoly
Significantly
differentiated
oligopoly
Above classification is based ons (1) the relative
degree of product heterogeneity - but with the limiting case
of perfect homogeneity not represented? and (2) the independe­
nce versus interdependence of the price - output decisions
30
51
Ibid, po 797,
Ibid.
105
of pairs of rival firms - as reflected specially in the
criterion of number or 'numbers equivalent*.
The ease for
strictly homogeneous products must then be separated into
pure competition and pure oligopoly by a direct measurement of
of the ith firms share of industry output.
Differentiated
competition and pure monopoly also remain to be separated,
Elasticity and Cross Elasticity
Prof. Chamberlin has suggested to reconstruct the market
classification on the basis of cross elasticity as suggested
by Kaldor, in place of old crititfia of number of sellers in a
market. He says,
the subject needs to be rewritten in ,
terms of that extremely useful concept ;with originated, I
^
W-i M. ^ -Cv.
believe, with Mr. Kaldor of cross-elasticity of demand, rather
than in terms of the number of sellers in a market eM 32
When only crossed elasticity is considered, the markets
can be divided into C1) Homogeneous competition and 12)
Heterogeneous competition.
With the admission of entry and
profitability and also numbers of firms, classification
becomes more detail.
As per classification made by Chamberlin, Triffin’s
pure monopolist is not free from competition.
32
He is only
Chamberlin, E.H. C1957), Towards a More General Theory
of Value, Oxford University Press, Cambridge, 1966,
p* 61.
106
isolated, in the sense that the effect of his adjustment is
so distributed among others that no one of them feels it
appreciably and he is similarly protected from any one of
them but both the position and the shape of the demand curve
for his product are vitally affected by the competing substi­
tutes for it, and it is essential to an understanding of the
nature of monopolistic competition in realise that such
isolated monopolies are a part of it, and not outside of it. 33
The limitation of Tr4ffin*s criteria of co-efficient
of cross elasticity for mar lost classification is that the co­
efficient approaches aero, not only under isolated selling,
but also under heterogeneous competition with large numbers,
this later being interpreted as usual i&fco mean that the
price adjustment of any seller has a negligible effect upon
any other.
It has a zero value under homogeneous competition
with large numbers, since it is a familiar aspect of pure
competition that no one seller can have any substantial effect
upon the sales of any other.
Thus isolation of competition is being seen under Ci)
monopoly, (ii) pure competition and (iii) monopolistic
competition of large group, vshere there seems no effect of a
pi40§ change by any seller upon others.
In all these cases
the co-efficientyrelating one individual heller to any other
33 Ibid., p. 79.
107
individual seller approaches zero. \iienever it is substantially
greater than zero, there existsi;■!o£igopoly.
Thus the classification of market structure based only
upon cross-elasticity seems defective.
$here needs more
particular criteria regarding such classification,
Prof.
Chamberlin has classified the market systems on the basis of
elasticity as well as cross elasticity of demand as below.
54
Market Classification by Prof. Chamberlin
Isolated SelliagL,Elasticity________________ _
1) Heterogeneous product
finite
2) Homogeneous product
Infinite
Cross-elasticity
0
QG
0
-»
0
- >
0
Hon-isolated selling
5) Heterogeneous product
finite
4) Homogeneous product
Infinite
^
0
®
U
yo
Monopolistic competition (large group) where elasticity
is finite and cross elasticity is zero*
2s
Perfect competition (atomistic) where elasticity is
infinite and cross elasticity is zero.
3s
Heterogeneous oligopoly where elasticity is finite and
cross elasticity is greater than zero.
34
Ibid., p. 81,
108
4s
Homogeneous oligopoly v&ere elasticity is infinite
and cross elasticity is greater than zero.
In any actual market where numbers and elasticities,
althouth both high, are finite, and i/ihieh therefore
’approximates* pure competition, the coefficient will be
smaller the laiger the number and larger the higher the
elasticities.
