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UNIT III
PART-I
INTRODUCTION TO
MARKETSAND
PRICING POLICIES
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What is a Market?
Market is defined as a place orpoint at which buyers and sellersnegotiate their exchange of well-defined products or services.
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Market
Market is any area over which buyers
and sellers are in close touch with oneanother, either directly or throughdealers, that the price obtainable in onepart of the market affects the prices paid
in other parts. - Benham
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MARKET STRUCTURE
As seen from the definition of market,the four components of a market are:
1. Sellers2. Buyers
3. Nature of product
4. Conditions of entry and exit
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COMPETITIVE MARKET
STRATEGIES
The less the power an individual firmhas to influence the market in which it
operates, the more competitive thatmarket is.
Types of Competition
Perfect Markets
Imperfect Markets
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MARKETS
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PERFECT COMPETITION
A market structure in which allfirms in an industry are price takersand in which there is freedom of entryinto and exit from the industry is
called Perfect Competition.
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FEATURES
A very large number of relatively smallbuyers and sellers
Price taker
Homogeneous products
The firms are free to enter or leave theindustry
Firms do not collude with each other
Mobility of factors of production Each buyer and seller operates under the
conditions of certainty
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IMPERFECT COMPETITION
Monopoly
Monopolistic
Duopoly
Oligopoly Monopsony
Duopsony
Oligopsony
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MONOPOLY
A pure monopoly exists if one and onlyone firm produces and sells a particularcommodity in the market.
The single firm producing the productis itself both the firm and the industry.
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FEATURES
Only one firm sells the commodity having norivals or direct competition
Price Maker
Indirect rivalry may exist in the form ofi) Existence of substitute products
ii) Competing for the consumers rupee
No other seller can enter the market, elsemonopoly would cease to exist.
The product is distinct i.e., inelastic demand
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CAUSES OF MONOPOLY
Patent Rights give legal monopoly
Govt. policies such as granting licenses
Ownership and control of some strategic
raw materials. Exclusive knowledge of technology by the
firm.
Size of the market may accommodate only asingle firm
Limit pricing policy adopted to prevent newentrants.
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MONOPOLISTIC COMPETITION
Monopolistic Competition refers to asituation where there are many sellers of a
differentiated product.There is competition which is not
perfect, between many firms making verysimilar products which are close but not
perfect substitutes.
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FEATURES
Many number of sellers
Product Differentiation
i) Advertisement
ii) Patent Rights and trade marksiii) Quality Differentiation
Freedom of entry of the new firms and exit
of the old firms Higher elasticity of demand.
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DUOPOLY
If there are two sellers, duopoly is saidto exist.
OLIGOPOLY
If there is a competition among a fewsellers, oligopoly is said to exist
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MONOPSONY
If there is only one buyer, monopsonymarket is said to exist.
DUOPSONY
If there are two buyers, duopsony is saidto exist.
OLIGOPSONY
If there are few buyers, oligopsony issaid to exist.
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TR, AR and MR
Total Revenue is the revenue earned byproducing and selling n units TR = P * Q
Average Revenue is the revenue earned per unitsold AR = TR / Q
Marginal Revenue is the change in revenue by
producing and selling one more unit MR = P
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PRICE SUPPLY EQUILIBRIUM
Very Short Period Equilibrium
Short run Equilibrium
Long run Equilibrium
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EQUILIBRIUM POINT
Equilibrium point refers to the position
where the firm enjoys maximum profits andit has no incentive either to reduce or increaseits output level.
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EQUILIBRIUM POINT
PERFECTCOMPETITION
MR = MC
MC curve should cut the MR curve frombelow
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EQUILIBRIUM POINT PERFECT
COMPETITION (SHORT RUN)
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SHORT RUN SUPPLY CURVE
AR = MR
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PRICE OUTPUT DETERMINATION IN
CASE OF LONG RUN UNDER PERFECT
COMPETITION
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MR AND AR IN MONOPOLY
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EQUILIBRIUM POINT MONOPOLY
MR = MC
MC curve should cut the MR curve frombelow
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PRICE OUTPUT DETERMINATION
UNDER MONOPOLY
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IS MONOLPOLY SOCIALLY
DESIRABLE?
NO, the reasons are:
Restrict the output Exploitation of consumers
Wide gap between rich and poor
Unfair trade practices
Restricted scope to R&D
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EQUILIBRIUM POINT
MONOPOLISTIC
MR = MC
MC curve should cut the MR curve from below
AR = AC
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PRICE OUTPUT DETERMINATION
UNDER MONOPOLISTIC
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PRICE DISCRIMINATION
When a firm sells its products to itscustomers of different profile at differentprices with no corresponding change in
cost, price discrimination is said to exist.
1. Purchasing power
2. Quantity bought3. Customers from different market conditions
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ADVANTAGES OF PRICE
DISCRIMINATION
Helps to meet the competition
Surplus production can be disposed off Customer base increases
Production costs decreases as volume increases
Long run profits
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PRICING
There are no cut and dried rules forpricing, since each firm, product and marketsituation have some features that are
unique.Under pricing will result in losses and
over pricing will make the customers runaway.
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PRICING OBJECTIVES
Maximize profits
Increase sales
Increase market share Satisfy customers
Meet the competition
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PRICING METHODS
Cost Based Pricing Methods Cost plus pricing
Marginal cost pricing
Competition Oriented Pricing Sealed bid pricing
Going rate pricing
Demand Oriented Pricing Price Discrimination
Perceived value pricing
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PRICING METHODS
Strategy Based Pricing Methods
Market Skimming
Market Penetration
Two part pricing
Block pricing
Commodity Bundling
Peak load pricing
Cross Subsidisation
Transfer pricing
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PRICING STRATEGIES IN THE CASE
OF STIFF PRICE COMPETITION
Price Matching
Promoting Brand loyalty
Time to time pricing
Promotional pricing
Target pricing
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