Introduction to Markets and Pricing Policies

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UNIT III

PART-I

INTRODUCTION TO

MARKETSAND

PRICING POLICIES


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What is a Market?

Market is defined as a place orpoint at which buyers and sellersnegotiate their exchange of well-defined products or services.


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Market

Market is any area over which buyers

and sellers are in close touch with oneanother, either directly or throughdealers, that the price obtainable in onepart of the market affects the prices paid

in other parts. - Benham


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MARKET STRUCTURE

As seen from the definition of market,the four components of a market are:

1. Sellers2. Buyers

3. Nature of product

4. Conditions of entry and exit


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COMPETITIVE MARKET

STRATEGIES

The less the power an individual firmhas to influence the market in which it

operates, the more competitive thatmarket is.

Types of Competition

Perfect Markets

Imperfect Markets


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MARKETS


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PERFECT COMPETITION

A market structure in which allfirms in an industry are price takersand in which there is freedom of entryinto and exit from the industry is

called Perfect Competition.


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FEATURES

A very large number of relatively smallbuyers and sellers

Price taker

Homogeneous products

The firms are free to enter or leave theindustry

Firms do not collude with each other

Mobility of factors of production Each buyer and seller operates under the

conditions of certainty


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IMPERFECT COMPETITION

Monopoly

Monopolistic

Duopoly

Oligopoly Monopsony

Duopsony

Oligopsony


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MONOPOLY

A pure monopoly exists if one and onlyone firm produces and sells a particularcommodity in the market.

The single firm producing the productis itself both the firm and the industry.


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FEATURES

Only one firm sells the commodity having norivals or direct competition

Price Maker

Indirect rivalry may exist in the form ofi) Existence of substitute products

ii) Competing for the consumers rupee

No other seller can enter the market, elsemonopoly would cease to exist.

The product is distinct i.e., inelastic demand


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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 asingle firm

Limit pricing policy adopted to prevent newentrants.


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MONOPOLISTIC COMPETITION

Monopolistic Competition refers to asituation where there are many sellers of a

differentiated product.There is competition which is not

perfect, between many firms making verysimilar products which are close but not

perfect substitutes.


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FEATURES

Many number of sellers

Product Differentiation

i) Advertisement

ii) Patent Rights and trade marksiii) Quality Differentiation

Freedom of entry of the new firms and exit

of the old firms Higher elasticity of demand.


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DUOPOLY

If there are two sellers, duopoly is saidto exist.

OLIGOPOLY

If there is a competition among a fewsellers, oligopoly is said to exist


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MONOPSONY

If there is only one buyer, monopsonymarket is said to exist.

DUOPSONY

If there are two buyers, duopsony is saidto exist.

OLIGOPSONY

If there are few buyers, oligopsony issaid to exist.


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TR, AR and MR

Total Revenue is the revenue earned byproducing and selling n units TR = P * Q

Average Revenue is the revenue earned per unitsold AR = TR / Q

Marginal Revenue is the change in revenue by

producing and selling one more unit MR = P


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PRICE SUPPLY EQUILIBRIUM

Very Short Period Equilibrium

Short run Equilibrium

Long run Equilibrium


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EQUILIBRIUM POINT

Equilibrium point refers to the position

where the firm enjoys maximum profits andit has no incentive either to reduce or increaseits output level.


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EQUILIBRIUM POINT

PERFECTCOMPETITION

MR = MC

MC curve should cut the MR curve frombelow


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EQUILIBRIUM POINT PERFECT

COMPETITION (SHORT RUN)


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SHORT RUN SUPPLY CURVE

AR = MR


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PRICE OUTPUT DETERMINATION IN

CASE OF LONG RUN UNDER PERFECT

COMPETITION


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MR AND AR IN MONOPOLY


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EQUILIBRIUM POINT MONOPOLY

MR = MC

MC curve should cut the MR curve frombelow


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PRICE OUTPUT DETERMINATION

UNDER MONOPOLY


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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


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EQUILIBRIUM POINT

MONOPOLISTIC

MR = MC

MC curve should cut the MR curve from below

AR = AC


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PRICE OUTPUT DETERMINATION

UNDER MONOPOLISTIC


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PRICE DISCRIMINATION

When a firm sells its products to itscustomers of different profile at differentprices with no corresponding change in

cost, price discrimination is said to exist.

1. Purchasing power

2. Quantity bought3. Customers from different market conditions


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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


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PRICING

There are no cut and dried rules forpricing, since each firm, product and marketsituation have some features that are

unique.Under pricing will result in losses and

over pricing will make the customers runaway.


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PRICING OBJECTIVES

Maximize profits

Increase sales

Increase market share Satisfy customers

Meet the competition


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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


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PRICING METHODS

Strategy Based Pricing Methods

Market Skimming

Market Penetration

Two part pricing

Block pricing

Commodity Bundling

Peak load pricing

Cross Subsidisation

Transfer pricing


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PRICING STRATEGIES IN THE CASE

OF STIFF PRICE COMPETITION

Price Matching

Promoting Brand loyalty

Time to time pricing

Promotional pricing

Target pricing


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Introduction to Markets and Pricing Policies

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