Pricing Under Imperfect

Competition
 Pricing Under Imperfect Competition-
• Introduction, Monopoly, Price Discrimination
under Monopoly, Bilateral Monopoly,
Monopolistic Competition, Oligopoly,
Collusive Oligopoly and Price Leadership,
Pricing Power, Duopoly, Industry Analysis.
 Bilateral Monopoly
Exists-
• One Supplier
• One Buyer
Points
Supplier will always tend to increase the Price
Buyer will always tend to Decrease
Union That’s Why
Conflict

Collective Bargaining
 How a Bilateral Monopoly Works

• Bilateral monopoly requires the seller and the

buyer, who have diametrically opposite
interests, to achieve a balance of their
interests.
The buyer seeks to buy cheap, and the seller tries to sell expensive. The key
to a successful business for both is reaching a balance of interests reflected
in a“win-win” model . At the same time, both the seller and
the buyer are well aware of who they are dealing with.
 Monopoly

Single Seller and large number of

No close substitute of product
No difference between firm & industry
buyers (firm= industry)
Restriction on entry of a firm
Price maker
 Price Discrimantion
• Price discrimination is a selling strategy that
charges customers different prices for the same
product or service based on what the seller thinks
they can get the customer to agree to.

• In pure price discrimination, the seller charges

each customer the maximum price they will pay. In
more common forms of price discrimination, the
seller places customers in groups based on certain
attributes and charges each group a different price.
 Types of Price Discrimination

• There are three types of price discrimination

• First-degree Price Discrimination

• First-degree discrimination, or perfect price discrimination,
occurs when a business charges the maximum
possible price for each unit consumed. Because prices vary
among units, the firm captures all available consumer
surplus for itself, or the economic surplus. Many industries
involving client services practice first-degree price
discrimination, where a company charges a different price
for every good or service sold.
• Second-degree Price Discrimination
• Second-degree price discrimination occurs when a
company charges a different price for different quantities
consumed, such as quantity discounts on bulk purchases.
• Third-degree Price Discrimination
• Third-degree price discrimination occurs when a company
charges a different price to different consumer groups. For
example, a theater may divide moviegoers into seniors,
adults, and children, each paying a different price when
seeing the same movie. This discrimination is the most
common
 Demand & Revenue Curve
• Demand of industry and firm will be same
• If producer increase P , D will fall
• To sell more P reduced
• Rate of change in MR will be more than AR

C&P

D = AR = P

Q
Conditions
• MC = MR
• MC cuts MR from below
MC

C&P

AC

e
D = AR = P
MR

Q
 Short run price determination
Conditions
• Super Normal Profit
• MC = MR
• Normal Profit
• MC cuts MR from below
• Loss
In case of High Demand
in short run he can increase factor of
production and increase price

In case of Loss in short run

Variable factors are reduced
Super Normal Profit
Normal Profit LOSS
• If monopolist want to change the product has
to increase cost. It could be normal profit or
loss.
• Monopolist accepts losses if he is able to
recover VC rather than shutting the
production.
 Long run price determination
Conditions
• MC = MR
Long Run Monopolist want
• MC cuts MR from below
to maximise his profit

Monopolist can go till min. AC in

case of entry of new firm leading
to normal profit
 Bilateral Monopoly
• A bilateral monopoly exists when a market has only
one supplier and one buyer. The one supplier will
tend to act as a monopoly power and look to charge
high prices to the one buyer. The lone buyer will look
towards paying a price that is as low as possible.
• Since both parties have conflicting goals, the two
sides must negotiate based on the relative bargaining
power of each, with a final price settling in between
the two sides' points of maximum profit.
 Example
• A common type of a bilateral monopoly occurs
in a situation where there is a single large
employer in a factory town, where its demand
for labor is the only significant one in the city,
and the labor supply is managed by a well-
organized and strong trade union.
 Monopolistic Competition
• Monopolistic competition characterizes an
industry in which many firms offer products or
services that are similar, but not perfect
substitutes.
• It’s a market condition is a combination of
Perfect + Monopoly
• Soap industry… homogeneous products..this market is not based on price but
other things like smell, packing, branding etc.
Features:
• Large number of sellers
• Free entry & exit from industry
• Product differentiation (same product but try
to create a changed elements like Lux, Dettol)
• Non-price competition
• Selling cost (
Short Run (super Normal profit & Loss)
Conditions
• MC = MR
• MC cuts MR from below
Super Normal Profit
LOSS
 Long Run (Normal profit)

Conditions
• MC = MR
• MC cuts MR from below
 Oligopoly,
• An oligopoly is a market structure in which a
few firms dominate.
• When a market is shared between a few firms,
it is said to be highly concentrated.
• Although only a few firms dominate, it is
possible that many small firms may also
operate in the market.
Homogeneous Oligopoly: Aluminium Industry
Differentiated Oligopoly : Car

Characteristics:
• Few Sellers
• Interdependence of Firms
• Advertising
• Barriers in Entry but Free exit
• Lack uniformity among sizes of firm
• High Competition
• Group Behaviour
Collusive Oligopoly