Module 4 Economics for Managers

Module 4: (8 hours)
Market Structure: Perfect Competition: Features, Determination of Price under Perfect Competition -
Monopoly: Features, Pricing under Monopoly, Price Discrimination - Oligopoly: Features, Kinked Demand
Curve, Cartel, Price Leadership - Monopolistic Competition: Features, Pricing under Monopolistic
Competition, Product Differentiation Pricing - Descriptive Pricing- Price Skimming, Price Penetration.
MARKET MORPHOLOGY
Meaning of Market
In general terms ‘a market is the a place where commodities are bought and sold at retail or wholesale prices. A
market place is thought to be a place consisting of a number of big and small shops, stalls and even hawkers selling
various types of goods.
In economics, however, the term “market” does not refer to a particular place as such but it refers to a market for a
commodity or commodities. Thus, economists speak of, say, a wheat market, a tea market, a gold market and so on.
Definition: An arrangement whereby buyers and sellers come in close contact with each other directly or indirectly,
to sell and buy goods is described as market.
 It follows that for the existence of a market, buyers and sellers need not personally meet each other at a
particular place. They may contact each other by any means such as telephone or telex.
 Thus, the term “market” is used in economics in a typical and a specialized sense:
 It does not refer only to a fixed location. It refers to the whole area of operation of demand and supply.
 It refers to the conditions and commercial relationships facilitating transactions between buyers and sellers.
Thus, a market signifies any arrangement in which the sale and purchase of goods take place.
 Thus, to create a market for a commodity, what we need is only a group of potential sellers and potential
buyers; they may be at different places.
 Market may be physically identifiable, e.g., the cutlery market in Mumbai situated at Jumma Masjid Street
or one which is identified in a general sense, without any reference to a particular commodity, such as the
labour market, the stock market, etc…
 Existence of different prices for a specific commodity means existence of different markets.
Product and Factor Markets
Analytically, markets may be categorized into: (i) product market, and (ii) factor market.
A ‘product market’ or ‘commodity market’ refers to an arrangement in effecting buying and selling of commodities.
Ex: Cotton market, Wheat market, Rice market, Gold market, Tea market, Cloth market, Automobile market.
While Factors markets in which factors of production such as land, labor and capital are transacted. There
are, thus, markets called labour market, land market, and capital market. The households or the consumers are the
buyers in the product markets. Their demand is the direct demand for the cons umption goods. The firms or the
producers are the buyers in the factor markets. Their demand for productive resources or factors of production is a
derived demand. In the product market, the commodity price of a specific commodity is determined individually in
the concerned commodity market by the interaction of demand for and supply of the commodity. The product
market facilitates exchange of goods in the society. Factor prices such as rent of land, wages of labor and interest for
capital are determined in the factor markets as the price of each factor is determined by the interaction between its
demand and supply in its respective market. Factor markets, in essence, facilitate distribution of income, in the form
of rents, wages, interest and profits.
Classification of Market Structures

By and large, a market structure relates to the competitive situation of a business identifying the number of
competitive firms, the relative size and strength of the firms, demand condition, cost and supply condition and the
extend of entry business in the industries. These factors pertaining to a market structure for given business play
significant role in the process of managerial economic decision making.
In view of the space element, or the geographical area covered by the market, we may enlist the following types of
markets:
 Local Markets,
 Regional Markets,
 National Markets, and
 World Markets.
I. Local Markets: Markets pertaining to local areas are called local markets. Goods supplied only in local markets
are usually produced on a small scale.
II. Regional Markets: There are regional markets when goods are sold within a particular region only. For
example, most of the firms produced in regional languages in India have regional markets only. Similarly, textbooks
sanctioned by the Maharashtra State SSC Board have a regional market.
III. National Markets: When goods are demanded and sold on a nationwide scale, there is a national market. The
goods produced by large scale industries tend to have national markets. A large number of items such as TV sets,
cars, scoters, fans, vanaspati ghee, cosmetic products, etc., produced by big companies have national markets. A
good of network of transport and communication and banking facilities help in promoting national markets.
IV. World markets: When goods are traded internationally, there exist world markets or international markets. In
international markets, goods are exchanged between buyers and sellers from different countries. In the world market
transactions, we use the term“exports” and “imports” of goods.
Multinational corporations (MNC) have world markets for their products. Similarly, export business is confined to
the world market. Incidentally, on geographical or spatial consideration, trade and markets may also be broadly
classified into: (i) domestic or internal and (i) international. We shall, thus, distinguish between internal trade and
international trade.

Market structure crucially determines the business behavior of the firms as well as the conduct and concentration in
industry relating to the pricing policy, product differentiation and improvements, the ease or difficulty for the entry
of the new firms, economic prospects and economic performance, typically measured in terms of profit earnings or
price cost margins of the firms subject to market conditions.
Market Based on Time Elements
Time element to the functional or operational time period pertaining to production processes and market forces at
work. The time element may be distinguished by the following functional time periods of varying durations, namely:
 Market period,
 Short period,
 Long period, and
 Very long period or secular time.
Considering these time periods, markets may be distinguished as: (1) Very short period market, (2) Short period
market, (3) Long period market, and (4) Very long period market.
1. Very Short Period Market/ Market Period: The market for a commodity during the market period is referred to
as “the very short period market.” On functional basis, the market period is regarded as a very short time period
during which it is physically impossible to change the stock of a commodity even by a single unit further. The basic
characteristics of a very short period (or market period) market is that, in this market it is not possible to make any
adjustments in the supply to the changing demand conditions. In a very short period market, the equilibriumprice of
a commodity is referred to as the “market price” which is established by the intersection of market period demand
and market period supply.
2. Short period Market: The market of a commodity during short period is referred to as the short period market.
The short period is a functional time period during which it is possible for a firm to expand output of a commodity
to some extent by changing the variable inputs such as labour, raw materials, etc., under its fixed plant size.
3. Long period Market: The market for a commodity in the long period is referred to as “the long period market”.
The long period refers to a functional time period which is sufficient to permit changes in the scale of production to
a firm by changing its plant size.
4. Very Long Period Market: The market for a commodity in the very long period is referred to as “the very long
period Market”. The very long period market is the secular time period which runs over a series of decades. During
such a very long functional time period, dynamic changes takes place in demand and supply situations. However,
the secular period is of little theoretical significance on account of the too long period involved in its operations.
Type of Market Structures formed by the nature of Competition
 Perfect Competition
 Monopoly
 Oligopoly
 Monopolistic Competition
1. Perfect Competition: Perfect Competition is a market structure where there is a perfect degree of competition
and single price prevails. The concept of Perfect Competition was introduced by Dr. Alfred Marshall. Nothing is
100% perfect in this world. So, this states that perfect competition is only a theoretical possibility and it does not
exist in reality.
A perfect market is one where there is perfect competition. This is a model market. According to Boulding, “the
competitive market may be defend as a large number of buyers and sellers all engaged in the purchase and sale of
identically similar commodity, who are in close contact with one another and who buy and sell freely among
themselves”.
Main Features of Perfect Competition
The following are the characteristics or main features of perfect competition :-
1. Many Sellers
2. Many Buyers
3. Homogenous Product
4. Zero Advertisement Cost
5. Free Entry and Exit
6. Perfect Knowledge

