Pricing and Public Policy

A Zeta Perception
Abhipsa,Ajay,Balakrishnan,
Karthikeyan, Dinesh, Vignesh
Consumer Surplus and Producer
Surplus
Perfect Competition
 Perfect Competition
Firms Expand till

Price for each Marginal Cost

Incremental Unit >
Price paid for Marginal Utility
Additional unit >
Perfect Competition
Monopoly

AVC
Monopoly & Price Discrimination

P1

P2

P3
Natural Monopoly
Natural Monopoly
Natural Monopoly
 Price Regulations
• Cost Plus Pricing- By understanding the cost
incurred by the firm + Some Profit.
• Above method is difficult
– Govt. might not be able to predict demand
– Or the cost incurred by the company.
 If Prices are not Regulated
• The monopolies Reduce the production –
Demand not met
– Eg if petrol prices shoot up to Rs 500/ liter.
 If Prices are not Regulated
• If the Monopolies do not control the
production cost.
– Eg if petrol prices shoot up to Rs 500/ liter. (Same
Example)
 If Prices are Regulated
• To produce more, firm Invest more and might
lead to Technical Inefficiency.
– Eg. If Prices of petrol is made to Rs 50/ liter. Firm
will invest more to achieve more qty of
production.
• But if the price is Fixed, firms will start
 Competition to Natural Monopoly
• The Sunk costs for a Natural monopoly is usually
high.
• So Competitors fear to get in.
• Even if the Sunk costs are relatively low, the
Natural Monopolist will not allow the Competitor
to survive- by reducing the cost.
• Then two things happen………..
– The Entrant will serve a portion of the market
– The Natural Monopolist in-order to compensate for
lower prices will not serve “High Maintenance”
customers.
Competition to Natural Monopoly
• Competition will force Natural Monopoly or
the INCOMBENT to think harder…. Improve
quality…. Efficiency etc….
 Oligopoly
• Two or more firms, Restricting the total
Output to Achieve more than Normal Profits