“in Critical Moments Even the Very Powerful

8/14/2019 in Critical Moments Even the Very Powerful

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IN CRITICAL MOMENTS EVEN THE VERY POWERFUL

HAVE NEED OF THE WEAKEST


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MARKETS

is a situation where buyers and

sellers come in contact with each other for

buying and selling goods and services at a

particular price at a point of time.

Two Parties

Commodity or Services

Price

Time


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Market as per competition

Pure or Perfect competition

Imperfect competition

(1) Monopolistic Competition

(2) OligopolyDuopoly

Monopoly


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Market as per competitionMarket as per competition

Perfect

Competition

Imperfect

Competition

Monopoly

Monopolistic

Competition

Oligopoly Duopoly


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Perfect Competition

Large number of buyers and sellers

Homogeneous products

Firm is a pricetaker

Free Entry and Exit

Prefect Knowledge

Prefect mobility of factors of production.

No transport cost

Examples: Vegetable market, Agricultural market


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Price Determination under PC

Price (Rs) Quantity DD Quantity SS Equilibrium

2 900 00 SS


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Revenue Relationship under PC

Price (Rs.) Quantity TR MR

10 1 10 10

10 2 20 10

10 3 30 10

10 4 40 10

10 5 50 10

10 6 60 10

10 7 70 10

10 8 80 10

10 9 90 10

10 10 100 10


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SSDD

10

400

E DD=AR=MR

Ep=Infinity

FirmIndustry

Price-Output Determination under Perfect

Competition

Quantity Demanded and

Supplied

00

10

Output


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SR- Price Output determination

under Perfect Competition

X

Y

oOutput

R

evenue

&

Costs

AR=MR=DD

MC

F E

Qo Q1

P

MR>MC


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SR- Price Determination under

Perfect Competition

MC

AC

AR=MR=DD

EP

sR

Abnormal profits

Qo Output X

Y

Reven

ueandC

ost s


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Perfect Competition

AR=MR=DD

MC

AC

EP

output X

Y

o

Revenuea

nd

Cost s

Q

Break-even point

Normal Profits


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Perfect Competition

X

Y

output

R

evenue a

nd

Cost

o

AR=MR=DD

MCAC

E

Q

P

R S

Super normal Profits


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LR- Price Determination under

Perfect Competition

LMC

LAC

E

P

outputX

Y

AR=MR=DDReven

ue

andCost s

Qo

Normal profits


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Monopoly Competition

One Seller many buyers

Single product

Firm is a Price makerBarriers to Entry

Price DiscriminationExamples: Railways, Bajaj Autoricksaw


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SR- Price Determination in Monopoly

MR

AR=DD

Qo

s

P

R

E

T

MCAC

output

R

evenueand C

ost s

X

Y

Supernormal

Profits


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X

Y

E

Q

sP

TR

MC

AC

AR=DD

MR

R

evenueand C

ost s

o

Abnormal

Profits

SR- Price Determination in

Monopoly


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X

Y

o

AR=DD

MR

MC

AC

E

Q

P s

output

R

even

ueandC

ost s

Normal Profits


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Monopoly

Under Monopoly the firm

continues to earn Super-

normal profits during long-run

as there is barrier to entry.


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LR- Price Determination in Monopoly

MR

AR=DD

Qo

s

PR

E

T

LMCLAC

output

R

evenueand C

ost s

X

Y

Supernormal

Profits


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Price discrimination

..it is charging different prices to

different customers for the same

product.Price discrimination is Possible:--

Legal Sanction

Nature of commodityGeographical Barriers

Ignorance of Buyers


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Price discrimination is profitable:--

If the elasticity is different in

different markets. The monopolistwill charge a higher price in an

inelastic market and low price in an

elastic market.


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AR=DDa

MRaMRb

AR=DDb

AMR

AR=DD

MC

N

N

Ea Eb E

Pb

a

Price Discrimination under Monopoly

Sub-Market -A

Inelastic

Sub Market B

Elastic

Total Market

Qa Qb Q

Comparison of Price and output


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Comparison of Price and output

in between Perfect Competition

and Monopoly

AR=MR=DD

MR

E2

E1

S

P1

P2

Q2 Q1 output

Rev

enue

and

costs

ACMC


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Dumping

.When a monopolist charges a higher

price in the home market and lower

price in the international market.


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Monopolistic Competition

Many buyers & Sellers

Heterogeneous products

Firm is a price makerFree Entry and Exit

High selling cost


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SR-Price Determination under

Monopolistic

In short-run the situation of firm is

same as monopoly. It can earn

Normal Profits Supernormal Profits or

Abnormal Profits or losses


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Monopolistic

Under Monopolistic

competition the firm earnsnormal profits during long

run due to free entry and

exit.


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X

Y

o

AR=DD

MR

LMC

LAC

E

Q

P s

output

R

even

ueandC

ost s

Normal Profits


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Oligopoly Competition

Few sellers and many buyersHomogenous Pure oligopoly

HeterogeneousImperfect oligopoly

Firm is a Price-Searcher

Barriers to entry

Interdependency of sellers

Price rigidity

High selling cost

Example: Automobile, Mobiles, Communicationnetwork, steel, cement etc


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Duopoly Competition

The Simplest form ofoligopoly.