7. Perfect Mobility of Factors
8. No Government Intervention
9. No Transport Cost
2. MONOPOLY
Monopoly means a market where there is only one seller of a particular good or service. The term ‘Monopoly’ has
been derived from Greek term ‘Monopolies’ which means a single seller. Thus, monopoly is a market condition in
which there is a single seller of a particular commodity who is called monopolist and has complete control over the
supply of his product. He is called a monopolist. He is the only producer in the industry. There are no close
substitutes for his product. Thus, when there is only one seller of a commodity and there is no competition at all, the
situation is one of pure monopoly. A monopolist firm is itself an industry, for the distinction between a firmand an
industry disappears under monopoly. In technical language, pure monopoly is a single firm-industry where the cross
elasticity of demand between its product and the products of the other industries is zero.
Pure monopoly rarely exists in reality. It is merely a theoretical concept, because even if there were no close
substitutes, some kind of competition would always be there, such as a choice between decorating a house or buying
a car. However, even though pure monopolies are a rare phenomenon in developed countries, they are found in
developing countries like India in the form of State monopolies, e.g. the Mahanagar Telephone NigamLtd. (MTNL)
and the Post and Telegraph Department of the Government of India.
Characteristics
 Only one single seller in the market. There is no competition.
 There are many buyers in the market.
 The firm enjoys abnormal profits.
 The seller controls the prices in that particular product or service and is the price maker.
 Consumers don’t have perfect information.
 There are barriers to entry. These barriers many be natural or artificial.
 The product does not have close substitutes.
Salient Features of Monopoly
 Single Seller
 Restricted Entry: Free entry of new organizations in this market arrangement is prohibited, that is, other
sellers cannot enter the market of monopoly. Few of the primary barriers, constricting the entry of new
sellers are:
1. Government license or franchise
2. Resource ownership
3. Patents and copyrights
4. High start-up cost
5. Decreasing average total cost
 Homogeneous Product
 Full Control Over Price
 Price Discrimination
 IncreasedScope for Mergers
 Price Elasticity: With regards to the demand of the product or service offered by the monopolizing
company or individual, the price elasticity to absolute value ratio is dictated by price increase and market
demand. It is not uncommon to see surplus and/or a loss categorized as 'deadweight' within a monopoly.
The latter refers to gain that evades both, the consumer and the monopolist.
 Lack of Innovation: On account of solitary market domination, monopolies exhibit an inclination towards
losing efficiency over a period of time; new designing and marketing dexterity takes a back seat.
 Lack of Competition: When the market is designed to serve a monopoly, the lack of business competition
or the absence of viable goods and products shrinks the scope for 'perfect competition'.

Being the sole merchant of a eccentric good with no close imitation, a monopoly has no opposition. The demand for
turnout induced by a monopoly is the market demand, adhering extensive market control. The incompetence
resulting from market dominance also makes monopoly a key type of market failure.
Advantages of monopoly
1. Monopoly avoids duplication and hence wastage of resources.
2. A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The
benefits can be passed on to the consumers.
3. Due to the fact that monopolies make lot of profits, it can be used for research and development and to
maintain their status as a monopoly.
4. Monopolies may use price discrimination which benefits the economically weaker sections of the society.
For example, Indian railways provide discounts to students travelling through its network.
5. Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid
competition.
Disadvantages of monopoly
1. Poor level of service.
2. No consumer sovereignty.
3. Consumers may be charged high prices for low quality of goods and services.
4. Lack of competition may lead to low quality and out dated goods and services.
Classification of Monopoly
1. Perfect Monopoly: It is also called as absolute monopoly. In this case, there is only a single seller of product
having no close substitute; not even remote one. There is absolutely zero level of competition. Such monopoly is
practically very rare.
2. Imperfect Monopoly: It is also called as relative monopoly or simple or limited monopoly. It refers to a single
seller market having no close substitute. It means in this market, a product may have a remote substitute. So, there is
fear of competition to some extent e.g. Mobile (Cellphone) telcom industry (e.g. vodafone) is having competition
from fixed landline phone service industry (e.g. BSNL).
3. Private Monopoly: When production is owned, controlled and managed by the individual, or private body or
private organization, it is called private monopoly. e.g. Tata, Reliance, Bajaj, etc. groups in India. Such ty pe of
monopoly is profit oriented.
4. Public Monopoly: When production is owned, controlled and managed by government, it is called public
monopoly. It is welfare and service oriented. So, it is also called as 'Welfare Monopoly' e.g. Railways, Defence, etc.
5. Simple Monopoly: Simple monopoly firm charges a uniform price or single price to all the customers. He
operates in a single market.
6. Discriminating Monopoly: Such a monopoly firm charges different price to different customers for the same
product. It prevails in more than one market.
7. Legal Monopoly: When monopoly exists on account of trade marks, patents, copy rights, statutory regulation of
government etc., it is called legal monopoly. Music industry is an example of legal monopoly.
8. Natural Monopoly: It emerges as a result of natural advantages like good location, abundant mineral resources,
etc. e.g. Gulf countries are having monopoly in crude oil exploration activities because of plenty of natural oil
resources.
9. Technological Monopoly: It emerges as a result of economies of large scale production, use of capital goods,
new production methods, etc. E.g. engineering goods industry, automobile industry, software industry, etc.
10. Joint Monopoly: A number of business firms acquire monopoly position through amalgamation, cartels,
syndicates, etc, it becomes joint monopoly. e.g. Actually, pizza making firm and burger making firm are competitors
of each other in fast food industry. But when they combine their business, that leads to reduction in competition. So
they can enjoy monopoly power in market.
Imperfect Competition
Theoretically, perfect competition is the simplest market situation assumed by the economists. In reality,
competition is never perfect. So, there is imperfect competition when perfect form of competition among the sellers
and the buyers does not exist. This happens as the number of firms may be small or products may be differentiated

