UNIT III PART-I

INTRODUCTION TO MARKETS AND PRICING POLICIES

What is a Market?
Market is defined as a place or point at which buyers and sellers negotiate their exchange of welldefined products or services.

Market
Market is any 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. - Benham

MARKET STRUCTURE
As seen from the definition of market, the four components of a market are: Sellers Buyers Nature of product Conditions of entry and exit

1. 2. 3. 4.

COMPETITIVE MARKET STRATEGIES

The less the power an individual firm has to influence the market in which it operates, the more competitive that market is.
Types of Competition Perfect Markets Imperfect Markets

MARKETS

PERFECT COMPETITION

A market structure in which all firms in an industry are price takers and in which there is freedom of entry into and exit from the industry is called Perfect Competition.

FEATURES
A very large number of relatively small buyers and sellers Price taker Homogeneous products The firms are free to enter or leave the industry Firms do not collude with each other Mobility of factors of production Each buyer and seller operates under the conditions of certainty

IMPERFECT COMPETITION
Monopoly Monopolistic Duopoly Oligopoly Monopsony Duopsony Oligopsony

MONOPOLY
A pure monopoly exists if one and only one firm produces and sells a particular commodity in the market. The single firm producing the product is itself both the firm and the industry.

FEATURES
Only one firm sells the commodity having no rivals or direct competition Price Maker Indirect rivalry may exist in the form of i) Existence of substitute products ii) Competing for the consumers rupee No other seller can enter the market, else monopoly would cease to exist. The product is distinct i.e., inelastic demand

CAUSES OF MONOPOLY
Patent Rights give legal monopoly Govt. policies such as granting licenses Ownership and control of some strategic raw materials. Exclusive knowledge of technology by the firm. Size of the market may accommodate only a single firm Limit pricing policy adopted to prevent new entrants.

MONOPOLISTIC COMPETITION
Monopolistic Competition refers to a situation where there are many sellers of a differentiated product. There is competition which is not perfect, between many firms making very similar products which are close but not perfect substitutes.

FEATURES
Many number of sellers Product Differentiation i) Advertisement ii) Patent Rights and trade marks iii) Quality Differentiation Freedom of entry of the new firms and exit of the old firms Higher elasticity of demand.

DUOPOLY
If there are two sellers, duopoly is said to exist.

OLIGOPOLY
If there is a competition among a few sellers, oligopoly is said to exist

MONOPSONY
If there is only one buyer, monopsony market is said to exist.

DUOPSONY
If there are two buyers, duopsony is said to exist.

OLIGOPSONY
If there are few buyers, oligopsony is said to exist.

TR, AR and MR
Total Revenue is the revenue earned by producing and selling n units TR = P * Q Average Revenue is the revenue earned per unit sold AR = TR / Q Marginal Revenue is the change in revenue by producing and selling one more unit MR = P

PRICE SUPPLY EQUILIBRIUM

Very Short Period Equilibrium Short run Equilibrium Long run Equilibrium

EQUILIBRIUM POINT
Equilibrium point refers to the position where the firm enjoys maximum profits and it has no incentive either to reduce or increase its output level.

EQUILIBRIUM POINT PERFECT COMPETITION

MR = MC MC curve should cut the MR curve from below

EQUILIBRIUM POINT PERFECT COMPETITION (SHORT RUN)

SHORT RUN SUPPLY CURVE

AR = MR

PRICE OUTPUT DETERMINATION IN CASE OF LONG RUN UNDER PERFECT COMPETITION

MR AND AR IN MONOPOLY

EQUILIBRIUM POINT MONOPOLY

MR = MC MC curve should cut the MR curve from below

PRICE OUTPUT DETERMINATION UNDER MONOPOLY

IS MONOLPOLY SOCIALLY DESIRABLE?

NO, the reasons are:
Restrict the output Exploitation of consumers Wide gap between rich and poor Unfair trade practices Restricted scope to R&D

EQUILIBRIUM POINT MONOPOLISTIC

MR = MC MC curve should cut the MR curve from below AR = AC

PRICE OUTPUT DETERMINATION UNDER MONOPOLISTIC

PRICE DISCRIMINATION
When a firm sells its products to its customers of different profile at different prices with no corresponding change in cost, price discrimination is said to exist.
1. Purchasing power 2. Quantity bought 3. Customers from different market conditions

ADVANTAGES OF PRICE DISCRIMINATION

Helps to meet the competition Surplus production can be disposed off Customer base increases Production costs decreases as volume increases Long run profits

PRICING
There are no cut and dried rules for pricing, since each firm, product and market situation have some features that are unique. Under pricing will result in losses and over pricing will make the customers run away.

PRICING OBJECTIVES
Maximize profits Increase sales Increase market share Satisfy customers Meet the competition

PRICING METHODS
Cost Based Pricing Methods
Cost plus pricing Marginal cost pricing

Competition Oriented Pricing

Sealed bid pricing Going rate pricing

Demand Oriented Pricing

Price Discrimination Perceived value pricing

PRICING METHODS
Strategy Based Pricing Methods
Market Skimming Market Penetration Two part pricing Block pricing Commodity Bundling Peak load pricing Cross Subsidisation Transfer pricing

PRICING STRATEGIES IN THE CASE OF STIFF PRICE COMPETITION

Price Matching Promoting Brand loyalty Time to time pricing Promotional pricing Target pricing