Thus, Chamberlin had modified the market classifica­
tion by adding elasticity concept to cross elasticity.
Cross
elasticity eo-efficient is BLj or Eji and elasticity is Eii.
As per co-efficient of eross elasticity markets are classified
in two groups? (1) Hon-oligopolistic or isolated and (2)
oligopolistic or non-as elated selling according as this co­
efficient is CD zero or (2 ) greater than zero, (a) Heterogene
ous and (b) homogeneous products according as the ‘own*
Elasticity CaJ finite or (b) infinite.
Traditional Classification by Text Book Writers^
Popular text book writers illustrate simple classifica­
tion of market structure on the basis of numbers of sellers
and kind of goods.
According to Stonier & Hague, apart from
perfect competition all other types of market situation can
be grouped under the general heading of imperfect competition.
Monopolistic competition is then the 'least imperfect* of
109
'most nearly perfect* type of competition.
Monopoly is the
*most imperfect* type of market situation.
*Pure* monopoly
is ignored in this classification since it is only a theoreti­
cal limiting case.
A general classification is given by
, ,
35
them as below.
Classification of Market Situation by Stonier & Hague
^
lumber of
Firms
Homogeneous produets
Many Firms
Perfect competition
Monopolistic competi­
tion
Few Firms
Oligopoly without
product differentiation.
Oligopoly with product
differentiation,
One Firm
Monopoly
\
Type of market situation
different iated products
- '
Classification is clear itself.
Stonier & Haque adds
a few conceptions in it, such as, (1) perfect competition and
(2) imperfect competition.
Apart from perfect competition
all other types of market situations are grouped under the
general heading of * imperfect competition*.
Stonier & Haque
have also suggested that the classification of market position
situations can be done with cross elasticities of demand also.
35
Stonier, Alfred W. and Hague, Douglas G., (1953),
A Textbook of Economic Theory, Longmans Greens London,
1962, p. 208.
110
In perfect competition the cross elasticity of demand for the
product of a single firm with respect to a change in the price
of the rest t^rthe industry will he infinite*
In monopolistic
competition the cross elasticity of demand for the product
of a single firm with respect to a change in the price of the
other products made in the monopolistic groups will he very
high.
The cross elasticity of the demand for the product of
a monopolist with respect to a decrease in the price of other
36
products in the economy will he very low or negligible*
Familiar Indian textbook writer Dr. Dewett had
classified the types of market firms on the same base adopted y
by Stonier & Haque i.e. number of firms and nature of commodity
But the order of classification differs in both classifications
Stonier & Haque used the term 'market situations', for which
Dewett used the term 'type of market forms*.
The names - terms
for different markets also differ.
The classification made by Dr. Dewett is given here.
37
Different Types of Market Forms Classified by Prof. K.K.Pewett
Type of
Market_______
'
Humber of firms
_____
Nature of the
commodity
A. Perfect Competition
Perfect or pure
Competition
Infinite
Homogeneous
36 Ibid., pp. 208-09.
37 Dewett, K.J& (1946), Modern Economic Theory, Syamlal Trust
New Delhi, 1969, p.221.
*
Ill
Number of firms
Type of
Market
B» Imperfect
Nature of the
commodity
Competition
(a) Monopolistics
competition
Many
Differentiated
(b) Perfect Oligo­
poly
A few
Homogeneous
Cc) Imperfect
Oligopoly
A few
Differentiat e d
(d) Ordinary
Monopoly
One
Homogeneous
G. Pure or Absolute Monopoly
Pure or absolute Monopoly
One
The classification is clear itself.
Homogeneous
Dewett had used
numbers of firms and nature of commodity and also used the
concepts of perfect and imperfect competition.
The classifications made by text book writers are
comprehensive and simple but not analytical classifications
^
sometimes serve no other purpose than of storing away an
4
accumulated mass of knowledge in some orderly fashion.
