PRICE DETERMINATION

under various market conditions

Perfect Competition
FEATURES:
Large number of buyers and sellers
Homogeneous product
Freedom to move in or move out
Full and unrestricted competition
Perfect knowledge
Perfect mobility of factors of production
Absence of transport cost
Price determination in the market period:
Factors:
Nature of commodity
Future price on reservation price
Reservation price on availability
Cost of production influences
PRICE DETERMINATION – MARKET PERIOD
RESERVATION PRICE
• Nature of commodity
• Sellers anticipation regarding future prices has
considerable influence.
• Availability of storage facilities and cost of storage
• Durable and semi-durable goods.
 Perfect Vs Pure
 Very short period
 Market Demand & supply, Market price
 Supply – Reservation price – vertical – upward
 Eq – industry – intersect, firm – RP = MP
 Short period
 MP – interaction , suitable adjustment
 MP, higher or lower than Spep
 Eq – produce in what quantitites? MC=MR (rules)
New price may be equal or
 Long period higher or lower than
 Change in demand old price
 Change in supply
 MONOPOLY
CLASSIFICATION OF MONOPOLY:
Ownership
Private
Public
Entry of Rivals
Without effective threat of entry
With effective threat of entry
Pricing
Simple – charge uniform pricing
Discriminating – charge more than one price for same
commodity.
Foundations/Bases for monopoly power
Control of strategic raw material
Public utilities
Fiscal monopolies
Legal backing by Government
Restricted market for a product
Control of a secret process
Monopolistic combinations
 PRICE DISCRIMINATION
Different prices
Uniform prices
Different varieties
Haphazard – special orders
Size of purchase
Location of buyers
Income of consumers
Time and type
FIRST DEGREE – perfect price
Different prices for different buyers
Different prices for different units buyers
p1 prepared to buy
p2

p3
P4
p5
SECOND DEGREE
Different prices for different buyers
Different prices for different units buyers
p1 but at lower level
p2 Consumer surplus

p3
P4
p5
THIRD DEGREE
Different prices for different sub-groups/markets

Classified based on Ed

p1 Lower price not to resell

in higher price
p2
Uniform price policy
p3
P4
p5
EFFECTS
Destroy competitors
Higher profits
Larger size of total output
MONOPOLISTIC
 ASSUMPTIONS
COMPETITION
 Large number of sellers – differentiated products
 Varieties but not perfect substitutes
 Perfect freedom
 FEATURES
 Product differentiation
 Imperfections in market
 Ignorance
 Inertia
 Cost of transport
 Irrational preference
 Advertisement of dealers
 DUOPOLY – Market with Two sellers
AUGUSTIN COURNOT’S MODEL

NQ= ½ NB
For X For Y
Price = OP OP1
Quantity = ON NQ
C
TP= ONCP NQDE
P
TQ of X and Y = ON + NQ
D = OQ
P1 TP of X and Y = ONCP + NQDE
E =
B

N Q

B1 B2
ASSUMPTIONS
Product is homogeneous
No cost of product AC & MC = 0
Output of rival is fixed
MD is linear
 OLIGOPOLY- market with few sellers
 Classifications
 Basis of entry – closed / open
 Nature of product – pure / differentiated
 Dominance – partial and full
 Collusion – collusive / non-collusive
 Work – organised /non-organised

Features
 Monopoly Power
 Different from perfect competition
 Conscious of reaction of rivals
 Indeterminate demand curve
 Conflicting attitudes among sellers
 PRICING POLICIES AND PRACTICES
 Full cost or cost-Plus Pricing
 Rate of return pricing
 RoR= Earnings/Inv. Capital
 Cap T/o – Inv.cap /St. costs
 Mark-up = Cap. T/o X RoR
 Ear/St. costs
 Price = St. costs + Mark up
 Target pricing
 Other
 Marginal cost
 Going rate
 Customary
Pricing
Product Life Cycle
New Product
Product Line pricing – Multiple products
Full cost
Incremental cost
Conversion cost
Cost, Ed and competitive condition
Competition and Market Types in Economic
Analysis