MODULE 4

MARKET STRUCTURE & PRICING PRACTICES

Market is a place where the various sellers and buyers sell and buy the products respectively. In
this module we will be discussing about various market structure.

Perfect Competition: Perfect market is a market condition with large buyers and sellers dealing
in homogenous commodity or identical product and in this market condition, all buyers and sellers
are aware of the price of the product that indicates the price of the product throughout the market.

Perfect competition describes a market structure where competition is at its greatest possible level.
To make it more clear, a market which exhibits the following characteristics in its structureis said
to show perfect competition:

1. Large number of buyers and sellers

2. Homogenous product is produced by every firm

3. Free entry and exit of firms

Features of Perfect Competition:

1. Large number of sellers and buyers: In a perfectly competitive market, there are large
numbers of buyers and seller each demanding a small part of the total market demand and supply
of the product respectively. As a result, no single seller or buyer is in a position to influence the
market price determined by the forces of market demand and supply.

2. Homogeneous Product: In a perfectly competitive market, all the firms produce and supply the
identical products. It means that the products of all the firms are perfect substitutes of each other.
As a result of this, the price elasticity of demand for a firm’s product is infinite.

3. Free entry and exit: In a perfectly competitive market, there are no restrictions on the entry
of new firms into market or on the exit of existing firms from the market.

4. Perfect knowledge: In a perfectly competitive market, the firms and the buyers possess perfect
information about the market. It implies that no buyer or firm is ignorant about the priceprevailing
in the market.
5. Perfect mobility of factors of production: In a perfectly competitive market, the factors of
production are completely mobile leading to factor-price equalization throughout the market

6. Free and Perfect Competition among buyers and sellers: In a perfect market, there are no
checks either on the buyers or sellers. They are free to buy or to sell to any person. It means there
are no monopolies.

7. Absence of Price control: In a perfectly competitive market, each buyer is aware of product
and its price in the market likewise the seller is also aware of the pricing of the product in the
market. Thus no individual in the market can influence the market.

8. Absence of transport cost: In a perfectly competitive market, it is assumed that there are no
transport costs. If transport costs are incurred, prices should be different in different sectors of the
market.

9. One price of Commodity: As there are large sellers in the market, all the sellers sell the
product at same price. Every firm is a price taker. It takes the price as decided by the forces of
demand and supply. No firm can influence the price of the product.

10. Independent Relationship among buyers and sellers:In a perfectly competitive market, it
is considered to be no seller is related to buyer. Thus there is no chance for buyer to ask the
product for lesser price and buyer will not sell the products at lesser price.

Determination of Price in Perfect Competition:

In perfect competition, the price of a product is determined at a point at which the demand and
supply curve intersect each other. This point is known as equilibrium point as well as the price
is known as equilibrium price. In addition, at this point, the quantity demanded and supplied is
called equilibrium quantity.
From the above figure when price is OP, the quantity demanded is OQ. On the other hand, when
price increases to OP1, the quantity demanded reduces to OQ1. Therefore, under perfect
competition, the demands curve (DD’) slopes downward

From the above figure the quantity supplied is OQ at price OP. When price increases to OP1, the
quantity supplied increases to OQ1. This is because the producers are able to earn large profits by
supplying products at higher price. Therefore, under perfect competition, the supply curves (SS’)
slopes upward.

From the Below figure, it can be seen that at price OP1, supply is more than the demand.

Therefore, prices will fall down to OP. Similarly, at price OP2, demand is more than the supply.
Similarly, in such a case, the prices will rise to OP. Thus, E is the equilibrium at which equilibrium
price is OP and equilibrium quantity is OQ.

The price at which demand and supply are equal is known as equilibrium price and the quantity
bought and sold at the equilibrium price is known as equilibrium output.

In the figure, equilibrium price is determined at the point E where both demand and supply are
equal. The upper limit of the price of a product is determined by the demand. The lower limit of
the price is determined by the production cost. The point E can be regarded as the position of stable
equilibrium.
MONOPOLY:

A market structure characterized by a single seller, selling a unique product in the market. In a
monopoly market, the seller faces no competition, as he is the sole seller of goods with no close
substitute.

"Monopoly is a market situation in which there is a single seller. There are no close substitutes of
the commodity it produces, there are barriers to entry”. -Koutsoyiannis

Features:

1. One Seller and Large Number of Buyers: The monopolist’s firm is the only firm; it is an
industry. But the number of buyers is assumed to be large.

2. No Close Substitutes: There shall not be any close substitutes for the product sold by the
monopolist. The cross elasticity of demand between the product of the monopolist and others must
be negligible or zero.