by different sellers in actual practice. There is no pure monopoly in reality, Imperfect competition covers all other
forms of market structures ranging from highly competitive in nature. Traditionally, oligopoly and monopolistic
competition are categorized as the most realistic forms of market structures under imperfect competition
3. Oligopoly:
Oligopoly refers to the market structures where a few sellers are (more than to but not too many) in a given line of
production. Fellner defines oligopoly as “competition among the few.” In an oligopolistic market, firms may be
producing either a homogeneous product or may have product differentiation in a given line of production, the
oligopoly model fits well in such industries as automobile, manufacturing of electrical appliances, etc, in our
country.
Following are the distinguishing of an oligopolistic market:
1. There are a few sellers supplying either homogeneous products or differentiated products.
2. Firms have a high degree of interdependence in their business policies in fixing price and determining
output
3. Firms under oligopoly have always the fear of retaliation by rivals
4. Competition is of a unique type in an oligopolistic market. Here, each oligopolistic faces competition, and
has to wage a constant struggle against his rivals
5. Advertising and selling costs have strategic importance to oligopolistic firms.
4. Monopolistic competition: Monopolistic competition refers to the market structure in where, there are a large
number of firms producing similar but not identical products. Monopolistic competition is a blend of monopoly and
competition. Monopolistic competition is similar to perfect competition in that it has a large number of sellers, but
its dissimilarities lie in its product differentiation. In perfect competition, goods are identical or homogeneous, while
in monopolistic competition. Products are differentiated through trade marks, brand names, etc. for example, in soft
drink market products are distinguished by brand names such as Thums Up, Limca, etc product differentiation
confers a degree of monopoly to each seller in a market under Monopolistic competition. Thus, in such a market,
many monopolists compete with each other on the selling side. There are a large number of buyers too but each
buyer has preference for a particular seller or a brand of the product in the market. For instance, a smoker may prefer
panama brand cigarettes to wills. Following are the major characteristics of monopolistic competition:
 There are a large number of sellers.
 There are a large number of buyers.
 There is product differentiation. Each seller tries to distinguish his product fromthe rest.
 Each seller resorts to advertising and sales promotion efforts. Thus selling costs are a unique feature of
Monopolistic competition
Monopolistic competition has two aspects:
(1) Price competition, i.e,. sellers compete in price determination, and
(2) Non – price competition, i.e,. sellers compete through product improvements and advertising sales promotion
efforts.
COMPETITIVE EQUILIBRIUM PRICE
Perfect competition in practice:
Perfect competition is an ‘ideal concept’ of market rather than an actual market reality. By and large, the perfect
competition model fits into the market for farm products. For instance, in the markets for rice, wheat, cotton, millet
and food grains, fruits, vegetables, eggs, milk, etc., there is a large number of buyers and sellers and for all practical
purposes, the products are physically identical. But, outsider of agriculture, prefect competition is a rare
phenomenon. In fact, in present – day economics, the competitive market is becoming less and realistic even in
agriculture products.
Theoretical importance of the perfect competitive market model
Despite perfect competition being regarded as not very realistic phenomenon, the beginning of economic analysis is
usually made with the competitive market model for the following reasons:
 It is a simple and convenient form of market structure to understand.
 It is also a near abstraction of the market economy when capitalism ruled supreme.

 It provides us a clear insight into how a market economy works.
 It helps us to form a clear perception of the basic principles governing the functioning of the market
economy
 It serves as a first step in understanding the nature of more complex forms of market structures.
 It regarded as an ideal form of market on normative grounds.
 In fact, people competition is honoured or its perfect efficiency and optimumallocation of resources. It
leads to such rational price determination at which total demand supply are in the long- run optimally
adjusted.
 It provides a standard to judge the economic efficiency and welfare implication of less competitive
types of markets.
 Competitive markets are not totally absent. Such markets are still found in some areas, e.g. food grain
markets in our country are highly competitive.
Perfect competition, though a limiting and much simplified model of market structure in theory, is a very
useful concept for studying the laws of markets as well as for understanding the mechanics of business
decision making in practice
Price Determination Under Perfect Competition
In a market, the exchange value of a product expressed in terms of money is called price. In a market economy, the
equilibrium price is determined by the market forces.
Under perfect competition, there is a single ruling market price-the equilibrium price, determined by the interaction
of forces of total demand (of all the buyers) and total supply (of all the sellers) in the market.
Thus, both the market or equilibrium price and the volume of production in a market under PE R F E C T
competition are determined by the intersection of total demand and total supply. To elucidate the prices of
intersection, let us consider hypothetical data on market demand for and market supply of wheat, as in table 14.1.
Table.14.1: Market Demand and Supply Schedules for Wheat
Possible price
(Rs. Per kg)
Total Demand
(Kg. per Week)
Total Supply
(Kg. per week)
Pressure on price
20 1,000 10,000 Downward
19 3,000 8,000 Downward
18 4,000 6,000 Downward
17 5,000 5,000 Neutral
16 7,000 4,000 Upward
15 10,000 2,000 Upward
Comparing the market demand and supply position at alternative possible prices, we find that when the price is Rs
20, supply of wheat is 10,000 kg., but demand for wheat is only 1,000 kg. Hence,9,000 kg., of wheat supply remains
unsold. This would bring a downward pressure on price, as the seller would compete and the force will push down
the price. When the price falls to Rs 19, Demand rises to 3,000 kg., while the supply will contract to 8,000 kg., Still
the supply is in excess of demand. Thus, the surplus of the supply causes a further downward pressure on price.
Eventually, the price will tend to fall. This process continues till the price settles at Rs 17 per kg. At which the same
amount (5,000 kg) is demanded as well as supplied. This is termed as equilibrium price. Equilibrium price is the
market clearing price. In this price, market demand tends to be equal to the market supply.
If, However, we begin from a low price (RS 15 per kg.), we find that the demand (10,000 kg) exceeds the supply
(2,000 kg). Thus, there is a shortage at Rs 15 per kg. This causes an upward pressure on the price, so the price will
tend to moveup. When the price rises, the demand contracts and the supply expand. This proces s continues till the
equilibrium price is reached,at which the demand becomes equal to the supply. At equilibrium price, there is neutral
pressure of demand and supply forces as both are equal in quantity. In general, a pictorial depiction of price is
determined at the intersection point of the demand curve and the supply curve.
Fig.14.1: Market Price Determination

In figure 14.1 PM is the equilibrium price, at which OM is the quantity demanded as well as supplied. At point P,
The demand curve intersects the supply curve. To understand the process of equilibrium, suppose the price is not at
the equilibrium point. Now, if the price is higher than the equilibrium price, as OP1, then at this price the supply is
P1b, while the demand is P1a. Thus, there is a surplus amounting ab. That is to say, more is offered for sale than
what the people are willing to buy at the prevailing price. Hence, to clear the stock of unsold output, the competing
sellers will be induced to reduce the price. Eventually, a downward movement and adjustment, as shown by the
downward pointed arrows, will begin, which would lead to (i) the contraction of supply, as the firms will be
prompted to reduce their resources in the industry, and (ii) the expansion of demand, as the marginal buyers * and
other potential buyers will be attracted to buy in the marker and old buyers also may be induced to buy more at the
falling price. Similarly, if the price is below the equilibrium level, the demand tends to exceed the supply.
At OP2 price, for instance, the demand is P2d, while the supply is P2c. Thus, there is a shortfall of supply
amounting to cd. That is to say, buyers want to purchase more than what is available in the market at the prevailing
price. This induces the competing buyers to bid up the price. So, an upward push and adjustment will develop as
shown by the arrows pointed upwards. Thus, the demand contracts as marginal buyers will be driven away fromthe
market and some buyers will buy less than before. On the other hand, the supply expands as the existing firms will
increase their output to which new firms will also add their output. Evidently, when the price is set at an equilibrium
point at which demand curve intersects the supply curve, shortages and surpluses, disappear, hence there is perfect
adjustment between demand and supply under the given conditions. So long as demand and supply positions are
unchanged, the ruling equilibrium price will prolong over a period of time.
Significance of Time Element
The element of time occupies a pivotal place in the Marshallian theory of value. According to the traditional value
theory, the forces of demand and supply determine the price. The position of supply is greatly influenced by the
element of time taken into consideration. Here, time refers to the operational time period pertaining to economic
action and force at work. Functionally, the supply of a commodity relates to his operational time involved regarding
adaption of firms in their production activity. Supply is thus adjusted in relation to the changing demand in view of
the time span given for such adjustment.
According to Marshall, the time element may be distinguished by the fallowing three time periods of varying
durations, namely: (1) market period (2) short period and (3) long period. Price determination, in view of this time
span,may be conceived as market period price, short period price and long period price.
Market Period Price
The market period is a very short period. During this period, it is practically impossible to alter output or increase
stock. Thus, supply of the commodity tends to be perfectly inelastic. During the market period, potential supply (the