71
State of Sellers* Mind
Prof. Mmchlup is of opinion that criteria of inter*
dependence is useful for classification of markets and it can
112
be conveniently expressed by cross-elasticities of demand
and supply. (^Thim, the interdependence or independence is
not only the result of physical circumstances i.e, more or
less numbers of competitors but the state of mind of sellers
which indicates the market system.
The state of mind of a
seller who feels that he is merely ’one among very many’
selling in the same market» represents the market of polypoly
58
i.e, too many sellers.
The feeling of a seller that he is competing with
conduct.
If he knows that there are many others who sell
the same or similar service or product, and that there is no
particular one among them who watches him, his competitors are
then ’colleagues® to him rather than ’rivals*.
Monopoly
Oligopoly
Monopoly
Oligopoly
Only one seller
of a goods
Competition among
the few sellers
General competition
for consumers’ dollar
1s Differentiated
and,
2s Standardized (
(homogeneous )
product.
58 Machlup, F. Op.cit., pp. 84»85
59
Ibid. pp. 154-35.
Pclypoly
•----------------—~—Li—
lolypoly
Competition of many
sellers
1s Pure or perfect
competition
(homogeneous 5
2s Monopolistic or
imperfect eompeti
tion (heterogen­
ous 3. ■
113
Above classification of market systems given by
Machlup is based on numbers of firms and nature of product.
Machlup also classified the market systems on the basis of
* sellers consciousness of their rivals* reactions.
He
distinguished “sellers consciousness of their rivals*
reactions'1 from "Sellers headless of rivals* reactions".
40
Classification of Market £ositions by Machlup - (2 )
A. Sellers conscious of their rivals* reactionss1) Duopoly
2) Oligopoly with differentiated products.
3) Oligopoly with standardised products.
B. - Sellers heedless of rivals * reactions s1) Monopoly
2) Competition with differentiated products.
3) Competition with standardised products.
As messy concepts and tern® are used in the market
positions, Machlup had rightly commented that "lore
discussion on the terminological and conceptual disorder
is needed before the theory of the blending of monopoly
and competition can progress further after its great advance
in the last decade".
40
41
Machlup, Fritz, "Monopoly and Competitions A Classifi­
cation of Market Positions", American Economic Review,
Sept. 1937, pp. 445-451.
Ibid., p. 445.
114
The terms 'perfect* and 'imperfect* are ■used to
denote immobility of factors, degree of pictioiO speed of
adoption, refer to potential changes in demand for the product
of individual sellers due to a flow of factors into or out
of an industry.
Competition may be pure and perfect, pure
and imperfect, monopolistic and perfect, monopolistic and
imperfect.
First in each of these pairs of objectives refer
to the shape of the demand curve and second to its position
in relation to the cost curve.
The absence of supernormal returns is a distinctive
feature of "monopolistic perfect competition", while "mono­
polistic imperfect competition" term is used when mobility
of firms and resources is less and slowly.
"Perfect monopo.
list" has no rivals vsfoo are of concern t o him, but the
"Imperfect monopolist" have "potential rivals". '
"But", Machlup says, "we have still to bear in mind
that the kinds of imperfections are so manifold and different
that it is hardly possible to label the various market
positions satisfactorily with the few tags now currently in
Summary
We can illustrate two alternative classifications
based on two different criteria (1) nature of the product and
42 Ibid., p. 450.
43 Ibid., p. 451.
115
(2) numbers of sellers.
Classification based on nature of
goods as main criteria aLongwith numbers of sellers can be
illustrated as below.
Classification aS per Nature of goods s
1s
Homogeneous competition (Large and Small group)
(a) lure or perfect competition (many sellers).
Cb) Homogeneous or pure oligopoly (Few sellers ).
2S
Heterogeneous Competition (Large & Small group).
(a) Monopolistic competition (large group) many sellers.
(b) Differentiated Oligopoly. Few Sellers.
3s
Monopoly * pure or perfect monopoly.
Only a seller
having no close substitute but a part of general
competition of the econon^r where competition prevails
for consumers * money.