3. Difficulty of Entry of New Firms: There are either natural or artificial restrictions on the entry
of firms into the industry, even when the firm is making abnormal profits.

4. Monopoly is also an Industry: Under monopoly there is only one firm which constitutes the
industry. Difference between firm and industry comes to an end.

5. Price Maker: Under monopoly, monopolist has full control over the supply of the
commodity. But due to large number of buyers, demand of any one buyer constitutes an

Infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the
monopolist.

6. Price discrimination: A company that is operating in a monopolistic market can change the
price and quantity of the product or service. Price discrimination occurs when the company sells
the same product to different buyers at different prices.

Considering that the market is elastic, the company will sell a higher quantity of the product if the
price is low and will sell a lesser quantity if the price is high.
7. No Competition: As there is only one firm in monopoly there are no competition in this type
of markets. Thus, this market is competition free.

8. Full Control over Price: As a single firm itself acts as the industry, the firm operating in this
market will always have an hedge of pricing the products at its will. Thus it controls the price
completely.

9. Full Control over Supply: In this market the products or services do not have close substitutes
and thus the producers have the control over the supply of their products.

Pricing or Price-Output Determination Under Monopoly:

A firm under monopoly faces a downward sloping demand curve or average revenue curve.
Further, in monopoly, since average revenue falls as more units of output are sold, the marginal
revenue is less than the average revenue. In other words, under monopoly the MR curve lies below
the AR curve.
 The Equilibrium level in monopoly is that level of output in which marginal revenue equals
marginal cost. The producer will continue producer as long as marginal revenue exceeds the
marginal cost. At the point where MR is equal to MC the profit will be maximum and beyond this
point the producer will stop producing.

It can be seen from the diagram that untill OM output, marginal revenue is greater than marginal
cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist
will be in equilibrium at output OM where marginal revenue is equal to marginal cost and the
profits are the greatest. The corresponding price in the diagram is MP or OP’. It can be seen from
the diagram at output OM, while MP is the average revenue, ML is the average cost, therefore, PL
is the profit per unit.

PRICE DISCRIMINATION:

In monopoly, there is a single seller of a product called monopolist. The monopolist has control
over pricing, demand, and supply decisions, thus, sets prices in a way, so that maximum profit can
be earned. The monopolist often charges different prices from different consumers for the same
product. This practice of charging different prices for identical product is called price
discrimination.

According to Robinson, “Price discrimination is charging different prices for the same product or
same price for the differentiated product.”

Different price discrimination are as follows:

i. First-degree Price Discrimination: Refers to a price discrimination in which a monopolist charges

the maximum price that each buyer is willing to pay. This is also known as perfect price
discrimination as it involves maximum exploitation of consumers. In this, consumers fail to
enjoy any consumer surplus. First degree is practiced by lawyers and doctors.
ii. Second-degree Price Discrimination: Refers to a price discrimination in which buyers aredivided
into different groups and different prices are charged from these groups depending uponwhat they
are willing to pay. Railways and airlines practice this type of price discrimination.

iii. Third-degree Price Discrimination: Refers to a price discrimination in which the monopolist
divides the entire market into submarkets and different prices are charged in each submarket.
Therefore, third-degree price discrimination is also termed as market segmentation.

In this type of price discrimination, the monopolist is required to segment market in a manner, so
that products sold in one market cannot be resold in another market. Moreover, he/she should
identify the price elasticity of demand of different submarkets. The groups are divided according
to age, sex, and location. For instance, railways charge lower fares from senior citizens. Students
get discount in cinemas, museums, and historical monuments.

MONOPOLISTIC COMPETITION

Monopolistic competition is a form of market structure having large number of sellers and buyers
dealing in similar products or close substitute products where there are no entry or exit barriers.

Features of Monopolistic Competition:

1. Large Number of Sellers:

There are large numbers of firms selling closely related, but not homogeneous products. Each firm
acts independently and has a limited share of the market. So, an individual firm has limited control
over the market price. Large number of firms leads to competition in the market.

2. Product Differentiation:

Each firm is in a position to exercise some degree of monopoly (in spite of large number of sellers)
through product differentiation. Product differentiation refers to differentiating the products on the
basis of brand, size, colour, shape, etc. The product of a firm is close, but not perfect substitute of
other firm.

Implication of ‘Product differentiation’ is that buyers of a product differentiate between the same
products produced by different firms. Therefore, they are also willing to pay different prices for
the same product produced by different firms. This gives some monopoly power to an individual
firm to influence market price of its product.
3. Selling costs on Advertisements:

Under monopolistic competition, products are differentiated and these differences are made
known to the buyers through selling costs. Selling costs refer to the expenses incurred on
marketing, sales promotion and advertisement of the product. Such costs are incurred to persuade
the buyers to buy a particular brand of the product in preference to competitor’sbrand. Due to
this reason, selling costs constitute a substantial part of the total cost under monopolistic
competition.