stock) and actual supply tend to be identical thus, the market period or for brevity, the market price is determined by
the iteration of market period demand and supply as shown in figure 14.2.
Fig.14.3.1: Market Period Price
In a panel (A) of figure 14.2, the SS supply curve is vertical straight line, representing perfectly inelastic supply. DD
is the demand curve.
In figure 14.2 (A), the intersection between demand curve (DD) and supply curve (SS) determines the equilibrium
price OP at which demand is equal to supply (OQ).
Supply being fixed during the market period; the equilibrium price - the market period price – tends to be solely
governed by the changes in demand condition. Evidently as demand increases, the market price rises
correspondingly and when demand decrease, the price also decreases to that extent. The point is clarified in panel
(B) of figure 14.2 (a) shifts in the demand curve from DD to D1D1 means an increase in demand along with which
the new equilibrium price rises from OP to OP1. Similarly, there is a decrease in demand as presented by the curve
D2D2, the new price is also set at OP2 level.
Short Period Price
The short period is that functional time period during which the size of the firm and the scale of production remain
unchanged. Hence, during the short period, the stock of a given commodity can be increased only to a limited extent.
As such the supply curves of the existing firms will tend to be relatively inelastic. Therefore, the supply curve of
industry or the market will also be relatively inelastic.
The short period price is determined by interaction of the forces of short – run demand and supply. In graphical
terms, the short period equilibrium price is determined at the point of intersection between the short – run demand
curve and short – run supply curve as shown in fig.

Fig.14.3:Short Period Price
In figure 14.3, SS is the short – run market demand curve which has a steeper slope, indicating relatively inelastic
supply (es>1). DD is the Short – run market demand curve. OP is the equilibrium price, at which OQ is the quantity
demanded as well as supplied.
Indeed, in short – run price determination also, demand forces tend to have greater impact as compared to the supply
force. Thus, when the short – run demand increases, there is some variation in supply in the process of adjustment,
but adjustment tends to be imperfect and much less than the market requirement. Short period price is also referred
to as subnormal price.
Long Period Price
Long period is the sufficient functional time period during which the firm can change its size and the
scale of production. Thus, in the long, therefore the supply curve of an industry tends to become relatively
elastic.
Consequently, interaction between long – run supply and demand determines the long period equilibrium
price. Geographically, the long – run price is determined at the point of intersection between the long –
run demand and supply curves, as shown in fig. 14.4.

Fig.14.4: Long Period Price
In figure 14.3.SS is the long – run supply curve which is flatter curve, indicating relatively elastic supply (es>1). DD
is the long – run demand curve which is also more elastic OP is the equilibrium price at which OQ is demanded as
well as supply.
In the long – run as compared to the demand force, the supply force becomes a dominant factor in determining the
equilibrium price. The Long – run price is also described as normal price.
Concluding Remarks
The Marshallian time analysis suggests that the degree of elasticity of supply tends to vary in relation to time. The
supply tends to be relatively inelastic in the short – run and relatively elastic in the long – run. Again, in the short
period, the utility of the commodity concerned has greater significance in the determination of its value (i.e., value
in exchange or price). In the long – run, the supply factor bears greater influence upon the equilibrium price
determination. The supply factor is based on the cost element. Thus, in the long run, cost considerations has greater
significance in the determination of value in fine, we may quote Marshall “Actual value at any time, the market
value as it is often called, is often influenced by passing events and causes whose action is fitful and short – lived
than by those which work persistently. But in long periods, these fitful and irregular causes, in a large measure,
efface one another’s influence that in the long – run, persistent causes dominate values completely.”
Market Price and Normal Price
A distinction is often made between market price and normal price. The fallowing points may be enumerated in this
regard.
Market price, in its strict sense, refers to the market period price. It is the equilibrium price determined by the
interaction of day – to – day demand and supply. Normal price on the other hand, refers to the long period price. It is
the equilibrium price determined by the forces of long – run demand supply.
MEANING OF MONOPOLY
Monopoly is a form of market structure in which a single seller or firm has control over the entire market supply, as
there are no close substitutes for his products and there are business to the entry of rival producers. This sole seller
in the market is called ‘monopolist’.
FEATURES OF MONOPOLY
1. Single firm:
2. No substitutes:
3. Antithesis of competition:
4. Price maker:
5. Downward sloping supply curve
6. Entry barriers:
7. Price-cum-output determination:
The Benefits of monopoly

The benefits of monopoly power to the economic society depend, to the some extent upon the attitude and behavior
of the monopoly firm.
1. Workers may benefit. Workers in a monopoly firm will tend to be better off the monopoly profits are shared
with the workforce by provided better working condition and facilities.
2. Growth of R&D. research and development may be facilitated by reinvestment of monopoly profit.
3. Innovation & growth initiation. High concentration economic power or large firm size may be more conducive
to a higher rate of innovation.
4. Economies of scale and slope. This can be realized through the production of innovation.
5. Capability. Large firm can easily bear the high cost involved in innovation.
6. Risk spreading. Through diversification of output. The large firm can spread the risk R&D.
7. Availability of finance. Large firm can easily arrange for the financial requirements of the R&D through internal
as well as external sources.
8. Incentives. With a command over a greater market power, the large or monopolistic firm can easily appropriate
the returns from innovation. As such there are greater incentives for the large firms to undertaken innovation.
9. Contribution to public revenue. The government can obtain good revenues through high corporate taxes
imposed on monopoly profits earnings of the firm. This may also serve as a means curb the undue growth of
monopoly power.
PRICE-OUTPUT DETERMINATION UNDER MONOPOLY:
A firm under monopoly faces a downward sloping demand curve or average revenue curve. Further, in monopoly,
since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue.
In other words, under monopoly the MR curve lies below the AR curve.
The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost. The
producer will continue producer as long as marginal revenue exceeds the marginal cost. At the point where M R is
equal to MC the profit will be maximum and beyond this point the producer will stop producing.
It can be seen from the diagram that up till OM output, marginal revenue is greater than marginal cost, but beyond
OM the marginal revenue is less than marginal cost. Therefore, the monopolist will be in equilibrium at output OM
where marginal revenue is equal to marginal cost and the profits are the greatest. The corresponding price in the
diagram is MP’ or OP. It can be seen from the diagram at output OM, while MP’ is the average revenue, ML is the
average cost, therefore, P’L is the profit per unit. Now the total profit is equal to P’L (profit per unit) multiply by
OM (total output).
In the short run, the monopolist has to keep an eye on the variable cost, otherwise he will stop producing. In the long
run, the monopolist can change the size of plant in response to a change in demand. In the long run, he will make

