Pricing
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The document discusses different market structures and pricing under each structure. It covers the four main market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. For each structure, it describes characteristics like number of firms, entry barriers, product differentiation. It then discusses pricing determination. Under perfect competition, firms are price takers and price equals marginal cost. Under monopoly, the single firm influences price by adjusting output to where marginal revenue equals marginal cost. Under monopolistic competition, in the short run firms maximize profits where marginal revenue equals marginal cost, and in the long run price equals average cost.
Pricing
- 3. MARKET PRODUCT MARKET FACTOR MARKET
- 4. CLASSIFICATION OF MARKETS AREA WISE COMPETITIONTIME ELEMENT LOCAL REGIONAL NATIONAL INTERNATIONAL VERY SHORT PERIOD MONOPOLISTIC OLIGOPOLY MONOPOLY PERFECT LONG PERIOD VERY LONG PERIOD SHORT PERIOD
- 5. The Degree of Competition Classifying markets number of firms freedom of entry to industry nature of product nature of demand curve The four market structures perfect competition monopoly monopolistic competition Oligopoly Structure → conduct → performance
- 6. Features of the four market structures Type of market Perfect competition Monopolistic competition Oligopoly Monopoly
- 7. Features of the four market structures Type of market Number of firms Perfect competition Very many Monopolistic competition Many / several Oligopoly Few Monopoly One
- 8. Features of the four market structures Type of market Number of firms Freedom of entry Perfect competition Very many Unrestricted Monopolistic competition Many / several Unrestricted Oligopoly Few Restricted Monopoly One Restricted or completely blocked
- 9. Features of the four market structures Type of market Number of firms Freedom of entry Nature of product Perfect competition Very many Unrestricted Homogeneous (undifferentiated) Monopolistic competition Many / several Unrestricted Differentiated Oligopoly Few Restricted Undifferentiated or differentiated Monopoly One Restricted or completely blocked Unique
- 10. Features of the four market structures Type of market Number of firms Freedom of entry Nature of product Examples Perfect competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Monopolistic competition Many / several Unrestricted Differentiated Builders, restaurants Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes)
- 11. Features of the four market structures Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve faced by firm Perfect competition Very many Unrestricted Homogeneous (undifferentiated) Cabbages, carrots (approximately) Horizontal: firm is a price taker Monopolistic competition Many / several Unrestricted Differentiated Builders, restaurants Downward sloping, but relatively elastic Oligopoly Few Restricted Undifferentiated or differentiated Cement cars, electrical appliances Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Monopoly One Restricted or completely blocked Unique Local water company, train operators (over particular routes) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price
- 12. Perfect competition Free entry and exit to industry Homogeneous products - identical so no consumer preference Large number of buyers and sellers-no individual seller can influence price Sellers are price takers - have to accept the market price Perfect information available to buyers and sellers
- 13. Short-run equilibrium of the industry & firm Adjust its level of output - maximize its profit In short - run the number and plant size of the firms are fixed Produce more only by increasing – variable inputs Firms or industry – earn – super normal profit – normal profit – incur loss in the short run period
- 14. O £ (b) Firm Q (thousands) O (a) Industry P Q (millions) S D Pe MC AR D = AR = MR Qe AC AC Short-run equilibrium of industry and firm under perfect competition
- 15. Long – run equilibrium of the industry & firm All factors are variable Existing firms earn – normal profit – long run When total output increase – demand for factors of production will increase – lead to increase in prices of the factors When the output produced increases – the supply of the product increases – demand remain – supply of product increase – price comes down
- 16. £ QO (SR)AC (SR)MC LRAC AR = MR DL LRAC = (SR)AC = (SR)MC = MR = AR Long-run equilibrium of the firm under perfect competition
- 17. O O (a) Industry P £ Q (millions) S1 D (b) Firm LRAC PL P1 QL Se AR1 D1 ARL DL Q (thousands) Long-run equilibrium under perfect competition New firms enter Supernormal profits Profits return to normal
- 18. Advantages of perfect competition Consumer sovereignty – having perfect knowledge about the market Price is equal to the minimum average cost Reduces the wastage of resources Maximum economic efficiency in production is achieved
- 20. Classification of imperfect competition: (i) Monopoly and Monopsony; (ii) Monopolistic competition; and (iii) Oligopoly and oligopsony
- 21. MONOPOLY
- 22. Monopoly definition: Monopoly is that market form in which a single producer controls the entire supply of a single commodity which has no close substitutes.There must be only one seller or producer.The commodity produced by the producer must have no close substitutes.
- 23. Main Features of Monopoly: The main features of Monopoly are: 1. There is only one seller of a particular good or service. 2. Rivalry from the producers of substitutes insignificant. This implies that the cross-elasticity of demand between the monopolists’ product and any other product is low. 3. The monopolist is in a position to set the price himself.