4. Freedom of Entry and Exit:

Under monopolistic competition, firms are free to enter into or exit from the industry at any time
they wish. It ensures that there are neither abnormal profits nor any abnormal losses to a firm in
the long run. However, it must be noted that entry under monopolistic competition is not as easy
and free as under perfect competition.

5. Lack of Perfect Knowledge:

Buyers and sellers do not have perfect knowledge about the market conditions. Selling costs create
artificial superiority in the minds of the consumers and it becomes very difficult for a consumer to
evaluate different products available in the market. As a result, a particular product (although
highly priced) is preferred by the consumers even if other less priced products are of same quality.

6. Pricing Maker:

A firm under monopolistic competition is neither a price- taker nor a price-maker. However, by
producing a unique product or establishing a particular reputation, each firm has partial control
over the price. The extent of power to control price depends upon how strongly the buyers are
attached to his brand.

7. Non-Price Competition:

In addition to price competition, non-price competition also exists under monopolistic

competition. Non-Price Competition refers to competing with other firms by offering free gifts,
making favourable credit terms, etc., without changing prices of their own products.

Firms under monopolistic competition compete in a number of ways to attract customers. They
use both Price Competition (competing with other firms by reducing price of the product) and
Non-Price Competition to promote their sales.

8. Demand curve is downward sloping:

Under monopolistic competition, large number of firms selling closely related but differentiated
products makes the demand curve downward sloping. It implies that a firm can sell more output
only by reducing the price of its product.
9. No Close Substitute products:

Products in this market do not have close substitutes to the competitors’ products.

Price-Determination under Monopolistic Market in Short Run:

During short period there may be three situations of the firms under monopolistic
competition as given below:

1. Profit Making Situation: AR>AC

Profit making situation will be when individual firm’s revenue is greater than its cost (AR>AC).
Profit making situation is also called abnormal or super profit situation as given in Diagram 1.

Price, costs and revenues are shown on OY-axis while output on OX-axis. The point of equilibrium
is E where marginal cost is equal to marginal revenue (MC=MR) of the firm. The price is OP,
output is OQ. The average profit (AR—AC) is TS and total profit is PLST.

2. Normal Profit: AR=AC

When the firm’s average revenue is equal to its average cost the situation is called normal profit.

In the diagram output is shown on OX-axis, price, costs and revenue are shown on OY-axis. The
point of equilibrium is E where firm’s marginal cost is equal to its marginal revenue (MC=MR).
Price is PQ and output is OQ. At P the average revenue is equal to average cost hence the firm is
earning normal profit only.

3. Loss Making Situation: AR<AC

Under monopolistic situation during short period a firm will earn loss when its cost is greater than
its revenue (AC>AR). It can be explained with the help of the Diagram 3.
Price, cost and revenue are shown on OY-axis while output is shown on OY-axis respectively. The
point of equilibrium (MC=MR) is E. Price is OP and output is OQ. Average loss (AC- AR) is ST
and total loss is LPTS.

Price-Determination under Monopolistic Market in long Run:

In monopolistic competition, since the product is differentiated between firms, each firm does not
have a perfectly elastic demand for its products. In such a market, all firms determine the price of
their own products. Therefore, it faces a downward sloping demand curve.

Conditions for the Equilibrium of an individual firm

The conditions for price-output determination and equilibrium of an individual firm are as follows:

1. MC = MR

2. The MC curve cuts the MR curve from below.

Price and Output Determination during Long Period:

Under monopolistic competition, firms have freedom to enter and exit the industry. In the long run
if firms are earning profit new firms are attracted and it will increase the output and consequently
prices will fall leading to conversion of profit making situation into normal profit situation.

Contrary to it when firms are incurring losses during long period they will leave the industry. It
will reduce the volume of output, prices will increase and the loss making situation will be
converted into normal profit. Thus, the firms will earn normal profit only during long period. It
can be seen from Diagram 4.
Price, costs and revenue are shown on OY-axis and output on OX-axis. Point of equilibrium
(MC=MR) is E. Price is PQ and output is OQ. At P point average cost is equal to average revenue
(AC=AR). Hence, the firm is earning normal profit only during long period.

PRODUCT DIFFERENTIATION:

A firm may have convinced consumers that its product is significantly better than the product of
new entrants. The new firm may be forced to sell at lower price and reduce profit though the
existing product may not essentially be superior.

The real differentiation refers to the technical features like the product’s technical life and
performance, durability, cost of operation and maintenance, etc.