adjustment in the amount of the factors, fixed and variable, so that MR equals not only to short run MC but also long
run MC.
MONOPOLISTIC COMPETITION:
MEANING:
Monopolistic competition is that form of the market in which there are many sellers of a particular product, but each
seller sells somewhat different products. It is also called as Imperfect Competition.
For EX: “SOAP MARKET”, where LUX is exhibited to be beauty soap, LIRIL is more related with freshness, while
DETTOL is exhibited as an antiseptic soap.
CHARACTERISTICS OF MONOPOLISTIC COMPETITION
1. Large Number of Sellers:
A market organization characterized by monopolistic competition must have a sufficiently large number of sellers or
firms selling closely related, but not identical products. The large number of firms, in the same line of production,
leads to competition. Since there is no homogeneity of goods supplied, competition tends to be pure but keen. The
number of firms being relatively large, there are less chances of collusion of business combines to eliminate
competition and to rig (arrange to gain) prices.
2. Product Differentiation:
It is one of the most important features of monopolistic competition. Each firm produces a different brand or variety
of the same products. The variety produced is closed substitutes of one another. Since all the brands are close
substitutes of one another, the seller will lose some customers to his competitors. Products like toothpaste, soap and
lipstick are prominent examples.
3. Large Number of Buyers:
There are large numbers of buyers in this type of market. However, each buyer has a preference for a specific brand
of the product. He thus becomes a patron of a particular seller. Unlike perfect competition, here buying is by choice
and not by chance.
4. Free entry and exit :
There are free entry and exit firms. It implies that in the long run firm will earn only normal profits.
5. Non Price Competition:
In this type of market sellers try to compete on basis other than price, and it is called non-price competition. They
incur advertising costs. It is because of the need to maintain a perception in the mind of the potential customers that
their respective brands are different compared to other brands.
6. Every firm is price maker and taker of his own product:
In monopolistic competition product are differentiated for every firms and so costs of every firm and the cost of
products manufactured by the firms are also different. Thus every firm is price maker and price taker for their
products.
7. Imperfect Mobility:
Here factors of production are completely not mobile. Buyers have their own preference and sellers have their own
preference.
Examples of monopolistic competition
Examples of monopolistic competition can be found in every high street.Monopolistically competitive firms are
most common in industries where differentiation is possible, such as:


Consumer services, such as hairdressing
PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION:
Under monopolistic competition, the firm will be in equilibrium position when marginal revenue is equal to
marginal cost. So long the marginal revenue is greater than marginal cost, the seller will find it profitable to expand
his output, and if the MR is less than MC, it is obvious he will reduce his output where the MR is equal to MC. In
short run, therefore, the firm will be in equilibrium when it is maximising profits, i.e., when MR = MC.
Short Run Equilibrium: the short run average cost is MT and short run average revenue is MP. Since the AR curve
is above the AC curve, therefore, the profit is shown as PT. PT is the supernormal profit per unit of output. Total
supernormal profit will be measured by multiplying the supernormal profit to the total output, i.e. PT × OM or
PTT’P’ as shown in figure (a). The firm may also incur losses in the short run if it is facing AR curve below the AC
curve. In figure (b) MP is less than MT and TP is the loss per unit of output. Total loss will be measured by
multiplying loss per unit of output to the total output, i.e., TP × OM or TPP’T’. (Diagram not furnished)
(b) Long Run Equilibrium: Under monopolistic competition, the supernormal profit in the long run is disappeared
as new firms are entered into the industry. As the new firms are entered into the industry, the demand curve or AR
curve will shift to the left, and therefore, the supernormal profit will be competed away and the firms will be earning
normal profits. If in the short run firms are suffering from losses, then in the long run some firms will leave the
industry so that remaining firms are earning normal profits.
The AR curve in the long run will be more elastic, since a large number of substitutes will be available in the long
run. Therefore, in the long run, equilibriumis established when firms are earning only normal profits. Now profi ts
are normal only when AR = AC : (Diagram not furnished)
(a) OLIGOPOLY MARKET
(b) Meaning of oligopoly:
(c) It is a market situation comprising only a few firms in a given line of production. Their products may be
standardized or differentiated. The price and output policy of oligopolistic firms are interdependent. The
oligopoly model fits well into such industries as automobile, manufacturing of electrical appliances, etc, in
our country.
(d) In fast food industry, for example, in case of burger, etc., we come across only a few prominent brand
suppliers such as McDonalds, KFC, King burger. Network of mobile phone services are provided by Airtel,
Vodafone, Tata and MTNL. Ready-to-eat breakfast industry is dominated by Corn Flakes, Nestle, Kraft
and Quaker Oats with a few others. There are only a few prominent brands of television set in India, such
as, Sony, Samsung, LG, and Videocon.
(e) Feller defines oligopoly as “competition among the few”. In an oligopolistic market, the firms may be
producing either homogeneous products or may be having product different0iation in a given line of
production.
(f) Features
(g) The following are the distinguishing features of an oligopolistic market:
(h) Few sellers : there are a few sellers supplying either homogeneous products or differentiated products.
(i) Homogeneous or distinctive product : the oligopoly firm may be selling a homogeneous product. For
example, Steel/Aluminium/Copper. these can be a unique or distinctive product. For example, Automobile-
Passenger Cars.
(j) Blockading entry and exit : firms in the oligopoly market face strong restrictions on entry or exit.
Imperfect dissemination of information : detailed market information relating to cost, price and product quality
are usually not publicized.
Interdependence : the firms have a high degree of interdependence in their business policies about fixing of
price and determination of output.
Advertising : advertising and selling costs have strategic importance to oligopoly firms. “it is only under
oligopoly that advertising comes fully into its own”. Each firm tries to attract consumers towards its product by
incurring excessive expenditure on advertisements.