Ihe alternative classification can be illustrated on
the basis of numbers of sellers as main criteria along with
nature of goods as subordinate criteria.
Classification as per Humber of Sellers
1.
Atomistic competition or polypoly - (many sellers).
Ca) Homogeneous or pure or perfect competition.
(b) Heterogeneous or monopolistic competition (large
group ).
116
I
|
2.
Oligopoly or competition among few sellers. j
(a) Homogeneous or pure oligopoly
(b) Heterogeneous or differentiated oligopoly.
r
3.
Monopoly or general competition.
Only one seller
Hairing close substitute or direct competition, but is
a subject to general competition where every isolated
seller compets for consumers* money.
Changing Market Structures
I
.
j
Market systems never remain the same in any industry
for ever, but those are the subject to change with the
i
changing economic and institutional conditions.
Some
economists in the past have tried to analyse theoretical
|
illustration of changes in market systems.
Coumot has
j
analysed the change of a market of monopoly into duopoly
and finally to unlimited competition i.e. perfect competition
where an individual seller has no influence on total supply.
Cournot started with a monopolist, then another seller
enters into the field, and the market position becomes
s
duopoly.
As the competitors enter into the market, the
element of monopoly i.e* control over supply and influence
over price decreases and the market becomes more and more
competitive.
Finally it results in unlimited i.e. perfect
competition where no monopoly element remains.
Cournot spfike
of ’unlimited competition* when each of the producers supplied
117
only an *in appreciable' part of the market.
Thus, one of
the earliest theoretical discussion appeared in 1838 in the
work of the mathematical economist Cournot, who first analysed
monopoly and then "competition between two sellers" and then
44
competition among 3, 4» ....n producers.
Prof, Marshall also had quoted Cournot for reverse
change of a market situation of perfect competition gradually
45
into monopoly, in the condition of decreasing most.
An
increase in output gives such "firm having larger increasing
returns, command over so great internal 4coii:omist}as much to
diminish its expenses of production,
Whatever firm first
gets a good start will obtain a monopoly of the whole business
of its trade in its district,
Marshall himself had accepted
the monopoly situation of few large firms instead of perfect
46
competition when increasing return situation prevails.
Prof, Chamberlin has also illustrated the change of a
market situation into other market situation.
He says,
"Monopoly and competition may be blended first one few or
c(
many selling the identical product - common market. shared
by all.
Monopoly shades gradually into one of pure competition
as the sellers increase.........
Sellers may offering identical,
44 Cournot, A., Op.cit. Chapters VII & VIII.
45 Marshall, Alfred, (1890), Principles of Economics, Mac­
millan t London, 1961.
46 Ibid. 4 p* 329.
118
slightly different or very different products.
identical* competition is pure.
If they are
With differentiation
appears monopoly, and as it proceeds further the element of
monopoly becomes greater.
Any degree of differentiation, each
sellers has an absolute monopoly of his own product, but is
subject to the competition of more or less imperfect substi­
tutes.
Since each is a monopolist and yet has competitors,
t
it is a situation of ’competing monopolists^'4 or ’monopoli47
stic competition*.
Machlup illustrated the idea of change of a polypoly
market into an olcgopoiy market.
He writes,
perfect
polypoly can exist (with few exceptions) only in industries
in which the optimum size of the single establishment is very
small in relation to the industry as a whole*...
Where the
opt imam size of the establishment is large, the number of
firms in the industry is probably small, polypoly must then
give v/ay to oligopoly, to the market where sellers are few
48
and rival conscious.
fhere can be listed some possibilities of change of
some markets into another.
19
A monopoly market may convert into oligopoly (few
sellers) either homogeneous or heterogeneous with the entry
of a few competitors into the field.
47 Chamberlin, E.H. Op.cit. pp.8-9.
48 Machlup, F., Op.cit. p. 144.
119
2)
Pure oligopoly market may be changed into perfect
competition with increasing mobility and entry of firms and
decreasing restrictions and obstacles.
