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MARKET STRUCTURE AND PRICING MODELS

Market Structure and Level of Competition Factors that determines the market structure:
 Nature of products  Number of firms  Size of firms  Barrier to entry The above factors will determine the market structure of the firm and the level of competition faced.

Produce homogenous product ii. . Large number of firms in the market iii. Small firms competing with each other iv. Given that firms‟ assumption of profit maximization. The firm has no control over pricing strategy. It is easy to set up business. output will be produced at MR = MC condition.PERFECT COMPETITION MARKET MODEL Characteristics of perfect competition model: i.

while consumers benefit by having lowest possible price. firms benefit through profit maximization. Resources are said to be efficiently allocated. . the firms will have to be cost-efficient to survive since they have no control over pricing and no way of differentiating their product to induce demand. firms are to compete to the their level of efficiency. By promoting competition. In a very competitive environment.PERFECT COMPETITION MARKET MODEL Under perfect competition market model.

PERFECT COMPETITION MARKET MODEL Decision rule on stay open or shut down. The decision rule is: If TR > TVC or P > AVC …… the firm should stay open . Under a depressing market price. a firm incurring a low profit or loss may have to decide either to stay open or shut down.

The firm do have control on price and output Level. Firms are relatively small (SMEs) iv. This would depend on the firm‟s objective . Products are differentiated iii.MONOPOLISTIC COMPETITION MARKET MODEL Characteristics of monopolistic competition model: i. Ease of entry and exit from market as a whole. Large number of competitive firms ii.

MONOPOLY MARKET STRUCTURE Characteristics of a Monopoly market model: i. A monopoly have significant control over market price and would have a low price elasticity since there is no substitute for its product. Substantial barrier to entry. Public utilities iii. Product is specific in nature. Firm is normally large. eg. . iv. ii. Only one firm.

Products may be homogenous or differentiated. . Entry of potential firms is difficult. they compete on other than pricing strategies. iv. Few number of competing firms. Firms are generally large (MNCs. iii. GLCs). Firms in Oligopolistic market do have control over pricing.OLIGOPOLISTIC MARKET MODEL Characteristics of Oligopolistic market model: i. ii. However.

Kinked demand .OLIGOPOLISTIC MARKET MODEL Why is that in Oligopolistic market. the price is found to be rigid? Among the models/approaches: .Dominant price leadership .

PRICE DISCRIMINATION AND ELASTICITY In market A In market B MRA = MCA MRB = MCB Since the MC is assumed to be the same for both markets. MRA = MRB Given that. eA = -2 and eB = -6 . MR = P ( 1 + 1/e ) Therefore. PA(1+1/eA) = PB(1+1/eB) Example. thus: MRA = MCA = MCB = MRB Therefore.

PRICING MECHANISM IN ESTABLISHED PRODUCT/MARKET  Marginalist Pricing MR = MC  Mark-up or cost-plus Pricing P = AVC + X% (AVC) Reconciliation to marginalist pricing Under constant MC. hence AVC = P ( 1 + 1/e ) P = AVC ( e/e + 1 ) P = AVC + ( -1/(e + 1) )AVC . marginalist pricing: MR = MC = AVC.

PRICING STRATEGIES FOR ESTABLISHED PRODUCTS/MARKET  Price positioning Pricing relative to competitors  Product-line pricing Pricing according to product series  Pricing to infer quality Pricing according to product branding  Product-bundle pricing Pricing as a package deal  Promotional pricing Pricing during seasonal „sales‟ .

.PRICING STRATEGIES FOR NEW PRODUCTS/MARKET  Price Skimming It is pricing at a relatively high price when the product is newly introduced to the market with the intention of getting as much profit as possible.  Price Penetration Setting a relatively low price in the current period to achieve broad penetration of the market and ensure a larger market share in subsequent periods.

the extent of competitiveness is determined by the market structure.MEETING CHALLENGES OF COMPETITIVE MARKET ENVIRONMENT At the firm or industry level. Marketing Strategies •Product Differentiation •Cost Efficiencies •Market Segmentation (focus) .

Capabilities (what you are able to do) . Competencies (what you are good at) c.SUSTAINING MARKET COMPETITIVENESS Besides meeting the challenges of a competitive market. firms need to sustain its competitiveness by continuously developing and maintaining: i. assets b. external or market position perspective ii. Internal or resource-based perspective a.

Theory of comparative/relative advantage:  labor‟s productivity  factor endowment  economies of scale  technology Porter‟s theory of competitive advantage  conducive environment that nurtures innovation .COMPETITION IN THE GLOBAL MARKET At the country‟s level. the extent of competition depends on its comparative advantage/competitive.

. “ A firm‟s long-term international competitiveness usually depends much more on its capacity to continuously innovate ” Several favorable conditions must exist in order to have a positive influence on the firm‟s innovativeness.SUSTAINING COMPETITIVE ADVANTAGE According to Porter.

Porter‟s Diamond Model Firms Strategy. Structure and Rivalry Factor Conditions Related and Supporting Industries Demand Conditions .