High cost elasticities : the firm under oligopoly have a high degree of cross elasticities of demand for their
products, so there is always a fear of retaliation by rivals. Each firm consciously consider the possible action and
reaction of its competitors while making any changes in the price or output.
Constant struggle : competition is of unique type in an oligopolistic market. Here, competition consist of
constant struggle of rivals against rivals.
Lack of uniformity : lack of uniformity in the size of different oligopolies is also a remarkable characteristic.
Lack of certainty : lack of certainty is also an important feature. In oligopolistic competition, the firms have
two conflicting motives. (i) to remain independent in decision making, and (ii) to maximize profits, despite the fact
that there is a high degree of independence among rivals in determining their course of business. To pursue these
ends,
they act and react to the price-output variation of one another in an unending atmosphere of uncertainty.
Price rigidity : in an oligopolistic market, each firm sticks to its own price. This is because, it is in constant fear
of retaliation from rivals if it reduces the price. It, therefore, resorts to advertisement competition rather than price-
cut. Hence, there is price rigidity in an oligopolistic market.
Kinked demand curve : According to Paul Sweezy, firms in an oligopolistic market have a kinked demand
curve for their product.
Kinked demand curve
(a) The kinked demand curve or the average revenue curve is made of two segments. (i) the relatively elastic
demand curve and (ii) relatively inelastic demand curve.
Corresponding to the given price OP, there is a kink at point K on the demand curve DD. Thus, DK is the elastic
segment and KD is the inelastic segment of the curve. Here, kink implies an abrupt change in the slope of the
demand curve. Before the kink point, the demand curve is flatter. After the kink, it becomes steeper.
Above the kink at a given price, demand curve is more elastic and below the kink less elastic. The kink leads to
indeterminateness of the course of demand for the product of the seller concerned. He thus, thinks it worthwhile to
follow the prevailing price and not to make any change in it, because raising of price would contract sales as demand
tends to be more elastic at this stage. There is also the fear of losing buyers to the rivals who would not raise their
prices.
On the other hand, a lowering of price would imply an immediate retaliation from the rivals on account of close
interdependence of price-output movement in the oligopolistic market. Hence, the seller will not expect much rise in
his sale with price reduction.
Kinked Demand Curve Theory of Oligopoly Price

An important point involved in kinked demand curve is that it accounts for the kinked average revenue curve to
the oligopoly firm.The kinked average revenue curve, in turn, implies a discontinuous marginal revenue curve MA-
BR. Thus, the kinky marginal revenue curve explains the phenomenon of price in the theory of oligopoly prices.
Because of discontinuous marginal revenue curve(MR), there is no change in equilibrium output, even though
marginal cost changes hence, there is price rigidity. OP does not change.
It is observed that quite often in oligopolisticmarkets,once a general pricelevel is reached whether by collusion or
by price leadership or through some formal agreement, it tends to remain unchanged over a period of time. This
price rigidity is on account of conditions of price interdependence explained by the kinky demand curve.
Discontinuity of the oligopoly firm’s marginal revenue curve at the point of equilibrium price, the price-output
combination at the kink tends to remain unchanged even though marginal cost may change.
It can be seen that the firm’s marginal cost curve can fluctuate between MC1 and MC2 within the range of the gap
in the MR curve. Without disturbing the equilibrium price and output position of the firm. Hence, the price remains
at the same level OP, and output OQ, despite change in the marginal costs.
Pattern of behavior in oligopolistic markets

Haynes, Mote and Paul (1970), have enlisted the following important patterns of behavior normally observed in
oligopolistic markets:
Price leadership
A traditional leader in the oligopoly market announces price changes from time to time which other competitors
follow. The dominant firm may assume the price leadership. There is barometric price leadership when a smaller
firm tries out a new price, which may or may not be recognized by the larger firms.
The price leadership of a firm depends on a number of factors, such as:
a) Dominance in the market: dominating position in the market is achieved by the firm when it claims a substantial
share of the market.
b) Initiative: when the firm develops a product or a new sales territory.
c) Aggressive pricing: when the firm charges lower prices aggressively and captures a sizeable market.
d) Reputation: when the firm acquires reputation for sound pricing and accurate decisions due to its long standing
in the business, the other firms may accept its leadership.
In the oligopoly market, price leadership of a dominant firm is a unique phenomenon. A leader firm usually is the
most reputed firm in the circle, or the most efficient one or the dominating firm determines with its own perception
of the total industry profit maximizing price. Then, the followers firms also set their price at the same level in a co -
operative mood to avoid price competition. Often in a oligopoly market, therefore, once the price is set by the leader
firm, the follower’s firm too set the same price and tend to compete on the layers of non-price competition, such an
advertising and other methods of marketing.
As such, the price of the price of the product in an oligopoly market tend to remain constant and there is a least
chance of price competition, unless and until the leader firm charges the price. There is, however, no written
agreement on this issue. But, there is an implicit practical norm seen at times followed by the oligopolist firm in
certain business such as the steel, cigarette, oil, tyre, cellphones, tanks and so on.
Price wars
Under cut-throat competition among the rivals, price wars may emerge in an oligopolistic market. Under price wars,
firm tend to charge prices even below their variable cost. Price wars are never planned. They occur as a consequence
of one firm cutting the prices and others following it.
Price-cuts to weed out competition
A financially strong firm may deliberately resort to price-cuts to eliminate competitors from the market and secure
its position.
Collusion
Business syndicates or trusts may be formed by the competing firms and agree to charge a uniformprice, thereby to
eliminate price retaliation or price-cut competition. Such business collusion implies conversion of an oligopoly into
a monopoly. Business collusion is considered illegal under anti-trust laws, such as the competition Act, 2002, in
India.
Cartel
In some cases, business cartels are the unique feature of oligopoly. In this case, the existing sellers forms an
agreement on controlling market supply jointly and determining the price for their output with the creation of
monopoly power. The OPEC is an international cartel in the world’s petroleum market.
Cartels are formed to enjoy a monopoly power. It is, however, regarded to be more harmful than the monopoly by is
itself. A monopoly is supposed to be creating some harms of consumer exploitation only when the seller intends to
exercise this monopoly power. Cartel, on the other hand, is just designed to earn monopoly profit to the
collaborating members by restricting the output and using the monopoly power straight away to raise the price.
Cartels violates competitive spirit and the laws.
In a country, such as Korea, for instance, the cartel is, thus, regarded as the public enemy number one in the market
economy. The Korea Fair Trade Commission(KFTC) undertakes strict actions against cartels. Cartels regulations is
emphasized in the enactment at the Monopoly Regulation and Fair Trade Act(MRFTA) of the Korean business law
passed in 1981. In the new millennium, there has been an increasing trend in the number of prosecution against
cartel members in Korean business.

In practice, however, detection of cartel is not an easy task. Often, information reward system and insider
information resorted to for the detection. ‘Amnesty plus’ and leniency programme are also introduced to increase the
rate of detection.
By and large, relatively more a centralized Cartel then it is more powerful and effective in raising the price due to its
higher degree of monopoly power in the market (see, Griffin, 1989).
Determination of Cartel Duration and Success
Number of Firms: there is a negative relationship between the number of firms in the Cartel and its duration.
This is for the obvious reason of co-ordination problems and intensities when the number of firms is large.
Industry concentration: Cartel duration tends to be longer lasting when there is a higher degree of industry
concentration. That is, when a large market share is controlled by the Cartel members.