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Forms of Oligopoly

Non-Collusive Oligopoly Collusive Oligopoly

Cournots ModelBertnards ModelStackelbergs ModelChamberlins Model

Sweezys Kinked DemandModel

Cartels

Price Leadership


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Collusive Oligopoly

1. Cartels aiming at Profit

Maximization

2. Market-Sharing Cartels

1. Low- Cost Firms

2. Dominant Firm

3. Barometric

CartelsPrice Leadership


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Collusive Oligopoly

One way of avoiding the uncertainty

arising from oligopolistic interdependence

is to enter into collusive agreements.Cartels and Price Leadership are the two

types of Collusive Oligopoly. Both forms

generally imply tacit (secret) agreements,since open collusive action is commonly

illegal in most countries at present.


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Collusive Oligopoly

Although direct agreements among theoligopolistic are the most obvious

examples of collusion, in the modern

business world trade associations,professional organizations and similar

institutions usually perform many of the

activities and achieve in a legal or indirectway the goals of direct collusive

agreements.


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Cartels Cartels imply direct (although secret)

agreements among the competing firms.

1. Cartels aiming at Joint-Profit Maximisation:

Here the firms are looking at maximisation

of the industry profit. The firms appoint a

central agency to which they delegate the

authority to decide not only the total quantity

and the price at which it must be sold so as toattain maximum group profit, but the

allocation of production among the members

of the cartel...


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Cartels conti.

and the distribution of the maximum joint profitamong the participating members. In practice

cartels rarely achieve maximum joint profits on

account of various reasons like mistakes in

estimation of market demand, MC, slow

process of cartel negotiations, the bluffing

attitude of some member, free of Government

interference, they wish to have a good publicimage, free of entry and keeping freedom

regarding design and selling activities.


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Cartel

2. Market Sharing Cartels:

This form of collusion is more commonin practice because it is more popular. Thefirms agree to share the market, but a

considerable degree of freedom concerningthe style of their output, their selling activitiesand other decisions.

There are two basic methods ofsharing the market:

a. Non-price Competition and

b. Determination of Quotas.


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Cartels

a. Non-Price Competition Agreements:

In this form of loose cartel the memberfirms agree on a common price, at which eachof them can sell at any quantity demanded.

The price is set by bargaining must be suchas to allow some profits to all members. Thefirms agree not to sell at a price below thecartel price, but compete on a non-pricebasis. They are free to vary the style of theirproduct and/or their selling activities such acartel is more unstable and may lead to a

price-war with only the fittest surviving.


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Cartels

b. Sharing of market by Agreement and Quotas:

The second method for sharing the market is theagreement on quotas i.e., agreement on the quantitythat each member may sell at the agreed price (orprices). These quotas may be decided on the basis of

past levels of sales, and/or the basis of productivecapacity. A major factor here becomes the bargainingpower and skill. Another popular method of sharingthe market is the definition of the region in which eachfirm is allowed to sell. In this case, of geographical

sharing of the market, the price as well as the stylemay differ. However, even a regional split of themarket is inherently unstable as the low-cost firmsalways have the incentive to reach out to adjacentmarkets.


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Price Leadership

In this form of coordinated behaviour ofoligopolist one firm sets the price and othersfollow it. Because it is advantageous to them orbecause they prefer to avoid uncertainity about

their competitors reaction even if it impliesdeparture of the followers from their profitmaximising position. Price leadership iswidespread in the business world. It may be

practiced either by explicit agreement orinformally. In nearly all cases, price leadershipis tacit, open collusive agreement are illegal inmost countries.


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Price Leadership

Price leadership is more widespread thancartels, because it allows the members

complete freedom regarding their product and

selling activities as compared to a completecartel. If the product is homogeneous and the

firms are highly concentrated in a location, the

price will be identical. However, if the product is

differentiated prices will differ, but the directionof their change will be the same, while the

same price differentials will broadly be kept.


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Price Leadership

1. Price Leadership by a low-cost firm.

2. Price Leadership by a large (Dominant) Firm:

This refers to the firm having the

considerable share of the total market.

3. Barometric Price Leadership:

The firm chosen as the leader is considered

as a barometer, reflecting the changes in economic

environment. Usually it is a firm which from pastbehaviour has established a reputation of a good

forecaster of economic changes. A firm belonging to

another industry may also be chosen as the barometric

leader.


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Paul Sweezys Kinked Demand


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Paul Sweezy s Kinked Demand

Curve

DD

dd

P

QoX

Output

Price

Y

P1

E1

Diff b t th M k t


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Difference between the Markets

Features Perfect

Competition

Monopoly Monopolistic Oligopoly

Buyers &

Sellers

Product

Price

Entry &

Exit

DemandCurve

“in Critical Moments Even the Very Powerful

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