Pricing under Different Market Structures
COMPONENTS AND MARKET STRUCTURE As seen from the definition of market, the components of Types of Competition I. Perfect Competition Markets II. PRICE OUTPUT DETERMINATION UNDER MONOPOLY; Presentation on theme: "UNIT 6 Pricing under different market structures"— Each produces only a very small portion of total market or industry output All firms Portion of MC curve above AVCmin MC curve gives the relationship between P . Identifying the relationship between price and market structure is hard for a num- equilibrium price or prices in the market under a variety of assumptions about the . relative effect of an increase in firm output and a decrease in the number of firms. .. Chapter 9 discusses the estimation of different models of demand.
Price and Output Determination under Monopoly
He can fix the price of his product, initially through a process of trial and error, by balancing losses and gains. As there are barriers to entry and no close substitutes, the monopolist will charge a high price and subsequently enjoy monopoly profits. The monopolist may also practice price-discrimination i.
In case of dumping also different prices will be charged for the same product.
- UNIT 6 Pricing under different market structures
- Market Structure & Pricing Decisions
In fact selling his product in foreign market at a price lower than his own market is itself referred to as Dumping. In case of, Monopolistic Competition each producer is a monopolist of his product and a group of producers producing same, though not identical product compete with each other in the market.
They differentiate their product and instead of having a price war with each other they practice product-differentiation. However, the prices charged are quite competitive in nature. Under Oligopoly there are few sellers competing in the market. They may be rivals or may form collusion.
The price policy of one producer is affected by the price policy of the others. Each producer before he fixes the prices of his product tries to understand the price behavior of other producers in the market.
Therefore under Oligopoly there prevails the phenomenon of price rigidity. Market structures are basically the number of firms in the market that produce identical goods and services.
Market structure influences the behavior of firms to a great extent. The market structure affects the supply of different commodities in the market.
When the competition is high there is a high supply of commodity as different companies try to dominate the markets and it also creates barriers to entry for the companies that intend to join that market. A monopoly market has the biggest level of barriers to entry while the perfectly competitive market has zero percent level of barriers to entry.
UNIT 6 Pricing under different market structures - ppt download
Firms are more efficient in a competitive market than in a monopoly structure. Perfect Competition Perfect competition is a situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers With many firms and a homogeneous product under perfect competition no individual firm is in a position to influence the price of the product that means price elasticity of demand for a single firm will be infinite.
Pricing Decisions Determinants of Price Under Perfect Competition Market price is determined by the equilibrium between demand and supply in a market period or very short run.
The market period is a period in which the maximum that can be supplied is limited by the existing stock.
The market period is so short that more cannot be produced in response to increased demand. The firms can sell only what they have already produced. This market period may be an hour, a day or a few days or even a few weeks depending upon the nature of the product. Market Price of a Perishable Commodity In the case of perishable commodity like fish, the supply is limited by the available quantity on that day.
It cannot be stored for the next market period and therefore the whole of it must be sold away on the same day whatever the price may be. Market Price of Non-Perishable and Reproducible Goods In case of non-perishable but reproducible goods, some of the goods can be preserved or kept back from the market and carried over to the next market period.
There will then be two critical price levels. The first, if price is very high the seller will be prepared to sell the whole stock. The second level is set by a low price at which the seller would not sell any amount in the present market period, but will hold back the whole stock for some better time.
The price below which the seller will refuse to sell is called the Reserve Price. Monopolistic Competition Monopolistic competition is a form of market structure in which a large number of independent firms are supplying products that are slightly differentiated from the point of view of buyers.
Thus, the products of the competing firms are close but not perfect substitutes because buyers do not regard them as identical. This situation arises when the same commodity is being sold under different brand names, each brand being slightly different from the others. It is monopolist as far as a particular brand is concerned. The relative market shares of all sellers are insignificant and more or less equal. That is, seller-concentration in the market is almost non-existent.
There are neither any legal nor any economic barriers against the entry of new firms into the market. New firms are free to enter the market and existing firms are free to leave the market.
In other words, product differentiation is the only characteristic that distinguishes monopolistic competition from perfect competition.
Pricing under Different Market Structures
Monopoly Monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitutes. According to this definition, there must be a single producer or seller of a product. If there are many producers producing a product, either perfect competition or monopolistic competition will prevail depending upon whether the product is homogeneous or differentiated.
On the other hand, when there are few producers, oligopoly is said to exist.