On the other hand, the non-technical differentiation may take the form of brand names, trademark,
packing, shape, size, etc. The non-technical differentiation adds a subjective appeal to a product
inducing buyers to increase its demand or pay more for it.

Price: Price can be used to differentiate a product in two ways. Companies can charge the lowest
price compared to competitors to attract cost-conscious buyers—the retailer Costco is an example.
However, companies can also charge high prices to imply quality and that a product isa luxury or
high-end item, such as a Bugatti sports car.

Performance and Reliability: Products can be differentiated based on their reliability and
durability. Some batteries, for example, are reputed to have a longer life than other batteries, and
consumers will buy them based on this factor.
Location and Service: Local businesses can differentiate themselves from their larger national
competitors by emphasizing that they support the local community. A local restaurant, for
example, will hire locally and may source its food and ingredients from local farmers and
purveyors.

Quality: How does the quality, reliability, and ruggedness of your product compare to others on
the market?

Design: Have you done something different with your design? Is it minimalistic and sleek? Easy-
to-navigate?

Customization: Can you customize parts of the product that competitors cannot?

Similarly we can differentiate the products on basis of color, brand, size etc.

OLIGOPOLY:

Oligopoly market is a situation where in there are few number of sellers and large buyers dealing
in homogenous product or differentiated products and there are entry-exit barriers for new firm.

Features of Oligopoly:

1. Few firms: Under oligopoly, there are few large firms. The exact number of firms is not defined.
Each firm produces a significant portion of the total output. There exists severecompetition
among different firms and each firm try to manipulate both prices and volume ofproduction to
outsmart each other. For example, the market for automobiles in India is anoligopolist
structure as there are only few producers of automobiles.

2. Interdependence: Firms under oligopoly are interdependent. Interdependence means that

actions of one firm affect the actions of other firms. A firm considers the action and reaction of
the rival firms while determining its price and output levels. A change in output or price by one
firm evokes reaction from other firms operating in the market.

3. Nature of the Product: The firms under oligopoly may produce homogeneous or
differentiated product.
If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or
perfect oligopoly.

If the firms produce a differentiated product, like automobiles, the industry is called differentiated
or imperfect oligopoly.

4. Barriers to Entry of Firms: The main reason for few firms under oligopoly is the barriers,
which prevent entry of new firms into the industry. Patents, requirement of large capital, control
over crucial raw materials, etc, are some of the reasons, which prevent new firms from entering
into industry. Only those firms enter into the industry, which is able to cross these barriers. As a
result, firms can earn abnormal profits in the long run.

5. Non-Price Competition: Under oligopoly, firms are in a position to influence the prices.
However, they try to avoid price competition for the fear of price war. They follow the policy of
price rigidity. Price rigidity refers to a situation in which price tends to stay fixed irrespective of
changes in demand and supply conditions. Firms use other methods like advertising, betterservices
to customers, etc. to compete with each other.

If a firm tries to reduce the price, the rivals will also react by reducing their prices. However, if it
tries to raise the price, other firms might not do so. It will lead to loss of customers for the firm,
which intended to raise the price. So, firms prefer non- price competition instead of price
competition.

6. Lack of Uniformity: Another feature of oligopoly market is the lack of uniformity in the size
of firms. Firms differ considerably in size. Some may be small, others very large. Such a situation
is asymmetrical. This is very common in the American economy. A symmetrical situation with
firms of a uniform size is rare.

7. Existence of Price Rigidity: In oligopoly situation, each firm has to stick to its price. If any
firm tries to reduce its price, the rival firms will retaliate by a higher reduction in their prices. This
will lead to a situation of price war which benefits none. On the other hand, if any firm increases
its price with a view to increase its profits; the other rival firms will not follow the same. Hence,
no firm would like to reduce the price or to increase the price. The price rigidity will take place.
8. Advertising: As the firms follow non-price competition by keeping the prices close to rival
firms; to increase the sales and profit of the firm they have to involve themselves in marketing and
promotions of the product.

9. Selling Costs: Since firms try to avoid price competition and there is a huge interdependence
among firms, selling costs are highly important for competing against rival firms for a larger
market share.

Price Determination under Oligopoly:

Oligopoly can be either collusive or non-collusive. Collusive oligopoly is a market situation

wherein the firms cooperate with each other in determining price or output or both. A non-
collusive oligopoly refers to a market situation where the firms compete with each other rather
than cooperating.

1. Price Determination in Non-Collusive Oligopoly:

In this case, each firm follows an independent price and output policy on the basis of its judgment
about the reactions of his rivals. If the firms are producing homogeneous products, price war may
occur. Each firm has to fix the price at the competitive level. On the contrary, in case of
differentiated oligopoly, due to product differentiation, each firm has some monopoly control over
the market and therefore charge near monopoly price.

