UNIT III

PART-I
INTRODUCTION TO
MARKET STRUCTURES
AND
PRICING POLICIES
 What is a Market?
Market is defined as a place or point at
which buyers and sellers negotiate their
exchange of well-defined products or
services.
Market is a place where buyer and seller
meet, goods and services are offered for
the sale and transfer of ownership occurs
 Definition of Market

Market is any area over which buyers and

sellers are in close touch with one another,
either directly or through dealers, that the
price obtainable in one part of the market
affects the prices paid in other parts.

- Benham
COMPONENTS AND MARKET
STRUCTURE
As seen from the definition of market, the
components of a market are:
1. Sellers (Producer)
2. Buyers (Customers)
3. Nature of product (Types of Product)
4. Conditions of entry and exit
5. Negotiation (Price)
6. Transfer of Ownership and Product
7. Transfer of Money or Equal Value
COMPETITIVE BASED MARKET
STRUCTURE

The less the power an individual firm has to

influence the market in which it operates,
the more competitive that market is.

Types of Competition
I. Perfect Competition Markets
II. Imperfect Competition Markets
Market Structures Based on
Competition
 PERFECT COMPETITION
MARKET

A market structure in which all firms in an

industry are price takers and in which
there is freedom of entry into and exit
from the industry is called Perfect
Competition.
 FEATURES OF
PERFECT COMPETITON MARKET
• A Large Number of Buyers and Sellers
• Price Taker (market price)
• Homogeneous Products (same product)
• The firms are Free to Entry or Exit
• No Individual Preferences (buyer/seller)
• Each buyer and seller operates under the
conditions of certainty
• Mobility of Factors of Production – move
freely from industry to industry and firm
to firm
IMPERFECT COMPETITION
1. Monopoly Market
2. Monopolistic Market
3. Duopoly Market
4. Oligopoly Market
5. Monopsony Market
6. Duopsony Market
7. Oligopsony Market
 MONOPOLY
A pure monopoly exists if one and only one
firm produces and sells a particular
commodity in the market.

The single firm producing the product is

itself both the firm and the industry.

E.g.: Railways, Nokia, DOT, APSRTC

 FEATURES OF MONOPOLY
COMPETITIVE MARKET
• Only one firm sells the commodity having
no rivals or direct competition
• Price Maker
• Indirect rivalry may exist in the form of
Existence of substitute products
• No other seller can enter the market, else
monopoly would cease to exist.
• The product is distinct i.e., inelastic
demand
 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 a
single firm
 Limit pricing policy adopted to prevent new
entrants.
“which represents a more realistic picture of the
actual market structure and the nature of competition
which is existing right now in the market”
MONOPOLISTIC COMPETITION
Monopolistic Competition refers to a
situation where there are many sellers of a
differentiated product.

There is competition which is not perfect,

between many firms making very similar
products which are close but not perfect
substitutes.

Monopolistic market exhibits characteristic

of both perfect competition and monopoly
FEATURES OF MONOPOLISTIC
COMPETITION
1. Large number of sellers/producers
2. Large number of buyers
3. Product Differentiation (Tooth paste)
4. Higher selling cost (Promotion cost)
5. Imperfect knowledge (Buyers)
6. Freedom of entry and exist
7. Higher elasticity of demand. (Price
sensitivity market)
 DUOPOLY
If there are two sellers, duopoly is said to
exist.

OLIGOPOLY

If there is a competition among a few sellers,

oligopoly is said to exist
 MONOPSONY
If there is only one buyer, monopsony
market is said to exist.

DUOPSONY
If there are two buyers, duopsony is said
to exist.

OLIGOPSONY
If there are few buyers, oligopsony is
said to exist.
S.NO. TYPES OF SIZE OF SIZE OF EXAMPLES
MARKETS SELLERS BUYERS
1 Monopoly Single Large Ex: Indian
Seller Buyers Railways, DRDO
2 Duopoly Two Large Ex: Soft drinks:
Sellers Buyers Pepsi & Coke
3 Oligopoly Few Large Ex: LPG Gas,
Sellers Buyers Cement Market,
Pizza Market
4 Monopsony Large Single Ex: Government
Sellers Buyer Contractors
5 Duopsony Large Two Ex: Petrol Buyers
Sellers Buyers in India: HPCL
and BPCL
6 Oligopsony Large Few Ex.: International
Sellers Buyers Airways
 TR, AR and MR

Total Revenue is the revenue earned by

producing and selling ‘n’ units TR = P * Q

Average Revenue is the revenue earned per unit

sold AR = TR / Q
Marginal Revenue is the change in revenue by
producing and selling one more unit MR = P
PRICE SUPPLY EQUILIBRIUM

 Very Short Period Equilibrium

 Short run Equilibrium
 Long run Equilibrium
 EQUILIBRIUM POINT

Equilibrium point refers to the position

where the firm enjoys maximum profits and
it has no incentive either to reduce or increase
its output level.
EQUILIBRIUM POINT – PERFECT
COMPETITION

MR = MC
MC curve should cut the MR curve from
below
EQUILIBRIUM POINT – PERFECT
COMPETITION (SHORT RUN)
SHORT RUN SUPPLY CURVE

AR = MR
PRICE OUTPUT DETERMINATION
IN CASE OF LONG RUN UNDER
PERFECT COMPETITION
MR AND AR IN MONOPOLY
EQUILIBRIUM POINT – MONOPOLY

MR = MC
MC curve should cut the MR curve from
below
PRICE OUTPUT DETERMINATION
UNDER MONOPOLY
 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
 EQUILIBRIUM POINT –
MONOPOLISTIC

MR = MC
MC curve should cut the MR curve from below
AR = AC
PRICE OUTPUT DETERMINATION
UNDER MONOPOLISTIC
 PRICE DISCRIMINATION

When a firm sells its products to its

customers of different profile at different
prices with no corresponding change in
cost, price discrimination is said to exist.

1. Purchasing power
2. Quantity bought
3. Customers from different market conditions
 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
 PRICING

There are no cut and dried rules for

pricing, since each firm, product and market
situation have some features that are
unique.
Under pricing will result in losses and
over pricing will make the customers run
away.
 PRICING OBJECTIVES

• Maximize profits
• Increase sales
• Increase market share
• Satisfy customers
• Meet the competition
 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
 PRICING METHODS

 Strategy Based Pricing Methods

 Market Skimming
 Market Penetration
 Two part pricing
 Block pricing
 Commodity Bundling
 Peak load pricing
 Cross Subsidisation
 Transfer pricing
PRICING STRATEGIES IN THE CASE
OF STIFF PRICE COMPETITION

 Price Matching
 Promoting Brand loyalty
 Time to time pricing
 Promotional pricing
 Target pricing