PRICING AND OUTPUT

DECISIONS
Determinants of Price

There are five basic determinants of

the price of a commodity-
the demand for it
its cost of production
objective of its producers
nature of the competition in its market
government policy pertaining to it
What is Market Structure?
Market structure is the competitive
environment.
Number of buyers and sellers.
Potential entrants.
Barriers to entry and exit, etc. .
MARKETS

Perfect Competition
Imperfect Competition
 IMPERFECT
COMPETITION

MONOPOLISTIC
MONOPOLY OLIGOPOLY
COMPETITION
PERFECT COMPETITION
CHARACTERISTICS
Large number of buyers and sellers
Homogeneous product
Free entry and exit
Perfect knowledge
No discrimination
Under such a market, no single buyer
or seller plays a significant role in
price determination.
All of them jointly determine the
price.
MONOPOLY
(Characteristics)
Single seller
No close substitutes
Price – maker
Entry barriers
Price – cum – output determination
Monopolistic Competition

Monopolistic Competition
Characteristics
Many buyers and sellers.
Product heterogeneity.
Free entry and exit.
Perfect information.
Opportunity for normal profits in long-
run equilibrium.
Oligopoly
Oligopoly Market Characteristics
Few sellers.
Homogenous or unique products.
Blockaded entry and exit.
Imperfect dissemination of information.
Opportunity for above-normal (economic) profits in
long-run equilibrium.
Examples of Oligopoly
National markets for aluminum, cigarettes, electrical
equipment, filmed entertainment, ready-to-eat cereals,
etc.
Local retail markets for gasoline, food, specialized
services, etc.
 Product Differentiation

Product differentiation is a process by

which a product being sold or
manufactured by a seller/ firm has
some special features.
Types of Product differentiation

Real Product differentiation

Imaginary Product differentiation
Real Product differentiation is a
process in which some real changes
are made in a product, so that it can
be made different from the other
products.
Imaginary Product differentiation is a
process in which there is no real
change in a product, but only the
presentation of the product is
different.
 Price discrimination under
Monopoly
Price discrimination is a situation
where a seller charges different
prices from different customers for the
same product.
 Price discrimination is possible when
the following conditions prevail-
 Monopoly market
 Elasticity of demand is different in the
two markets
 The commodity or service being sold
is not transferable between persons
and markets
 Regulation of Monopoly

 Removing barriers to entry

 Price control
 Taxation of Monopolist
 Nationalisation
Models of Oligopolistic Market

Paul Sweezy’s kinked demand curve

theory –
According to this theory a firm’s
demand curve under oligopoly is
downward sloping from left to right but
it is kinked (it is neither a straight line
nor a curved one)
 The reason for this unique type of
demand curve is the assumption
about the other firms’ behaviour.
 As a result, his products become
relatively expensive and demand for
his products decreases substantially.
 The best option for the firm is to stick
to the present price.
 Cournot Model
Augestine Cournot a French economist &
engineer had developed this model of
duopoly behaviour. In this model he had
assumed-
 That the cost of production was almost nil
for both the sellers and
 Each seller had assumed that the rival
seller will keep his output unchanged on
account of any change of output by him.
Cartels and Collusion- Agreements

Cartel- Firms operating with a formal

agreement to fix prices and output.
Collusion- A covert, informal
agreement among firms in an industry
to fix prices and output levels.
All firms in an Oligopoly market could
benefit if they formally or informally
got together and set prices to
maximize industry profits.
 Price Leadership Model

Price Leadership exists in an

oligopoly market when there is one
strong dominant firm and others are
small firms.
In such a situation the dominant firm
decides the price of the product & the
other small firms follow the price.
 Game Theory
Game theory is a theory for the study
of rational behaviour by individuals &
firms for interactive decision problems.
Game theory is attributed to James
Von Neumann and Oskar Morgenstern
who published the book ‘Theory of
Games and Economic Behaviour’ in
1944.
Game theory concepts have wide
application in the study of imperfect
competition.
In competitive games, the outcome
for each firm depends upon the
strategies conducted by all
competitors.
Terms used in Game theory
Game
Strategy
Payoff
Equilibrium (saddle point)