Usually, in Oligopolistic markets, there are many price rigidities. In 1939, Paul Sweezy used an
unconventional demand curve – the kinked demand curve to explain these rigidities.

Kinked-Demand Curve:

Like traditional demand curves, kinked demand curves are downward sloping. As the name
suggests, the kinked demand curves have a ‘kink’. This kink is nothing but a discontinuity at a
concave bend and this kink is what sets it apart from the traditional demand curves. Now let's find
out why these kinks exist in the first place.
MR= Marginal Revenue,MC= Marginal Cost

KPD= Deman Curve or Average Revenue,OR is output at price OP0

Assumptions:

1. Firm selling their products at satisfactory price.

2. Rivals will tend not to raise prices in response to the firm's higher prices.
3. Rivals will not follow an attempted increase in price by one of the firms but will follow a decrease.

In the figure above, KPD is the is the kinked-demand curve and OP0 is the prevailing price in the
oligopoly market for the OR product of one seller. Starting from point P, corresponding to the
point OP1, any increase in price above it will considerably reduce his sales as his rivals will not
follow his price increase.

This is because the KP portion of the curve is elastic and the corresponding portion of the MR
curve (KA) is positive. Therefore, any price increase will not just reduce the total sales but also his
total revenue and profit. On the other hand, if the seller reduces the price of the product below
OPQ (or P), his rivals will also reduce their prices.

However, even if his sales increase, his profits would be less than before. This is because the PD
portion of the curve below P is less elastic and the corresponding part of the marginal revenue
curve below R is negative. Therefore, in both price-raising and price-reducing situations, the seller
is the loser. He will stick to the prevailing market price OP0 which remains rigid.

This asymmetrical behavioral pattern results in a kink in the demand curve and hence there is price
rigidity in oligopoly markets. The prices remain rigid at the kink (point P). In other words, the
price will remain sticky at OP0 and the output = OR at this price.

Due to the difference in the elasticities, the MR curve becomes discontinuous corresponding to the
point of change in elasticity of the demand curve. The kink represents this. At the output < OR,
the demand curve is KP and the corresponding MR curve is KA and MR>MC. For output > OR,
the demand curve is PD and the corresponding MR curve is BMR and MR<MC.
2. Price Determination in Collusive Oligopoly:

Sometimes, firms may try to remove uncertainty related to acting independently and enter into
price agreements with each other. This is collusion. Collusion is either formal or informal. It can
take the form of cartel or price leadership.

Price and Output under Perfect Collusion:

Under oligopoly, perfect collusion may be formed among different producers, sellers in two ways,
namely, centralised cartel and market sharing cartel, and price and output are determined
accordingly.

A cartel is an association of independent firms within the same industry which follow the common
policies relating to price, output, sale, profit maximization, and the distribution of products.

(a) Centralised Cartel:

Under this type of collusion different firms of oligopoly market structure set up a centralised cartel.
These firms transfer their function relating to managerial decisions and other activities to the
centralised cartel to improve the volume of profit. Centralised cartel aims at maximisation of profit
of all the firms. The cartel fixes price of the product, volume of output and production quota of
individual firms.

In the diagram AR is the demand curve of industry and MR is the marginal revenue curve which
has been drawn on the basis of AR or demand curve.∑MC is the total marginal cost curve of the
industry which is the aggregate marginal cost of two firms engaged in production in that
industry. Marginal revenue curve of industry is cut by the marginal cost curve of the industry at
point E where∑MR is equal to∑MC (∑MR=∑MC). It is the equilibrium of the industry. Price is
OP and output is OQ in the industry. Number of products to be produced by a firm is fixed on
the basis of MR, that is when MR of firm is equal to combined MR of market.

(b) Market Sharing Cartel:

Another form of perfect collusion is the market sharing by the firms. This type of collusion can
be effective and successful when all the firms are producing homogeneous product and production
costs are similar. In order to explain this type of collusion we assume that there are two firms
producing on the uniform cost of production and are ready to share market on 50:50 basis.

There are two main methods of market-sharing:

(a) Non-price competition; and (b) Quota system.

(a) Non-Price Competition Cartel:

The non-price competition agreement among oligopolistic firms is a loose form of cartel. Under
this type of cartel, the low-cost firms press for a low price and the high-cost firms for a high price.
But ultimately, they agree upon a common price below which they will not sell. Such a price must
allow them some profits. The firms can compete with one another on a non-price basis by varying
the colour, design, shape packing etc. of their product and having their own different advertising
and other selling activities. Thus each firm shares the market on a non- prices basis while selling
the product at the agreed common price.

