“ Market is a set of conditions through which buyers and sellers come in contact with each other for the purpose of exchange of goods and services for value.”
On the basis of area
- Local Market
- Regional Market
- National Market
- International Market
On the basis of Nature of transactions
- Spot Market
- Future Market
On the basis of Volume of business
- Wholesale Market
- Retail Market
On the basis of Time
- Very short period Market
- Short period Market
- Long period Market
On the basis of Status of sellers
- Primary Market
- Secondary Market
- Terminal Market
On the basis of Regulations
- Regulated Markets
- Unregulated Markets
Significance of time element
- According to Marshallian theory of value, the forces of demand and supply determine the price. The position of supply is greatly influenced by the element of time. Supply is to be adjusted in relation to changing demand in the view of the time span given for such adjustments.
Market period price – Market period is a very short period during which it is practically impossible to alter output or increase the stock. Thus the supply of the commodity tends to be perfectly inelastic.
Short period price – Short period is that period during which supply of the commodity can be changed to some extent though scale of production remains unchanged. Here supply curve is elastic to some extent.
Long period price – Long period is sufficient time period during which the firms can change the scale of production to match the changing demands. Thus supply curve becomes perfectly elastic in the long run
The degree of elasticity of supply tends to vary in relation to time. In the short period the utility of the commodity has greater significance in the determination of its value (price). In the long run the supply exerts greater influence on equilibrium price determination.
On the basis of Competition
- Pure and perfect competition
Pure & Perfect competition
Characteristic features of perfect competition
- Large number of sellers
- Large number of buyers
- Product homogeneity
- Free entry and exit of firms
- Perfect knowledge of market conditions
- Perfect mobility of factors of production
- Government non-intervention
- Absence of transport cost element
The distinction between pure and perfect competition
It is more a matter of degree than of kind. For a market to be purely competitive four fundamental conditions must prevail (first four conditions in the list). For perfect competition four additional conditions must be fulfilled (next four in the list).
Price determination under perfect competition
- U nder perfect competition there is a ruling market price determined by the interaction of forces of total demand and total supply in the market.
- B oth buyers and sellers are price takers and not the prices makers.
Equilibrium of the firm
Assuming that firms always attempt to maximise profits, basic economic theory provides a framework for determination of price. The rationale to this theory is – If the production and sale of an additional unit of product adds more to revenue than to cost, profit is increased and thus that unit should be produced and sold.
In other words the firm continues to increase output until marginal revenue (MR) is larger than marginal cost (MC). Thus the firm is in equilibrium only when MR = MC
Short run equilibrium of the firm under perfect competition
Normal profit - It is the minimum profit just sufficient to keep the entrepreneur in that business. It is the opportunity cost of entrepreneurship. As it is the factor cost of entrepreneurship, it is included in the cost curve itself. So when the firm’s revenue is equal to cost, it is earning the normal profit.
Super-Normal Profit – Revenue over and above the cost indicates the super-normal profit.
At the given price the firm may or may not be able to attain the super- normal profit, depending on its short run cost function.
When the AR>AC, there is super-normal profit
When AR=AC, normal profit is yielded
When AR<AC, Losses occur.
Long run equilibrium of the firm under perfect competition
In the long run the firms under perfect competition will be able to earn normal profits only, given the free entry and exit of firms.
Monopoly is a well defined market structure where there is only one seller who controls the entire market supply, as there are no close substitutes for that product.
Features of monopoly
- Monopolist is the single producer of the product in the market
- under monopoly firm and industry are identical
- No close competitive substitutes
- It’s a complete negation of competition
- A monopolist is a price maker and not a price taker.
Bases of monopoly
- Natural factors
- Control of raw material
- Legal restrictions
- Economies of large scale production
- Business Reputation
- Business combines
Types of monopoly
- Pure & Imperfect Monopoly
- Legal monopoly
- Natural monopoly
- Technological monopoly
- Joint monopoly
- Simple & discriminating monopoly
- Public & private monopoly
The monopolist can control both price and supply of the product. But at any point of time she can fix only one of them. Either she can fix the quantity of output and let the market demand determine the price of the product; or she can fix the price of the product and let the market demand determine the quantity which she can sell at the given price.
Having profit maximising objective, she adopts the rationale of equating MC with MR and fixes the level of output which gives her the maximum profits or where the losses are minimum. Thus when equilibrium output is decided, the price is automatically determined in relation to the demand for the product.
A monopolist may be earning profits or incur losses in
the short run.
Features of Monopoly price
It is not the highest possible price.
This price does not bring the highest average profit to the seller
Monopoly price is often associated with the output, the AC of which is still falling.
Under perfect competition, the price charged is equal to MC but in monopoly the price is above MC.
Long run equilibrium of monopoly firm
Price discrimination implies the act of selling the output of the same product at different prices in different markets or to different buyers.
Types of price discrimination
- Personal discrimination
- Age discrimination
- Sex discrimination
- Locational or territorial discrimination
- Size discrimination
- Use discrimination
- Time discrimination
Objectives of price discrimination
- To maximise the profits.
- To convert the consumers’ surplus into producer’s profit.
- To capture new markets.
To keep hold on export markets.
To exploit the unutilised capacity by widening the size of market through price discrimination.
To clear off surplus stock.
To augment future sales by quoting lower rates at present to the potential buyers who may develop the taste for the product in future.