Large customer: Instability of Cartel would be more when selling to relatively large buyers as they may
provide incentive for a Cartel is presumed under an increase in demand growth.
Demand growth: a negative effect on duration of Cartel is presumed under an increase in demand growth.
Economic and demand stability: stable demand in an industry will sustain a Cartel for a long duration. Cartels
are destabilized by the instability of demand. Apparently, violent economic changes create negative effect on
stability and duration of Cartel in oligopoly markets.
Organization features: the success and durability of Cartel is conditioned by its internal organizational
characteristics such as existence and execution of penalties on defector firms, narrowness of product scope in the
market, specialized and complex governance structure.
Internal conflict: Cartels are destabilized or have breakdown due to internal conflicts and defection by the
member firms. Disagreement over market conflicts and defection by the member firms. Disagreement over the
market shares, bargaining and monitoring prices wars have caused breakdown of Cartels in several cases of
opportunistic behavior of Cartel members.
Technological change : in some cases of technological change, such as rubber industry, zinc, etc., cartel have
natural breakdown.
To sum up, usually with larger duration in greater market shares are more concentrated industries. Lesser
concentration and lower market share is linked to a shorter duration of Cartels. Cartels are destabilized by instability
of economic and business situation in the markets. By and large, external factors and their relationship exert
influences on the success and stability in Cartels in general (see, Levenstein Margaret and Valerie Suslow, 2001)
Secret Price Concessions
Sometimes, oligopolies may offer secret price concessions for selected buyer instead of having an open price-cut,
which is likely to be retaliated by their rivals.
Non-price Competition
Owing to the danger of retaliation in price-cut competition, the oligopolists may also resort to non-price competition
in sales promotion efforts, advertising, product improvement, etc. Here, too, the rivals do retaliate.
PRICE DISCRIMINATION 
Price discrimination refers to the practice of a seller of selling the same good at different prices to different buyers.
A seller makes price discrimination between different buyers when it is both possible and profitable for him to do
so. Price discrimination is not a very common phenomenon.
It is very difficult to charge different prices for the identical good from different customers. Frequently, the product
is slightly differentiated to successfully practice price discrimination.
In the words of Mrs. John Robinson “The act of selling the same article, produced under single control at different
prices to different buyers is known as price discrimination”. Also Prof. Stigler defines Price discrimination as “the
sales of technically similar products atprices which are not proportional to marginal cost” As per this definition, a
seller is indulging in price discrimination when is charging different prices from different buyers for the different
varieties of the same good if the differences in prices are not the same as or proportional to the di fferences in the
cost of producing them. For Example, If the manufacturer of a mobile of a given variety sells at Rs. 10.000/- to one
buyer and at Rs. 11,000/- to another buyer, (Specific Model) he is practicing price discrimination.

Price discrimination is not possible under perfect competition, even if the two markets could be kept separate.
Sincemarket demand in each market is perfectly elastic,every seller would try to sell in thatmarket in which could
get the highest price. Competition would make the price equal in both the markets. However, price discrimination
is possible and profitable only when markets are imperfect.
TYPES OF PRICE DISCRIMINATION
Price discrimination is of various types. Some of them are as follows:
1. Personal price discrimination: It may be personal based on the income of the customer. For example, Doctors and
Lawyers charge different fees from different customers on the basis of their income. Higher fees are charged to rich
persons and lower to the poor.
2. Geographical or Local discrimination: There is geographical price discrimination when a monopolist sells in one
market at a higher price than in the other market. For example, in a posh locality, a beauty parlor may be charging
more while charging lower rate for the same service in a common locality.
3. Discrimination on the basis of Nature of the Product: Different prices are charged when there is a difference in the
quality of the product. For example, Unbranded products, like open tea, are sold at lower prices than branded tea like
Brooke Bond or Tata tea.
4. Discrimination on the basis of Age, Sex and Status: Here different prices are charged on the basis of age, sexand
status of consumers. For example, railways fare for children and senior citizens are different, various states in India
there is no fees for girls in schools and in case of Toll tax all MLAs, MPs and Ministers are exempted.
5. Discrimination on the basis of Time: Different rates may be charged for a service depending upon time. For
example, Telephone STD call rates at day time and night. Besides, advertising rates on TV based on prime time and
non –prime time.
6. Discrimination on the basis of Use of product / Service: Prices differ according to the use to which the product is
utilized. For example, electricity per Unit rates are different for users as domestic use, Farmuse and industrial use.
Degree of Price Discrimination: It is the extreme case of price discrimination. Under this, the monopolist charges
different prices to different unit if the same product. The price charged for each unit, in each buyer’s case, is set in
accordance with the marginal utility the buyer estimates and thus at what maximum price he is willing to pay for it .
Under first degree price discrimination, the entire consumer’s surplus of the buyer is converted into monopolist’s
revenue and profits.
Perfect Price Discrimination

First degree price discrimination may better be called perfect discrimination. When a monopolist can charge each
buyer the highest price that he/she is willing to pay, the price discrimination is perfect. The above figure illustrate
perfect discrimination through a diagrammatic model.
The monopoly firm equates its supply curve with demand curve and produces OQ level output. The firm charges
each buyer a price which he is willing to pay the most highest say, he may be charging Rs 19 to a buyer which he is
willing to pay utmost. He charges Rs. 9 to a buyer who is willing to pay only up to Rs 9 for the unit and so on.
There are two major problems encountered in resorting to perfect price discrimination . First, the monopolist should
know perfectly well as to how much maximum price buyer is willing to pay.
In practice, these conditions cannot be perfectly well . Often, therefore, price discrimination tends imperfect . It may
be met practically well . It may be of a second degree or third degree price discrimination.
2. Second Degree Price Discrimination
Under this category discrimination, the monopolist sells blocks of output at different prices . Here, the possible
maximum price is charged for some given minimum block of output purchased by the buyer and then the additional
blocks are sold at successively lower prices.
Thus, when first degree price discrimination is case of unit-wise differing , the second degree price discrimination is
a case of block –wise differing prices . In the second degree price discrimination, the monopolist captures a part of
the consumer’s surplus and not the whole of it.
Thus, in the case of public utilities , like supply of electricity, telephone services, gas services, rail and bus transport
services, etc., the services are given in blocks of small units, such as kilowatts of distance, etc.,
3. Third Degree Price Discrimination
Third degree price discrimination price discrimination is the most common type of monopolist price discrimination
in which the firm divides its total output into many sub market and sets different prices for its product in market in
relation to the demand elastics. The third degree price discrimination , thus, crucially differs fromthe second degree
one in one respect that in the latter case, the price tends to be minimum as per the marginal utility of the marginal
buyers , while in the case of the former, price depends on the allocation of the output.
The below figure represents the case of third degree price discrimination .Two markets are taken into account .
Demand curves for the market I and market curve II are D1 and D2 respectively.D1 is less elastic and D2 is more
elastic demand curve . When the monopoly firm produces Q1Q2 total output , it distributes OQ amount in market I
and OQ2 in market II.