(b) Market Sharing by Quota Agreement:

The second method of market sharing is the quota agreement among firms. (All firms in an
oligopolistic industry enter into collusion for charging an agreed uniform price. But the main
agreement relates to the sharing of the market equally among member firms so that each firm gets
profits on its sales.

Price and Output under Imperfect Collusion: Price Leadership

Under oligopoly price and output can also be determined without any collusion among the firms.
The firms may decide to follow a firm in price and output determination in the long run. Such sort
of policy is called price leadership under oligopoly.

Price leadership is based on informed collusion. Under price leadership, one firm is a large or
dominant firm and acts as the price leader who fixes the price for the products while the other
firms allow it.

In the diagram output is shown on OX-axis while price, cost, and revenue are shown on OY-axis.
DD is the market demand curve while DD1 is the demand curve of the firm. AC2 and MC2 are
average cost curve and marginal cost curve of the firm having high cost of production. Its point
of equilibrium is E2 where the price is OP2 and the output is OQ2.

The average cost curve (AC1) and marginal cost curve (MC1) are of a firm having least cost of
production. Its point of equilibrium is E 1 where the price of the firm is OP1 and output is OQ1. The
marginal revenue curve (MR) of both the firms is equal to their MC1 and MC2. The firm producing
OQ1 output with OP1 price is the low cost producing firm and it will be the price leader in the
market and the same price policy OP1 will be following by other firm.

There are several types of price leadership. The following are the principal types:

(a) Price leadership of a dominant firm, i.e., the firm which produces the bulk of the product
of the industry. It sets the price and rest of the firms simply accepts this price.

(b) Barometric price leadership, i.e., the price leadership of an old, experienced and the largest
firm assumes the role of a leader, but undertakes also to protect the interest of all firms instead of
promoting its own interests as in the case of price leadership of a dominant firm.
(c) Exploitative or Aggressive price leadership, i.e., one big firm built its supremacy in the
market by following aggressive price leadership. It compels other firms to follow it and accept

the price fixed by it. In case the other firms show any independence, this firm threatens them and
coerces them to follow its leadership.

Descriptive Pricing Approaches:

Pricing is the art of converting the value of products or services into quantitative terms to
customers at a point of time.

Factors determining Pricing:

(i) Cost of Production: Cost of production is the main component of price. No company can sell
its product or services at less than the cost of production. Thus, before price fixation, it is necessary
to compile data relating to the cost of production and keep that in mind.

(ii) Demand for Product: Intensive study of demand for product and services in the market be
undertaken before price fixation. If demand is relatively more than supply, higher price can be
fixed.

(iii) Price of Competing Firms: It is necessary to take into consideration prices of the products
of the competing firms prior to fixing the price. In case of cut-throat competition it is desirable to
keep prices low.

(iv) Purchasing Power of Customers: What are the purchasing power of the customers and at
what price and how much they can purchase? It should also be taken into consideration.

(v) Government Regulation: If the price of the commodity and services is to be fixed as per the
regulation of the government, it should also be borne in mind.

(vi) Objective: Usually, at the time of price fixation a certain amount of profit is added to the cost
of production. If company’s objective is to earn higher profit it may add higher amount of it.

(vii) Marketing Method Used: Price is also influenced by the marketing method used by the
company, e.g., commission which is to be paid to the middlemen for sale of the goods is also added
to the price. Similarly, if the customers are to be provided “after sale service” facility, thenthose
expenses are also added to the price.
PRICING STRATEGIES ARE:

 Full cost pricing

 Product line pricing
 Price Skimming
 Penetration Pricing
 Loss leader pricing
 Peak Load pricing

1. Full cost pricing: Full cost pricing is a practice where the price of a product is calculated by a
firm based on its direct costs per unit of output plus a markup to cover overhead costs and profits.

It is a price-setting method under which you add together the direct material cost, direct labor cost,
selling and administrative costs, and overhead costs for a product, and add to it a markup
percentage (to create a profit margin) in order to derive the price of the product. The pricing
formula is:

(Total production costs + Selling and administration costs + Markup)

-----------------------------------------------------------------------------------------
Number of units expected to sell
2. Product line pricing: Product line pricing involves the separation of goods and services into
cost categories in order to create various perceived quality levels in the minds of consumers. You
might also hear product line pricing referred to as price lining, but they refer to the same practice.
3. Price Skimming: Price skimming is a product pricing strategy by which a firm charges the
highest initial price that customers will pay and then lowers it over time. As the demand of the first
customers is satisfied and competition enters the market, the firm lowers the price to attract
another, more price sensitive segment of the population. The skimming strategy gets its name from
"skimming" successive layers of cream, or customer segments, as prices are lowered over time.