To weed out the potential competition from the market or destroy a rival firm.
Conditions necessary for price discrimination
- Separate markets
- Apparent product differentiation
- Prevention of re-exchange of goods
- Non-transferability nature of product
- Let go attitude of buyers
- Legal sanctions
- Buyer’s illusion
When price discrimination is profitable?
Even though circumstances are favourable to practice price discrimination, it may not always be profitable. It is profitable only when the following two conditions are prevailing.
- Elasticity of demand differs in each market
- The cost-differential of supplying output to different markets should not be large in relation to the price differential based on elasticity differential.
If the seller faces iso-elastic curves in two markets, the price discrimination will not be profitable, as the AR and MR of those two markets will also be equal in that case. Hence if any amount of output transferred from one market to the other and different prices are charged, the gains realised in one market is lost in the other.
MR = P [e-1/ e ]
When the monopolist considers separate markets, he takes the combined marginal revenue ( ∑ MR) by aggregating the MR of different markets and distributes equilibrium total output in different markets so that marginal revenues in each market are the same.
“ Dumping is the act of selling a good abroad at a price lower than the selling price of the same good at the same time and in the same circumstances at home, taking account of differences in the transport cost”
“ Monopolistic competition is defined as a market setting in which a large number of sellers sell differentiated products”
“ Monopolistic competition is a market situation in which there is keen competition, but neither perfect nor pure, among a group of large number of small producers or suppliers having some degree of monopoly power because of their differential products” – Prof. E.H. Chamberlin
Features of monopolistic competition
- Large number of sellers
- Large number of buyers
- Free entry & exit
- Product differentiation
- Two dimensional Competition
- Selling cost
- The group
Price and output determination under monopolistic competition
- Monopolistic demand curve (AR) is more elastic than monopoly.
- If the group consists less number of firms and great
product differentiation, then the elasticity is comparatively less.
- If the group consists of large number of firms and the product differentiation is weak, then the elasticity is comparatively more.
- The extent of monopoly power of the firms on the basis of differentiation and the resultant elasticity of demand decides the super normal profits of the firms in short run.
- The firms under monopolistic competition normally earn only normal profits in the long run.
- Some firms may earn super normal profits even in the long run with high product differentiation / good will etc.
Product differentiation is the major feature of monopolistic competition
- Product differentiation may broadly be defined as anything that causes buyer to prefer one product to another. Therefore, in the real sense, product differentiation exists in the mind of consumer. That is it is not necessary for the difference to be real-it is only necessary for the consumer to think it is real.( The role of advertising and brand name )
- The real differentiation among products may arise due to :
Patents, trademarks and copy rights
Differences in colour and packaging
Conditions relating to sale of the product
Method, time and cost of delivery
Availability of service
Guarantees and warranties
Non price competition - selling cost
‘ Expenditure incurred by a firm on advertising and sale promotion of its products is known as selling cost’. It includes,
Advertising and publicity expenditure of all sorts
Expenses of sales department viz, commission and salaries of sales staff
Margin granted to dealers
Expenditure for window display, demonstration of goods, free distribution of samples etc.
“ Oligopoly is defined as a market structure in which there are few sellers selling a homogeneous product or differentiated products”.
Types of oligopoly
- Pure or homogeneous oligopoly
- Differentiated or heterogeneous oligopoly
Sources of oligopoly
- Huge capital investment
- Economies of scale
- Patent rights
- Control over certain raw materials
- Mergers and takeovers
Features of oligopoly
- Small number of sellers
- Interdependence of decision making
- Barriers to entry
- Huge cost
- Economies of scale
- Price rigidity
- Indeterminate price
Sweezy’s kinked demand curve model ( Model of price stability)
- Why price stays stable?
- Three possible ways of rival firms reaction to the price changes
Rival firms follow the price changes both cut and hike
Rival firms do not follow the price changes
Rival firms follow the price cuts but not the price hikes
Price leadership models
A firm may become price leader formally or informally
- Formal price leadership- Out of tacit or explicit agreement
- Informal price leadership
Price leadership by a low cost firm
Price leadership by a dominant firm - Assumption – There exists a large firm in the industry which supplies a large proportion of the total market supply
Barometric Price leadership
- Barometric price leadership – A firm ( not necessarily the dominant firm ) taking lead in price change ( which is due but not effected due to uncertainty in the market ).
- Ability to forecast the market conditions more accurately
- A firm initiates a well publicized changes in the price which are generally followed by rival firms. Such firm need not be the largest or low cost firm in the industry but should have the better knowledge of the prevailing market conditions and ability to predict them more precisely.
Reasons for the evolution of barometric leaders
- Rivalry between large firm leading to cut-throat competition to the disadvantage of all the firms make them unacceptable.
- Lack of capacity and desire to make continuous calculations of cost, demand and supply conditions on the part of many firms.
- As a reaction to the long term economic welfare.
Conditions necessary for price leadership
- Number of firms is small.
- Entry of new firms restricted.
- Products are by-n-large homogeneous.
- Demand for the industry is less elastic.
- Firms have almost similar cost curves.
- Product differentiation - Advertisements
- Collusion model : The cartel
Duopoly is a limiting case of oligopoly. It is a market structure assuming only two sellers selling identical products in the market
Pricing strategies & Practices
Cost based pricing methods ( Cost plus pricing )
- Full-cost / Mark up pricing /Average cost pricing