(This was a submission for my Economics Internal Assessment where we had to take a news article and analyse it with an Economic Concept of our choice. )
1.INTRODUCTION
Market is
generally understood to mean a particular place or locality where goods are
sold and purchased. In economics, by the term market we do not mean any
particular locality in which goods are bought and sold as the idea of a
particular locality is unnecessary to this concept. There needs to be contact
between buyers and sellers for a market to exist so that a transaction at an
agreed price can take place between them. A market is said to exist if buyers
and seller despite being spread out over a vast region, remain in close
communication which each other through personal contact, letters, telegrams,
telephones, etc., so that they can sell and buy goods at an agreed price. It is
noteworthy that because in a market, there is close and free communication
between various buyers and sellers, price of
a homogenous commodity settled between different sellers and buyers
tends to be the same.
Thus the 4
essentials of a market are
1. Commodity
which is dealt with
2. The
existence of buyers and seller
3. A place,
be it a certain region, a country or the entire world
4.
Communication between buyers and sellers that only 1 price should prevail for
the commodity at the same time.
In the words
of a French economist Cournot, ”Economists
understand by the term market not any particular market place in which things
are bought and sold but the whole of any region in which buyers and sellers are
in such free intercourse with one another that the price of the same good tends
to equality easily and quickly.”
CLASSIFICATION OF MARKET STRUCTURES
The popular
basis of classifying market structures rests on three crucial elements.
1.The number
of firms producing the product.
2. The
nature of product produced by the firms (as in whether the product is
homogenous or differentiated)
3. The ease
at which new firms can enter the industry.
MARKET STRUCTURES
MONOPOLY
According to
H.L.Ahuja, “Monopoly is said to exist
when one firm is the sole producer or seller of a product which has no close
substitute.”
‘Mono’ means
single and ‘poly’ means seller. Thus Monopoly can be understood as, the
existence of a single seller which is producing or selling a product which has
no close substitutes. A monopoly firm has sole control over the supply of a product
that can have only remote substitutes, so as a sole supplier it has complete
control over the price of the concerned product. Due to the absence of competition
a monopolist is considered to be a price maker and not a price taker. The
expansion and contraction in output of a product by a monopolist will
considerably affect the price of a product contraction in output will raise its
price and expansion in output will lower its price. In Monopoly there are
strong barriers to the entry of new firms in the industry. Under this market
structure entry of other firms is highly restricted.
According to
E.H. Chamberlin, “ A monopoly refers to a single firm, which has control over
the supply of a product, which has no close substitute.”
IMPERFECT COMPETITON
This is a
market structure in which individual firms exercise control over the price to a
smaller or larger degree depending upon the degree of imperfection present in a
case. Control over the price of a product i.e. existence of imperfect
competition is caused either by the fewness of firms or by the product
differentiation. Imperfect competition has multiple subcategories and the ones
that will be focoused on over here is monopolistic competition.
MONOPOLISTIC COMPETITION
Monopolistic
competition is characterized by a large number of firms and product
differentiation. E.H. Chamberlin laid a great stress on monopolistic competition
in his work “The Theory of Monopolistic
Competition”. In Monopolistic competition a large number of firms produce
somewhat different products which are close substitutes of each other. Unlike a
monopoly there is a free entry and exit of firms under monopolistic
competition. As a result the demand curve facing a firm here is highly elastic
and this indicates that a firm working in it maintains some degree of control
over the price of the commodity.
PURE OLIGOPOLY
This is also
known as Oligopoly without product differentiation. Here there is a competition
among few firms producing an identical or homogenous product. There will be a
few number of firms and this will ensure that each one of them will have some
control over the price of the product. The entry of other firms will be limited
and the demand curve facing them will be downward sloping thus indicating that
price elasticity for each firm will not be infinite.
2. ANALYSIS
The gas
distribution sector is one which is highly prone to monopolies given that only
one entity can lay pipelines in a particular geography. The article focuses on
how the PNGRB (Petroleum and Natural Gas Regulatory Board) has rejected the
state owned gas distribution company IGL(Indraprastha Gas Ltd’s) request to
maintain monopoly over the Delhi gas pipeline network in the NCR(National
Capital Region). This ruling will prevent the IGL (Indraprastha Gas Ltd’s) in
being able to be the sole supplier of piped natural gas and condensed natural
gas in the NCR. The ruling will assist in the termination of monopoly in the
NCR’s Gas Distribution Sector and stop the monopolist (IGL) from taking
advantage of the fact that they are the sole supplier of a given commodity and
hence can charge any price as they have complete control over the supply of a
product. The PNGRB’s ruling will likely usher in competition. i.e. other
suppliers of the similar product or somewhat different product which are close
substitutes of each other. According to the article the monopoly will end(The 2nd
paragraph of the article states that the PNRGB’s ruling is likely to encourage
more competition in the supply of PNG and CNG in the NCR) and then firstly move
towards Pure Oligopoly(as there will be competition among a few firms producing
a homogenous or identical product) as in the beginning with a limited number of
pipelines,(1/3rd of the pipelines will be reserved for other players
who wish to supply gas)there will only be space enough for a few firms to enter
this sector. Bids will be invited from potential investors to lay down
pipelines so that more firms will be able to enter this sector. After this
happens the shift will take place from Pure Oligopoly to Monopolistic
Competition (where a large number of firms will produce somewhat different
products which are close substitutes of each other) This will make the demand
curve of firms supplying Compressed Natural Gas and Piped Natural Gas under
monopolistic competition highly elastic and displays that the firm enjoy some
control over price. The ruling will convert the market from a one with strong
barriers to free entry to a one with limited entry and finally we will see the
market having a free entry for close substitutes.
3.CONCLUSION
The aim of
the PRNGB (Petroleum and Natural Gas Regulatory Board) passed a ruling that
would end the monopoly in a sector that is highly prone to monopolies given
that only 1 entity can lay pipelines in a particular geography and thereby encourage
more competition in the supply Of Piped Natural Gas and Compressed Natural Gas,
as in the absence of monopoly there are no barriers to the entry and exit of
firms in a market. With the absence of a monopoly the consumers will have a
choice of suppliers and will be able to choose from whom they would like to
purchase the commodity. There will exist a competition in the pricing of gas
for consumers. First with the entry of a few firms into the gas distribution
sector there will result in the creation of the Imperfect market structure:
Pure Oligopoly. The limited number of these firms at first will ensure that
each one of them will have some control over the price of the product. There
will be a downward sloping demand curve facing each of these limited number of
firms which indicates price elasticity of demand will not be infinite. The
article states that the pipelines will be increased as bids will be invited
from potential investors to lay them. With the increase there will be a larger
number of firms that enter the market and Pure Oligopoly will turn into another
aspect of Imperfect Market Structure i.e. Monopolistic Competition. The firms
competing in a Monopolistic Competition are faced by a demand curve which is
highly elastic and this shows that they enjoy some control over the price. Thus
by the ruling the number of firms in the market will increase resulting to a
change in the market structure and the degree of control over price. The
consumers will greatly benefit by this ruling. The element of inflation will be
avoided as there are competitors free to enter the market and there is no form
which has complete monopoly thereby allowing them to be a price maker. The
media by putting forth such a story will encourage the rise of monopolistic
competition in many other sectors so the consumers can benefit by having a wide
variety of sellers to choose from.
BIBLIOGRPHY
1.Mahrashtra
State Board Class 12 Economics Textbook
2.Advanced
Economic Theory(Microeconomic Analysis) – 20th Revised Edition
- H.L.Ahuja
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