4. Penetration Pricing: Penetration pricing is a marketing strategy used by businesses to attract

customers to a new product or service by offering a lower price during its initial offering. The
lower price helps a new product or service penetrate the market and attract customers away
from competitors. Market penetration pricing relies on the strategy of using low prices
initially tomake a wide number of customers aware of a new product.

The goal of a price penetration strategy is to entice customers to try a new product and build
market share with the hope of keeping the new customers once prices rise back to normal
levels.

5. Loss leader pricing: Loss leader pricing is an aggressive pricing strategy in which a
storesells selected goods below cost in order to attract customers who will, according to
the loss leader philosophy, make up for the losses on highlighted products with additional
purchases of profitable goods. Loss leader pricing is employed by retail businesses; a
somewhat similar strategy sometimes employed by manufacturers is known as penetration
pricing.

6. Peak Load pricing: The Peak Load Pricing is the pricing strategy wherein the high
price is charged for the goods and services during times when their demand is at peak. In
other words, the high price charged during the high demand period is called as the peak load
pricing.

This type of price discrimination is based on the efficiency, i.e. a firm discriminates based on
high usage, high-traffic, high demand times and low demand times. The consumer who
purchases the commodity during the high demand period has to pay more as compared to the
onewho buys during low demand periods.
ELASTICITY OF SUPPLY(MODULE 2)

The elasticity of supply establishes a quantitative relationship between the supply of a

commodity and it’s price. Hence, we can express the numeral change in supply with the
change in the price of a commodity using the concept of elasticity. Note that elasticity can
also be calculated with respect to the other determinants of supply.

However, the major factor controlling the supply of a commodity is its price. Therefore, we
generally talk about the price elasticity of supply. The price elasticity of supply is the ratio of
the percentage change in the price to the percentage change in quantity supplied of a
commodity.

Es= [(Δq/q)×100] ÷ [(Δp/p)×100] = (Δq/q) ÷ (Δp/p)

Δq= The change in quantity supplied

q= The quantity supplied

Δp= The change in price

p= The price

Types of Elasticity of Supply

Perfectly inelastic supply: This is when the Es formula equals to zero, meaning that there is
no change in the supply when there are price changes. This can be the case where there is a
limited quantity of supply, for example, if there is only 200 of a certain product made and
there will never be any more made, there will be no increase or decrease in the quantity of
supply.

Relatively inelastic supply: This is when the Es formula gives a result between zero and one,
meaning that when there is a change in price, the percentage change in supply is lower than
the percentage change in price. For example, if a product costs $1 and then increases to $1.10
the increase in price is 10% and therefore the change in supply will be less than 10%.

Unit Elastic supply: This is when the Es formula equals to one, meaning that quantity
supplied and price change by the same percentage. Using the previous example to show unit
elasticity, when there is a 10% increase in price, there will also be a 10% increase in quantity
supplied.

Relatively elastic supply: This is when the Es formula gives a result above one, meaning that
when there is a change in price, the percentage change in supply is higher than the percentage
change in price. Using the above example to show an elastic supply, when there is a 10%
increase in price there will be more than a 10% increase in supply.

Perfectly elastic supply: This is when the Es formula actually gives an infinite result,
meaning that the quantity that can be supplied is infinite, however, that is only at a specific
price and if the price changes there will be no quantity supplied at all. For example, there may
be an infinite supply of product at a price of $1 but if that price changes to $1.10 then the
supply becomes zero.

MAJOR SOURCES FOR DATA COLLECTION FOR DEMAND FORECASTING

A researcher needs to collect different types of data for different purposes.

There are mainly two types of data, as shown in Figure-4:

Following points explain the primary and secondary types of data:

i. Primary Data:

Refers to the data that does not have any prior existence and collected directly from the
respondents. It is considered very reliable in comparison to all other forms of data. However,
its reliability may come under scrutiny for various reasons. For example, the researcher may
be biased while collecting data, the respondents may not feel comfortable to answer the
questions, and the researcher may influence the respondents.

In all these scenarios, primary data would not be very dependable. Therefore, primary data
collection should be done with utmost caution and prudence. Primary data helps the
researchers in understanding the real situation of a problem. It presents the current scenario in
front of the researchers; therefore, it is more effective in taking the business decisions.

ii. Secondary Data:

Refers to the data that is collected in the past, but can be utilized in the present
scenario/research work. The collection of secondary data requires less time in comparison to
primary data.

Methods of Primary Data Collection:

There are various methods of data collection and selecting a correct method is very important
to get the reliable data.

Figure-5 shows various methods of primary data collection:

Let us learn about the methods of primary data collection in detail.

