Professional Documents
Culture Documents
Cournots Model
Illustrates a market situation of duopoly.
There are two firms selling mineral water
They take decisions as if they are
operating independently in the market
One firm enters the market first and the
other follows
Assumes
Each firm maximizes profit at MR=MC
Cost of production is zero thus MC=0
Market demand is linear
Each firm decides on its price assuming
the other firms output is given.
Oligopoly
Kinked demand curve
Collusion or Cartel
Collusive Agreement
Since the number of firms are less they
are aware of the interdependency for a
clear increased profit, less uncertainty and
better opportunity to prevent entry
If the purpose of the cartel is to maximize
cartel profits, it will allocate sales to
firms in such a way that the MC of all
the firms is equal
Centralized Cartel
Centralized Cartel sets the monopoly
price for the commodity, allocates the
monopoly output among the member
firms and determines how the monopoly
profits are to be shared.
Price Discrimination
Price Discrimination
Price Discrimination: refers to the charging
of different prices for different quantities of
commodity or in different markets which
are not justified by cost differences.
Price Discrimination of first degree
Price Discrimination of Second degree
Price Discrimination of Third degree
Pricing Techniques
Tying
Tying is a pricing technique that is used
when the products are complementary to
each other
Bundling
A firm requires customers who buy one of
its products to buy another of its products
as well.
Max Price that the theater would pay for the two
movies, leased separately or as bundle
Movie
Theater
Alvin
Palace
Casablanca
$ 12,000
$ 9,000
$ 8,000
$ 10,000
Bundle
$ 20,000
$ 19,000
Transfer Pricing
The price at which a product gets
transferred from one division to the other
is called as Transfer pricing.
Ramsay Pricing
Ramsay gave a model for taxation which
became very useful for pricing decisions of
a multi product firm.
He suggested that the government should
levy high tax on the goods which had low
price elasticity and low tax on goods which
had high price elasticity.