3)
Pure oligopoly market may be converted into differe­
ntiated oligopoly with appearance of advertisement and product
differentiation.
4)
Differentiated oligopoly may become the monopolistic
competition (laige group! with free entry situation.
5)
Perfect or pure competition may become monopolistic
or imperfect; competition with appearance of product differentia­
tion and advertisements and also with the change in consumers*
preferences.
6)
Perfect competition may be converted into the market
situation of pure or differential duopoly with technological
and emecutianal changes where more capital intensive
production techniques take place.
7)
Pure or differentiated oligopoly may be converted to
monopoly where increasing returns may take place on very
large extent.
8)
Monopolistic competition (laige group) may be changed
into olygopoly market (small group of heterogeneous competition)
where laige scale production techniques are introduced and
120
optimum size of the firm may become greater.
VIII
Coexistence of Market Systems*
Market systems are generally analysed separately and
it is thought that they are mutually exclusive.
But in
practice market is a mixture of more than one market systems.
There are references to economic literature regarding
coexistence or mixture of market systems.
Prof. Chamberlin has analysed the monopolistic compe­
tition mainly as large group and shorn the possibility of small
group also tof'ahicp according to him can be termed as olig$pj&y.
He has observed that the blending of monopoly and competitive
elements is an economic reality.
he only had invented the analysis
and competition®
He has also claimed that
of blending of monopoly
'Concept of a blending of competition and
monopoly according to him is quite lacking in Mrs. Robinson^
Imperfect competition.
The dichotomy appears to be as
distinct there as it is Bigou, Marshall, Tousig, or John
Stuart Mill.
of the two",
But actual situations are typically a combination
49
Erof. Chamberlin*s remark for former writers,
however, do not seem totally correct.
Monopoly and competition
were considered blended in doupoly and competition among few
49
Chamberlin, S.H., Op.cit. p. 205.
121
sellers, hence the blending of monopoly and competition is
not a new thing in monopolistic competition ihich Prof.
Chamberlin has claimed.
In fact, Prof. Chamberlin has tried
to establish the * monopolistic Competition* more general
market system in 1957, in his book ” Towards a More General
Theory of Value”. 50 But he failed to show the co-existence
of different market systems, or even failed to show the co­
existence of monopolistic competition as large and small
groups.
There are many references in the writings of different
economists such as Mill, Marshall, Rothschild, Hichol,
Pellner, Scitovsky etc. about the co-existence of different
market system at a point of time.
Here we can state the most
probable mixing of different markets as under
%
«
1s
Homogeneous competition with imperfect market.
2s
Homogeneous competition with large and small group.
3s
Heterogeneous competition with large and small group.
4s
’ Heterogeneous and homogeneous small groups or large
groups and their cross co-existence such as
( i ) big group of homogeneous firms and big group of hetero­
geneous firms.
(ii ) big group of teomogeneous product and small group of
50 Chamberlin, E.H. (1957), ’’Towards a More General Theory of
Value”, Oxford University Press, New York, also Triffin,
Robert, (1940), Monopolistic Competition and General Equi­
librium Theory? Cambridge? Harvard University Press.
122
heterogeneous products;
(iii) big group of heterogeneous products and small group
of homogeneous products; and
5«
Only one big seller with many small firms of homo­
geneous products.
6s
Only one big seller with many small firms of heteroge­
neous products.
7s
Only one big seller with many small firms of heteroge­
neous and homogeneous products*
J.M.‘ KLark has also started that there can be many
combinations of competition.
He says, "The specific character
of competition in any given case on a surprisingly large number
of conditions - so many* infact, that the number of mathemati­
cally possible combinations runs into the hundreds or thousands
and suggests the possibility that every industry may be in
some significant respect different from every other or from
itself at some other stage of development. 51
r
51
9.
.
O
KLark, J.l. "Eowards a Concept of Workable Competition",
imerican Economic Heview, Vol.XXX, June 1940* p. 245.