Observation Method:

Observation method is a method in which the population of interest is observed to find out
relevant facts and figures. Observing a person is an art because it requires special skills to
study the behavior of a person. The way a common person observes something is entirely
different from the way a researcher observes things.

A common person observes something just for the sake of interest; whereas, a r esearcher
observes things for a particular reason. The researcher not only notes how the things are
happening; however study in deep why they happen. If he/she is analyzing a situation; then
the researcher would take into consideration the behavior of individuals in that situation, the
reason for their behavior, and the impact of their behavior on other individuals and society.

For example a researcher observes that in a retail showroom some people are buying products
while some people are not buying anything. In this case, he/she would try to find out the
reasons behind why and how some people buy products and why some people do not buy
anything. The researcher would also observe the behavior of shopkeeper with people.

Observation method is divided into various sub-methods, as shown in Figure-6:

Following points explain the sub-methods of observation method:

i. Natural Method:

Refers to the method in which the researcher observes the behavior of people without any
intervention. For example, the researcher observes the bikes passing from the road to study
the most popular brand in the city. In addition, the researcher can observe the activities,
movements, gestures, and facial expressions of people.

ii. Contrived Method:

Refers to the method in which the researcher takes the information from the people in an
indirect way. For example, a researcher approaches different shopkeepers as a customer to
buy some products. In this way, the researcher observes how different shopkeepers treat their
customers.

iii. Direct Method:

Refers to the method in which the researcher waits for a particular experiment or behavior to
occur. This process takes a longer time to get a single response. For example, a researcher is
observing the sale of new Products in an automobile showroom. In this case, the researcher
has to wait till tire time a customer comes in the showroom and asks for the new product.

When a customer comes and sees the new product, he/she may or may not purchase it on the
same day. In such a situation, the researcher has to wait till that customer comes back to buy
the product and the other customers come for the same purpose. Even if the first customer
buys the product, the researcher has to wait for other customers because nothing ca n be
concluded by observing one customer.

iv. Indirect Method:

Refers to the method in which the researcher observes the behaviors that have occurred in the
past. This method consumes less time and cost as compared to other methods. Let us
understand the application of indirect method with the help of an example. A researcher needs
to know the sale of a particular brand in a store. In tins case, the data can be collected from the
registers showing the sale of different products in the store.

v. Structured Method:

Refers to the method in which the researcher knows what is to be observed. For example if a
researcher has to know about a particular brand of car, he/she would observe only that brand
of car and does not pay any attention to other brands of cars. The structured method consumes
less time and makes it easier for the researcher to analyze data.

vi. Unstructured Method:

Refers to the method in which the researcher does not know what exactly he/she has to
observe. The unstructured method is used in exploratory research. In this method, the
researcher wants to search f affect a particular problem in detail. For example, the researcher
observes the buying behavior of people for different brands of the same product. He/she
would study all the factors that can affect the buying decision of people. After that, he/she
would analyze the buying decision for a particular brand.

vii. Mechanical Method:

Refers to a method in which the researcher uses some devices to observe people’s response.
Examples of these devices are video cameras and audiometers.

Methods of Secondary Data Collection:

The different methods of secondary data collection are shown in Figure-9:

Following points explain the different methods of secondary data collection:

i. Company records:

Provide the information in the form of balance sheets and sales records. This information is
used to perform a trend analysis of data and forecast the overall growth of a company in
future. It also helps in deciding whether the company is moving on the right track to achieve
its vision or not. Company records are maintained every year by the company itself.

ii. Internet:

Given the information regarding the previous researches done on the same topic. The Internet
also provides lots of the data related to the research from different sources.

iii. Print media:

Offers you the information that is publicized. Print media includes newspapers, magazine,
books, research papers, and journals. The data collected from print media is get an overview
of the present market situation and experts opinions on different topics.

iv. Census and other government records:

Furnish a large data of each and every individual of the state. This data contains the personal
information of respondents. It is used mostly used by government and big organizations. This
type of data helps in conducting research on a big scale.

Question Bank:

1. Define perfect competition.

2. Define cartels.
3. What is monopoly? Discuss its characteristics.
4. What is price discrimination? Mention the degrees of price discrimination.
5. Mention the characteristics of of perfect competition.
6. Explain the concept of monopolistic completion. How prices are determined.
7. Elaborate the characteristics of oligopoly.
8. Define market structure. What are the different types of market structure?
9. Explain kinked demand curve along with graph and its assumptions.
10. How are prices determined under perfect competition? Explain with
the help of suitablegraphs.
11. Discuss the various descriptive pricing strategies.
12. Enumerate the factors governing pricing decisions.