UNITUNIT IIIIII PART-IPART-I INTRODUCTIONINTRODUCTION TOTO MARKETMARKET STRUCTURESSTRUCTURES ANDAND PRICINGPRICING POLICIESPOLICIES What is a Market? Market is defined as a place or point at which buyers and sellers negotiate their exchange of well-defined products or services. Market is a place where buyer and seller meet, goods and services are offered for the sale and transfer of ownership occurs Definition of 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 COMPONENTS AND MARKET STRUCTURE As seen from the definition of market, the components of a market are: 1. Sellers (Producer) 2. Buyers (Customers) 3. Nature of product (Types of Product) 4. Conditions of entry and exit 5. Negotiation (Price) 6. Transfer of Ownership and Product 7. Transfer of Money or Equal Value COMPETITIVE BASED MARKET STRUCTURE

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 I. Perfect Competition Markets II. Imperfect Competition Markets Market Structures Based on Competition PERFECT COMPETITION MARKET

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 OF PERFECT COMPETITON MARKET

• A Large Number of Buyers and Sellers • Price Taker (market price) • Homogeneous Products (same product) • The firms are Free to Entry or Exit • No Individual Preferences (buyer/seller) • Each buyer and seller operates under the conditions of certainty • Mobility of Factors of Production – move freely from industry to industry and firm to firm IMPERFECT COMPETITION

1. Monopoly Market 2. Monopolistic Market 3. Duopoly Market 4. Oligopoly Market 5. Monopsony Market 6. Duopsony Market 7. Oligopsony Market 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.

E.g.: Railways, Nokia, DOT, APSRTC FEATURES OF MONOPOLY COMPETITIVE MARKET

• Only one firm sells the commodity having no rivals or direct competition • Price Maker • Indirect rivalry may exist in the form of Existence of substitute products • 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. ““whichwhich represents represents a a more more realistic realistic picture picture of of the the actualactual marketmarket structurestructure andand thethe naturenature ofof competitioncompetition whichwhich isis existingexisting rightright nownow inin thethe market”market” 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.

Monopolistic market exhibits characteristic of both perfect competition and monopoly FEATURES OF MONOPOLISTIC COMPETITION

1. Large number of sellers/producers 2. Large number of buyers 3. Product Differentiation (Tooth paste) 4. Higher selling cost (Promotion cost) 5. Imperfect knowledge (Buyers) 6. Freedom of entry and exist 7. Higher elasticity of demand. (Price sensitivity market) 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. S.NO. TYPES OF SIZE OF SIZE OF EXAMPLES MARKETS SELLERS BUYERS 1 Monopoly Single Large Ex: Indian Seller Buyers Railways, DRDO 2 Duopoly Two Large Ex: Soft drinks: Sellers Buyers Pepsi & Coke 3 Oligopoly Few Large Ex: LPG Gas, Sellers Buyers Cement Market, Pizza Market 4 Monopsony Large Single Ex: Government Sellers Buyer Contractors 5 Duopsony Large Two Ex: Petrol Buyers Sellers Buyers in India: HPCL and BPCL 6 Oligopsony Large Few Ex.: International Sellers Buyers Airways 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