The Different Forms of Imperfect Market are as follows:
(i) Duopoly:
When there are exactly two sellers dealing in intrinsically identical but externally differentiation products, the market form is called a duoploy. The external differentiation refers to the difference of looks caused by packaging, brand name or by external design.
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Intrinsically, the products are same or very close substitutes. Two brands of mineral water or unbranded mineral water sold by two sellers provide examples of a duopoly. Till some time back, the automobile industry in India was a duopoly.
There were only two cars the Ambassador and the Fiat. The vehicles possessed external as well as internal differences. The external differences related to design and looks, while the internal differences were those relating to fuel economy, engine-power, vehicle pickup and such other functional differences.
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The two formed very close substitutes. Both were price makers. Both behaved like rivals. If one lowered the price, the other followed, but if one raised it the other did not. The degree of interdependence was very high. Duopoly often starts with price wars and ends up ultimately with price collsion.
Action and reaction in respect of price and quantity supplied are common features. Price wars in between do not lead to uncertainty or indeterminacy of equilibrium. Equilibrium is eventually reached despite action-reaction chain perpetuating a cut-throat competition between the two.
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You will study the process of attainment of equilibrium in higher classes through the models of Cournot, Edgeworth, Chamberlin, Sweezy and Baumol.
(ii) Oligopoly:
When number of sellers is more than two but limited to a few, the market structure is referred to as an oligopoly. Oligopoly literally means a few sellers. Some economists fix the number anywhere from 3 to 6 but there is no hard and fast rule in this regard.
The market structure is characterised by high degree of interdependence, price wars or cartels with price leadership, aggressive marketing methods and a fair degree of monopoly power. An oligopoly is classified as open or closed depending on the entry of new firms whether it is open or closed.
It is also classified as pure or differentiated oligopoly depending on the nature of products—whether they are homogeneous or differentiated. Petroleum industry is an example of pure oligopoly, while the automobile industry, that of differentiated oligopoly.
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There is yet another classification of oligopoly. It is collisive oligopoly if price wars persist and collusive oligopoly if cartels are formed.
(iii) Monopolistic Competition:
Monopolistic competition is a market structure in which there are large number of buyers and sellers dealing with differentiated products while each seller acts like a monopoly to his loyalist buyers.
Product differentiation is generally external—caused by packaging, external looks, or simply by brand positioning. Internally the products are close substitutes of each other. Firms in monopolistic competition incur huge advertising or selling costs in order to position their products via-a-vis other competing brands.
The basic purpose of such advertising is to lure consumers away from the other competing brands by making them to believe that the brand being used by them is superior to other competing brands. That is why such advertising is sometimes referred to as persuasive advertising.
The advertiser intends to retain its market share through persuasive advertising. Another feature of the monopolistically competitive market is the existence of free entry and free exit owing to which firms in this type of market structure make only normal profits in the long run.
The abnormal profits of the short run are driven to zero due to the feature of free entry. Price is equal to LAC but greater than LMC in the long-run. Examples of monopolistic competition are toothpaste and cigarette manufacturers.
There is a high degree of brand loyalty among the consumers. It is this loyalty that is exploited by a monopolistically competitive firm as a monopoly. Attainment of equilibrium of a firm and industry is beyond the scope of this book.