The Ingredients for Discriminating Monopoly: Conditions Essential for Price Discrimination
• Monopoly
• Segmentation of the Market
• Apparent Product Differentiation
• Buyers’ Illusion
• Prevention of resale or re-exchange of goods
• Non-transferability characteristics of goods
• Let-go attitude of buyers
• Legal sanction
Product Differentiation Pricing
A marketing process that showcases the differences between products. Differentiation looks to make a product more
attractive by contrasting its unique qualities with other competing products. Successful product differentiation
creates a competitive advantage for the seller, as customers view these products as unique or superior.
 Firms seek to be unique along some dimension that is valued by consumers. Differentiation can be based
on the product itself, the delivery system, or the marketing approach.
 If the firm/product is unique in some respect, the firm can command a price greater than cost.
Full cost (cost-plus) pricing
 Under this method, the cost of product is calculated and a fair percentage of profit margin is added hence,
the price of the product is determined.that is
 PRICE=COST+FAIR PROFIT MARGIN
 Cost means full allocated cost at current output n wage levels. according to Joel Dean(1972) there are 3
different concepts of cost used in the formula of full costing pricing.
 Actual cost usually means historical cost for the latest available period. It includes wages, materials,
overheads charges etc
 Expected cost means forecast of actual cost for the pricing period on the basis of the expected prices, output
ratios, efficiency
 Standard cost means normal cost at some normal rate of output with efficiency at some standard level,
which may be normal level or an optimum level

 Fair profit means a fixed percentage of profit mark up. It differs from industry to industry and among firms
Price skimming
Price skimming is a product pricing strategy by which a firm charges the highest initial price that custo mers will
pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-
sensitive segment.
The causes for the adoption are:
 Heavy expenditure on a new product
 Absence of competition at the initial stage
 Demand is relatively less elastic
 Suitable for luxurious products
 Early recovery of initial investment
 Attracting the consumers of high income group
 Earning high rate of profit at the initial stage
Price Penetration
A marketing strategy used by firms to attract customers to a new product or service. Penetration pricing is
the practice of offering a low price for a new product or service during its initial offering in order to attract
customers away from competitors. The reasoning behind this marketing strategy is that customers will buy
and become aware of the new product due to its lower price in the marketplace relative to rivals.
Penetration pricing can be a successful marketing strategy when applied correctly. It can often increase
both market share and sales volume. Additionally, the high sales volume can also lead to lower production
costs and higher inventory turnover, both of which are positive for any firmwith fixed overhead. The chief
disadvantage, however, is that the increase in sales volume may not necessarily lead to a profit if prices are
kept too low. As well, if the price is only an introductory campaign, customers may leave the brand once
prices begin to rise to levels more in line with rivals.
The causes for the adopting are:
 Low cost of production of a need product
 Economies of a large scale production
 Low expenditure on research advertisement and sales promotion programme
 Enter and expand the market
 Suitable when the demand for a product is relatively elastic
 Discouraging competition
 Attracting consumers of low income group
 Discouraging government intervention
 Earning maximum profit through maximum sales.
Pricing over a life cycle of a product
There are 6 stages in the life cycle of a product:
INTRODUCTION: this is the first stage in the life cycle of a product. A product is developed and introduced in the
market as a new one. There are 2 strategies in it:
1) High initial pricing strategy
2) Low initial pricing strategy
GROWTH: at this stage the product gets popularity among consumers and the demand for a product increases
steadily. Firms get the opportunity to earn maximum profits through maximum sales. At this stage if there is no
competition in the market, the firm can fix relatively high price for the product. To sustain growth consumer
satisfaction should be ensured at this stage.
MATURITY: at this stage, though the sales of a product continue to increase the rate of increase in sales declines
.this is because of the fact that the number of potential consumers for the product starts declining. Hence the product
loses its popularity. A number of substitutes come to the market. The product becomes a common one. There is no
scope for improvement in the quality of the product.

SATURATION: at this stage, the demand for the product stabilizes and there is in demand. Advertisement and sales
promotion activities should be intensively undertaken to maintain the demand for the product. At this stage the level
of sales of the product reaches a stage when demand starts shifting to other products.
DECLINE: at this stage, the sales of the product start declining. Substitute products become more popular. All
efforts taken to increase or to maintain the demand for the product become ineffective. At this stage, the firmshould
follow break-even point price policy so as to continue its production activities.
OBSOLESCENCE: this is the last stage in the life cycle of a product. At this stage there are almost no sales of the
product. Practically the product is out of the market and its production should be discontinued. The resources
engaged in its production should be diverted to the production of their product.
Price discount:
Price discounts the difference between the list price shown in the catalogue and the net price charged by the
producer. The price charged by the producer or the seller is always lower than the list price.
There are 3 types of prices discounts as mentioned below:
1) Distributor’s discount
2) Buyer’s discount
3) Dealer’s discount
Peak load pricing:
Peak load pricing is a method of charging a higher price from consumers who require service during periods of peak
demand and a lower price for those who consume during off-peak periods.
Peak load pricing may be suitable only if three conditions are met in producing a product:
1) The product cannot be storable. Pricing of long-distance telephone calls is an example of peak-load pricing.
2) The same facilities must be used to provide the service during different periods of time.
3) There must be variation in demand characteristics of consumers at different periods of time.
Transfer pricing:
Transfer pricing is a method of charging a price by different divisions of the same firm for goods and services
exchanged between them. Transfer prices are determined by the following methods:
1) Market price
2) Bargained market price
3) Full or marginal costs.
Module 5: (8 hours)
Indian Economic Environment: Overview of Indian Economy, Recent changes in Indian Economy.
Measurement of National Income: Basic Concepts, Components of GDP- Measuring GDP and GNP,
Difficulties in measuring National Income, Growth Rate.
Business Cycle – Features, Phases, Economic Indicators, Inflation : Types, causes, Measurement , Kinds of
Price Indices, Primary, Secondary and Tertiary Sectors and their contribution to the Economy, SWOT
Analysis of Indian Economy.
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Overview of Indian Economy
With 1.2 billion people and the world’s fourth-largest economy, India’s recent growth and development has
been one of the most significant achievements of our times. Over the six and half decades since independence, the
country has brought about a landmark agricultural revolution that has transformed the nation from chronic
dependence on grain imports into a global agricultural powerhouse that is now a net exporter of food. Life
expectancy has more than doubled, literacy rates have quadrupled, health conditions have improved, and a sizeable
middle class has emerged. India is now home to globally recognized companies in pharmaceuticals and steel and
information and space technologies, and a growing voice on the international stage that is more in keeping with its
enormous size and potential.
Historic changes are unfolding, unleashing a host of new opportunities to forge a 21st-century nation. India will
soon have the largest and youngest workforce the world has ever seen. At the same time, the country is in the midst
of a massive wave of urbanization as some 10 million people move to towns and cities each year in search of jobs
and opportunity. It is the largest rural-urban migration of this century.
The historic changes unfolding have placed the country at a unique juncture. How India develops its significant
human potential and lays down new models for the growth of its burgeoning towns and cities will largely determine
the shape of the future for the country and its people in the years to come.

Massive investments will be needed to create the jobs, housing, and infrastructure to meet soaring aspirations
and make towns and cities more livable and green. Generating growth that lifts all boats will be key, for more than
400 million of India’s people–or one-third of the world’s poor–still live in poverty. And, many of those who have
recently escaped poverty (53 million people between 2005-10 alone) are still highly vulnerable to falling back into
it. In fact, due to population growth, the absolute number of poor people in some of India’s poorest states actually
increased during the last decade.
Inequity in all dimensions, including region, caste and gender, will need to be addressed. Poverty rates in
India’s poorest states are three to four times higher than those in the more advanced states. While India’s average
annual per capita income was $1,410 in 2011–placing it among the poorest of the world’s middle-income countries–
it was just $436 in

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Module 4 Economics for Managers