- 24. Causes of Monopoly: (i) The Government may grant a license to any particular person or persons for operating public utilities like a gas company or an electricity undertaking. (ii) A producer may possess certain scarce raw materials, patent rights,secret methods of production, or specialized skill which might give him monopoly power. For example, Hoechst held a monopoly for some time in oral medicines for diabetes because they were the first to find out the methods of reducing blood sugar by an oral dose. (iii) The necessity of having large resources, as is the case where the minimum efficient scale of operations is very large, may often create monopoly. For example, it is so for making some chemicals. (iv) Ignorance, laziness and prejudice of the buyers may create monopoly in favor of a particular producer.
- 25. Revenue and Costs of Monopolists Average Revenue.:If a monopolist raises his price slightly, he will sell less, but there will still be some buyers of his product. He can increase his sales only by reducing his price. His average revenue (demand) curve will slopes downwards to the right. It shows that larger quantities can be sold at lower prices, whereas smaller quantities can be sold at higher prices.
- 26. Disadvantages of Monopoly: (i) When a monopolist exercises the market power by restricting supplies, he will become richer and he will do so at the expense of those who consume his producer. (ii) Consumer choice is restricted because in monopoly there is only one producer. (iii) The absence of competition means that there will be no pressure on the monopolist firms to be as economical as feasible. Wasteful costs tend to be reflected in higher prices. (iv) The exercise of monopoly power causes resources to be misallocated from society’s point of view. As the monopolist restricts output, his output is too small. He employs too little of society’s resources. As a result, too much of these resources may go into the production of goods with low consumer preferences. Thus resources are misallocated. (v) A firm enjoying monopoly position in a strategic sector may provide too big a risk for the economy. For example, it has been pointed out that putting all the power engineering facilities in one company, i.e., BHEL, is full of risks, as an natural or man-made causes of slow-down or stoppage of production would give severe setback to the economy.
- 27. MONOPOLISTIC COMPETITION Monopolistic competition refers to a market situation in which there are many producers producing goods which are close substitutes of one another. The important distinguishing characteristics of monopolistic competition are, (a) Product Differentiation, (b) existence of many firms supplying the market, and (c) the goods made by them are close substitutes.
- 28. Short-run Equilibrium In the short run, the firm will be in equilibrium when it is maximizing its profit, i.e., (i) Marginal Revenue = Marginal Cost, and (ii) Slope of marginal cost > Slope of marginal revenue.
- 29. In the figures (6 and 7), AR is average revenue curve, MR is marginal revenue curve, SAC is the short-run average cost curve, and SMC is the shortrun marginal cost curve. In these figures, marginal revenue curve (MR) and marginal cost curve (SMC) intersects each other at the output OM at which price is OP’.
- 30. Long run Equilibrium In, the long run, firms which are realizing losses, will leave the industry so that the remaining firms will be earning normal profits.Another point which is to be noted in this context is that average revenue curve in the long run will be more elastic, due to large number of available substitutes. Hence, in the long run, equilibrium is established when firms are earning only normal profits. Therefore, the equilibrium in the long run under monopolistic competition is when Average Revenue = Average Cost. In Fig. 8, average revenue curve (AR) is a tangent to the average cost curve (LAC) at P. Hence, the equilibrium output in the long run is OM and the corresponding price is MP. At this point, average cost and average revenue is MP. Therefore, there are only the normal profits which form part of the cost of production. Thus in the long run, the firm is in equilibrium when output is OM, and the price is MP.
- 32. Barriers to entry: Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal (monopoly) profits in the long run. Barriers to entry have the effect of making a market less contestable.
- 33. EXAMPLES OF BARRIERS TO ENTRY: Patents Giving the firm the legal protection to produce a patented product for a number of years Limit Pricing Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss Cost advantages Lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars cosmetics, confectionery and the motor car industry.
- 34. Research and Development expenditure Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. Clearly much R&D spending goes on developing new products but there are also important spill-over effects which allow firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms. Presence of sunk costs Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry. International trade restrictions Trade restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets.
- 35. Sunk Costs Sunk Costs are costs that cannot be recovered if a businesses decides to leave an industry Examples include: " Capital inputs that are specific to a particular industry and which have little or no resale value " Money spent on advertising / marketing / research which cannot be carried forward into another market or industry When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk, making huge losses if they decide to leave a market). A good example of substantial sunk costs occurred in 2001 when British Telecom announced it was scrapping its loss-making joint venture with US telecoms firm AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of Concert's workforce. And, it will cost BT $2bn (�1.4bn) in impairment charges and restructuring costs, and AT&T $5.3bn.
- 37. PRICING Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix.
- 38. OBJECTIVES OF PRICING Achieve the financial goals of the company (e.g., profitability) Fit the realities of the marketplace Support a product's positioning and be consistent with the other variables in the marketing mix Price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product
- 39. PRICING METHODS Cost-plus pricing Target pricing Marginal costing Going rate pricing Customary pricing
- 40. PRICE DISCRIMINATION Sales of identical goods or services are transacted at different prices from the same provider. The aim of which is to extract from the purchaser, the price they are willing to pay.
