Module 2 – Part 3

Pricing and Output

(Market Models under Capitalism)

We have grown used to talking about the determination of price in capitalist economies.
We say that prices are determined by the “invisible hand” – simply put, the interaction
between the demand and supply which appears to guide price setting in a perfectly
competitive market.

However, even in capitalism, the degree of control of the buyers and sellers over prices
vary according to the market model where the enterprise currently operates. Let us take
each one separately.

There are four(4) basic market models in capitalism according to the intensity of
competition hence, the price setting power of either the buyers, or the sellers.

Four basic market models:According to degree of competitition(most to least)

1. Pure competition – involves a very large number of firms producing a standardized

product(i.e., a product like vegetable or fish for which each new producer’s output
is virtually identical to that of every other producers). New firms can enter or exit
the industry very easily.
2. Monopolistic competition – relatively large number of sellers producing
differentiated products (e.g., clothing, furniture, books, restaurants, donuts, etc.) .
Widespread non-price competition(aka product differentiation) – a selling strategy
in which one firm tries to distinguish its product or service from all competing
products on the basis of attributes such as design and worksmanship. Entry or exit
is quite easy. (e.g., brand differentiation like in jeans production – Levis, Wrangler,
Rough Rider Jeans, Guess, etc.)
3. Oligopoly – a few sellers of a standardized or differentiated products. Each firm is
affected by the decisions of its rivals and must take those decisions into account in
determining its own price or output(e.g., commercial plane manufacturing as
Airbus, McDonnell Douglas, Bombardier, etc.).
4. Pure Monopoly - one firm the sole seller of a product or service from which there is
no substitute.(e.g., Microsoft Windows, a local electric utility like Cagelco or
TWD).

Characteristics and Occurences

Pure Competition
 1. Very large number – Large number of independently acting sellers offering their
products in large markets.
2. Standardized products(identical or homogenoous) – Buyers are indifferent about
which seller to buy the product from. Producers make no attempt to differentiate
their products.
3. “Price Takers” not “Price Makers” – no effort to control product price. Each firm
produces a small fraction of total products. Increase or decrease in production
brings no significant change in the market.
4. Free entry and exit – no significant legal, technological, financial or other obstacles.

Monopolistic Competition

1. Relatively large number of sellers – 25, 35, 60 or 70, not by the hundreds of
thousands like in Pure Competition. Example is the jeans market, clothes shop,
shoe brands, etc.
2. Small market shares - small percentage of the total market; limited control of
market price.
3. Absence of collusion – it is unlikely because there are many players hence, difficult
to agree on prices.
4. Independent action by each producer
5. Product differentiation in terms of:
a. Product attributes – physical or qualitative differences. Difference in either
functional features, materials, design and workmanship(e.g., personal
computers- differ in storage capacity, speed, graphic displays and included
software; Pizza – thin crust or thick crust; Eat-all-you-can – all Japanese, all
Seafoods, etc.
b. Service – self service vs. serviced; prestige appeal of a hotel like hospital;
courtesy and helpfulness of staff; product exchangepolicy; credit availability.
c. Location – accessibility of stores, 7 eleven or Mini stop convenience stores can
still compete with large supermarkets because of their accessibility.
6. Some control over price – “Some” control over rpice because of product
differentiation.
7. Easy entry and exit but not as easy as pure competition.
8. Advertising – Heaviest among all market models because of product
differentiation(e.g., grocery stores, gasoline stations, hair salons, mineral water,
restaurants)

Oligopoly – a few large producers of a homogenous or differentiated products. Examples:

a. Cellphone service – Globe/Smart
b. Tires – Yokohama, Bridgestone, Gajaj Tungal
c. Car Batteries – Motolite, GS
d. Aircraft Manufacturing – Airbus, Boeing, McDonnell Douglas
e. Motor Vehicles – Honda, Toyota, Mitsubishi, Nissan, Ford
 1. Either homogenous or differentiated products
2. Control over price but mutual interdependence
3. Entry Barriers – economies of scale, moreso in high input industries like aircraft
manufacturing.
4. Consolidation though mergers.,
5. Collusion - Cooperation with rivals; fix prices, divide markets, restrict competition
among them.

Pure Monopoly – a single seller of product with no close substitutes(e.g., Microsoft

Windows, Facebook)

1. A single seller – firm and industry are synonymous.

2. No close substitutes – product unique
3. Price Maker
4. Blocked entry – via patents and licenses

Examples of “near monopolies”

1. Intel – Control of 80% of the total market for microprocessors
2. Western Union – 80% of global money transfers
3. Frisbee – 90% of plastic throwing devices
4. DeBeers – 55% of world” rough-cut diamonds

On the basis of the foregoing discussions, prepare a reaction paper answering the following
questions.

1. Provided with your current family financial condition, presuming you are thinking
of opening up a business, which market model would be most realistic for you to
participate in? What business model would you propose. Write down the
justifications for your choice.
2. In an ideal world where you can practically open any business you want, what
business would you engage in, in what market model would this business be
classified under and why is this your choice?

Send your output to my email ad: mstanjr@csu.edu.ph on or before March 27, 2021.