Perfect Competition pricing

decisions..

 are determined by the forces of

demand and supply.
 The point of intersection between
demand and supply curves
determines the equilibrium price.
Each firm is a price
 The Average Revenue Curve is
horizontal and that AR = MR.
Market Price of a Perishable
Commodity
 Eg.fruits and vegetables
 the supply is limited and
cannot be stored for the
next market period
 therefore the commodity
must be sold away on the
same day whatever the
price may be.
Market Price of Non-Perishable
 goods can be preserved and
carried over to the next market
period.
 if price is very high the seller
will be sell the whole stock.
 if price is low the seller will not
sell any amount in the present
market period, but will hold
back for some better time.
 price below which the seller will
refuse to sell is called the
Reserve Price.
 Pricing under Monopoly
 monopolist is a price maker.
 Initially he fixes the price through trial and error process, by
balancing losses and gains.
 equilibrium ->MR = MC and corresponding point on the
Average Revenue Curve determines the price to earn maximum
profit.
 he will charge a high price and subsequently enjoy monopoly
profits.
Pricing under Monopoly
 In the long run , the monopolist firm strives and plans
to earn only profits
 He may also practice price-discrimination -charging
different prices to different buyers and in different
regions for the same product
 Selling his product in foreign market at a price lower
than his own market is itself referred to as Dumping.
Pricing under Monopolistic
Competition
 a group of producers producing same but not identical
product compete with each other in the market.
 They practice product-differentiation instead of
having a price war with each
 the prices charged are quite competitive in nature.
 Eg- Lux, Liril, Dove, etc.
Pricing under Monopolistic
Competition
 In monopolistic competition, every firm has a certain
degree of monopoly power and can take initiative to
set a price.
 there can never be a unique price but the prices will be
in a group reflecting the consumers’ tastes and
preferences for differentiated products.
 the price of the product of the firm is determined by
its cost function, demand, its objective etc
Pricing under Monopolistic
Competition
 Demand curve /average revenue curve of a firm under monopolistic
competition is elastic sloping downwards to the right but not perfectly
elastic
 Reason :
 reduction in the price will increase the sales of the firm but it will have
little effect on other firms as each will lose only a few of its customers.
 an increase in price will reduce demand substantially but each of its
rivals will attract only a few of its customers.
 This happens because the products are close substitutes but not
indentical.
 When it exercises some control over price, it resembles monopoly and
when its demand curve is affected by market conditions it resembles
pure competition. Such a situation is, characterised as monopolistic
competition.
Pricing under Monopolistic
Competition
 Every firm acts independently and for a given demand
curve, marginal revenue curve and cost curves, the firm
maximizes profit or minimizes loss when MC=MR
Pricing under Monopolistic
Competition
 If a firm in a is making substantial amount of economic
profits and assuming that the other firms in the market are
also making profits, attracted by the super-normal profits,
new firms will enter the group.
 As a result, there will be an increase in the number of close
substitutes available in the market and hence the demand
curve would shift downwards since each existing firm
would lose market share. The entry of new firms would
continue as long as there are economic profits.
 Thus monopolistic competition is similar to perfect
competition where economic profits are eliminated in the
long run.
Pricing under Monopolistic
Competition
 The demand curve will
continue to shift
downwards till it becomes
tangent to LRAC at a
given price P1 and output
at Q1 as shown in the
figure. At this point of
equilibrium, an increase
or decrease in price would
lead to losses. In this
case the entry of new
firms would stop, as there
will not be any economic
profits.
Pricing under Monopolistic
Competition
 Due to free entry, many firms can enter the market and
there may be a condition where the demand falls below
LRAC and ultimately suffers losses resulting in the exit
of the firms. Therefore under the monopolistic
competition free entry and exit must lead to a situation
where demand becomes tangent to LRAC
 Due to product differentiation/ availability of variety firms
in the long run do not produce at the minimum point of
their average cost curve, and thus there is excess capacity
available with each firm and consumers pay the higher
price for the increased variety available in the market.
Pricing under Oligopoly
 Under Oligopoly there are few sellers competing in the
market. They may be rivals or may form collusion
 Each producer before he fixes the prices of his product
tries to understand the price behavior of other
producers in the market.
 Under Oligopoly there prevails the phenomenon
of price rigidity.
 Firms may prefer to resort to non-price competition
leaving each other to follow their own policies.
Kinked Demand Curve
 Each oligopolistic believes that if he
lowers the price, his rivals will also
lower their prices. Thus, the upper
portion of the demand curve is price
elastic. If he increases the price, the
rivals will not and therefore, he will
lose customers. This explains the
inelastic lower portion of the
demand curve.
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