- 41. Price Discrimination Under certain conditions, a firm with market power is able to charge different customers different prices. This is called price discriminatio n.
- 42. Perfect Price Discrimination Perfect price discrimination Firm charges each customer the most the customer would be willing to pay for each unit he or she buys By assuming that firms could somehow find out maximum price customers would be willing to pay for each unit of output it sells It could increase profits even further, but at expense of consumers
- 43. Peak and off peak pricing Peak and off-peak pricing and is common in the telecommunications industry, leisure retailing and in the travel sector. Telephone and electricity companies separate markets by time: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate. Electricity suppliers also offer cheaper off-peak electricity during the night.
- 44. At off-peak times, there is plenty of spare capacity and marginal costs of production are low (the supply curve is elastic) whereas at peak times when demand is high, we expect that short run supply becomes relatively inelastic as the supplier reaches capacity constraints.
- 46. FIRST DEGREE The practice of charging each consumer the maximum amount she is willing and able to pay. DISADVANTAGES: Make consumers pay the amount that they’re WILLING to pay, or at least close to it. Consumer surplus is taken by the supplier
- 47. SECOND DEGREE The practice of posting a discrete schedule of declining prices for different ranges of quantities. DISADVANTAGES: More people can consume the good and more consumption Most times UNNECESSARY consumption.
- 48. THIRD DEGREE Price varies by location or by customer segment. DISADVANTAGES: It can seem unfair to pay more than somebody else for the same good Some suffers and some are able to afford to buy
- 49. Price determination under perfect competition Price for an individual firm under perfect competition is given It cannot influence the prices Demand curve or average revenue curve facing a firm under PC is perfectly elastic at the ruling price Firms can sell as much as it wishes without affecting the prices
- 50. Price and Output determination under Monopoly A firm buying competitively and selling monopolistically. It can choose to sell many units at a lower price of fewer units at a higher price. For maximization of profit or minimization of loss, a monopoly enterprise would curtail inputs and outputs to the level at which the marginal revenue equals the marginal cost.Then the slope of MC should be greater than slope of MR and it is presented in fig.5. In the figure equilibrium output is OQ for an equilibrium price OP. the total revenue is OPBQ (OQ*OP) and total cost is OP0AQ(OQ*OP0). Hence, the profit of a monopoly is P0ABP (PP0*OQ).However, monopoly may get profit, loss or neither profit or nor loss in the short run. But, in the long-run he will obtain only profit, otherwise he will not continue in the firm.
- 52. Price-output Determination under Monopolistic Competition Under monopolistic competition, different firms, produce different varieties of the product. Therefore, different prices for them will be determined in the market depending upon their respective demand and cost conditions. Each firm under monopolistic competitions seeks to achieve equilibrium or profit‐maximizing position as regards (1) price and output, (2) product adjustment and (3) adjustment of selling costs. In other words, the producer, under monopolistic competition, must make optimal adjustments not only in the price charged and as regards the quantity of output sold but also in the design of the product and the way in which he promotes the sales.
- 53. SECOND DEGREE The practice of posting a discrete schedule of declining prices for different ranges of quantities. DISADVANTAGES: More people can consume the good and more consumption Most times UNNECESSARY consumption.
- 54. Case Study Company name ‐ Holiday Packers Industry ‐ Tourism Industry • It makes 36 millions each year • Half of which are packaged holidays • Packaged holidays ‐ Consumer buys complete package of accommodation, flight and other extras
- 55. What they are doing Providing tour packages to peoples Tour package ‐ way of achieving high sales volumes Making profit of 22 pounds on holiday price of 450 pounds Vertically‐integrated holiday operators are making more profit from the consumers
- 57. limited ability to reduce output in the short‐term tour operators for the most part, only try to match supply and demand via the price mechanism The fixed costs of tour operation make up a high proportion of total costs, so that relatively high levels of discount can be applied if necessary to clear unsold stock Reductions of up to 25% off the initial brochure price However the impact of discounting on ‘lates’ in a normal season should be seen in the context of the operator’s turnover for the season Effectively reduced by only about 5%
- 58. MONPOLY BY
- 59. DEBEERS –WELL KNOWN IN DIAMOND INDUSTRY Founded in 1888 Founded by –Cecil Rhodes In 1927 Ernest Oppenheimer a mining giant of Anglo American PLC took control of Debeers From 1927 till his retirement he builded the global monopoly over world daimond industry
- 60. Feared that discoveries of diamond would lead to price fall Convinced independent producers to join its single channel monopoly It flooded the market with diamonds similar to those of producers who refused to join the cartel
- 61. Countries dominated by Debeers Russia-In 1957 daimond were found in siberia . they quickly negotiated with SU. Though conditions were not revealed Zaire –Zaire felt that the terms they were given by the CSO fell below their expectations . They can easily make more profit in free market. Israel – in the mid 1970’s Australia , Angola, Canada
- 62. In 2000, the De Beers model changed • Decision by producers in Russia, Canada and Australia • Distribute the daimond outside Debeers • Monopoly ends