Pricing and Output Decisions (2)

8/7/2019 Pricing and Output Decisions (2)

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PRICING AND OUTPUT

DECISIONS


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Determinants of Price

There are five basic determinants of

the price of a commodity-

the demand for itits cost of production

objective of its producers

nature of the competition in its marketgovernment policy pertaining to it


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What is Market Structure?

Market structure is the competitive

environment.

Number of buyers and sellers.

Potential entrants.Barriers to entry and exit, etc. .


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MARKETS

Perfect Competition

Imperfect Competition


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IMPERFECT

COMPETITION

MONOPOLYMONOPOLISTIC

COMPETITIONOLIGOPOLY


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PERFECT COMPETITION

CHARACTERISTICS

Large number of buyers and sellers

Homogeneous product

Free entry and exitPerfect knowledge

No discrimination


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Under such a market, no single buyer

or seller plays a significant role in

price determination.

All of them jointly determine the

price.


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MONOPOLY

(Characteristics)

Single seller

No close substitutes

Price makerEntry barriers

Price cum output determination


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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.


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Oligopoly

Oligopoly Market CharacteristicsFew 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 OligopolyNational markets for aluminum, cigarettes,electrical equipment, filmed entertainment,ready-to-eat cereals, etc.

Local retail markets for gasoline, food,

specialized services, etc.


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Product Differentiation

Product differentiation is a process by

which a product being sold or

manufactured by a seller/ firm has

some special features.


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Types of Product differentiation

Real Product differentiation

Imaginary Product differentiation


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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 aprocess in which there is no real

change in a product, but only the

presentation of the product isdifferent.


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Price discrimination under

Monopoly

Price discrimination is a situation

where a seller charges different prices

from different customers for the same

product.


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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


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Regulation of Monopoly

Removing barriers to entry

Price control

Taxation of Monopolist Nationalisation


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Models of Oligopolistic Market

Paul Sweezys kinked demand curve

theory

According to this theory a firmsdemand curve under oligopoly is

downward sloping from left to right but

it is kinked (it is neither a straight line

nor a curved one)


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The reason for this unique type of

demand curve is the assumptionabout 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.


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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.


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Cartels and Collusion- Agreements

Cartel- Firms operating with a formal

agreement to fix prices and output.

Collusion- A covert, informalagreement 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.


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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.


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Game Theory

Game theory is a theory for the studyof rational behaviour by individuals &

firms for interactive decision problems.

Game theory is attributed to JamesVon Neumann and Oskar Morgenstern

who published the book Theory of

Games and Economic Behaviour in1944.


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Game theory concepts have wide

application in the study of imperfectcompetition.

In competitive games, the outcome

for each firm depends upon the

strategies conducted by all

competitors.


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Terms used in Game theory

Game

StrategyPayoff

Equilibrium (saddle point)

Pricing and Output Decisions (2)

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