Market structure

1. UNIT - 5
• Market Structure – Perfect Competition,
Monopoly, Monopolistic and Oligopoly
Competition. Pricing Policies – Steps in Pricing,
Pricing Decisions, Pricing Methods –
Macroeconomics – Business Cycles – Stages.

2. Market structure
• The term “ market” refers to a place where
sellers and buyers meet and facilitate the
selling and buying of goods and services.
Definition
• The Market Structure refers to the
characteristics of the market either
organizational or competitive, that describes
the nature of competition and the pricing
policy followed in the market.(like monopoly,
oligopoly)

3. Types of market structure

4. 1] Perfect Competition
Definition
• The Perfect Competition is a market structure
where a large number of buyers and sellers
are present, and
• all are engaged in the buying and selling of the
homogeneous(SIMILAR) products at a single
price prevailing in the market.

5. Features of Perfect Competition

6. • No artificial restriction. This means any
customer can buy from any seller, and any
seller can sell to any buyer.
• Thus, no restriction is imposed on either party.
• prices are liable to change freely as per the
demand-supply conditions.
• In such a situation, no big producer and the
government can control the demand, supply
or price of the goods and services.

7. Monopolistic Competition/ imperfect competition
Definition- Monopolistic Competition
• There are a large number of firms that produce
differentiated products which are close
substitutes for each other.
• In other words, large sellers selling the products
that are similar, but not identical and compete
with each other on other factors besides price.
EG: high-street stores and restaurants

8. Features of Monopolistic Competition

9. • Product Differentiation: The products being
slightly different from each other remain close
substitutes of each other and hence cannot be
priced very differently from each other.
• Large number of firms: A large number of
firms operate under the monopolistic
competition, and there is a stiff competition
between the existing firms.

10. • Free Entry and Exit: With an intense
competition among the firms, the entity
incurring the loss can move out of the industry
at any time it wants. Similarly, the new firms
can enter into the industry freely.
• Some control over price: Since, the products
are close substitutes, if a firm lowers the price
then the customers will switch over to it and
vice versa. hence there exists price control

11. • Heavy expenditure on Advertisement and other
Selling Costs
The firms incur a huge cost on advertisements
and other selling costs to promote the sale of
their products. Since the products are different
and are close substitutes for each other.
• Product Variation: A product can be sold in
different variations for example in different colors
and size.
The monopolistic competition is also called
as imperfect competition because this market
structure lies between the pure monopoly and
the pure competition.

12. Oligopoly Market
Definition
• The Oligopoly Market characterized by few
sellers, selling the homogeneous or differentiated
products.
• In other words, the Oligopoly market structure
lies between the pure monopoly and
monopolistic competition
• where few sellers dominate the market and have
control over the price of the product.
• Example: Pepsi and Coca-Cola in the soft drink
market

13. • Homogeneous product: The firms producing
the homogeneous products are called as Pure
or Perfect Oligopoly.
EG: cosmetic items such as cotton balls and
cotton swabs.
• Heterogeneous Product: The firms producing
the heterogeneous products are called as
Imperfect or Differentiated Oligopoly. soaps,
detergents, television, refrigerators, etc.

14. Features of Oligopoly Market

15. • Few Sellers: The sellers are few, and the
customers are many.
• Interdependence: The seller has to be
cautious with respect to any action taken by
the competing firms.
• Since there are few sellers in the market, if any
firm makes the change in the price or
promotional scheme, all other firms in the
industry have to comply with it, to remain in
the competition.

16. • Advertising: Every firm advertises their
products on a frequent basis, with the
intention to reach more and more customers
and increase their customer
• Competition: It is genuine that with a few
players in the market, there will be an intense
competition among the sellers.

17. • Entry and Exit Barriers: The firms can easily
exit the industry whenever it wants, but has to
face certain barriers to entering into it. These
barriers could be Government license, Patent
etc.
• Lack of Uniformity: There is a lack of
uniformity among the firms in terms of their
size, some are big, and some are small.

18. Monopoly Market
• Definition: The Monopoly is a market
structure characterized by a single seller,
selling the unique product with the restriction
for a new firm to enter the market.
• Example: State Electricity board; Railways

19. Features of Monopoly Market

20. • Under monopoly, the firm has full control over
the supply of a product. The elasticity of
demand is zero for the products.
• There is a single seller or a producer of a
particular product, and there is no difference
between the firm and the industry. The firm is
itself an industry.
• The firms can influence the price of a product
and hence, these are price makers, not the
price takers.
• There are barriers for the new entrants.

21. • The demand curve under monopoly market is
downward sloping, which means the firm can
earn more profits only by increasing the sales
which are possible by decreasing the price of a
product.
• There are no close substitutes for a monopolist’s
product.
• Under a monopoly market, new firms cannot
enter the market freely due to any of the reasons
such as Government license and regulations,
huge capital requirement, complex technology
and economies of scale.
• These economic barriers restrict the entry of new
firms.

22. Pricing Policy
• Pricing policy refers
how a company sets the
prices of its products
and services based on
costs, value, demand,
and competition.

23. The following considerations involve in formulating the pricing
policy:
(i) Competitive Situation:
• Have to analyze whether the firm is facing perfect competition or imperfect
competition.
• In perfect competition, the producers have no control over the price. Pricing
policy has special significance only under imperfect competition.
ii) Goal of Profit and Sales:
• The businessmen use the pricing device for the purpose of maximizing
profits.
• They should also stimulate profitable combination sales. In any case, the
sales should bring more profit to the firm.

24. (iii) Long Range Welfare of the Firm:
• Businessmen are reluctant (unwilling) to charge a high price
for the product because this might result in bringing more
producers into the industry.
• In real life, firms want to prevent the entry of rivals. Pricing
should take care of the long run welfare of the company.
(iv) Flexibility:
• Pricing policies should be flexible enough to meet changes
in economic conditions of various customer industries.

25. (v) Government Policy:
• The government may prevent the firms in forming combinations to
set a high price.
• Often the government prefers to control the prices of essential
commodities with a view to prevent the exploitation of the
consumers.
(vi) Overall Goals of Business:
• objectives relate to rate of growth, market share, maintenance of
control and finally profit.
• The A pricing policy should never be established without
consideration as to its impact on the other policies and practices.

26. (vii) Price Sensitivity:
• Businessmen often tend to exaggerate the
importance of price sensitivity and ignore many
identifiable factors which tend to minimize it.
(viii) Routinisation of Pricing:
• A firm may have to take many pricing decisions.
• If the data on demand and cost are highly
conjectural, the firm has to rely on some
mechanical formula.

27. Steps in Pricing

28. 1) Selecting the pricing Objective –
• The company first decides where it wants to
position its marketing offering.
• The clearer a firm’s objectives, the easier it is
to set price.
• Eg. A company can pursue any of five major
objectives through pricing: survival, maximum
current profit, maximum market share,
maximum market skimming, or product-
quality leadership.

29. 2) Determining the demand –
• Demand and price are inversely related: the
higher the price, the lower the demand .
• In the case of prestige goods, the demand curve
sometimes slopes upward.
• E.g. Perfume Company raised its price and sold
more perfume rather than less! Some consumers
take the higher price to signify a better product.
• the process of estimating demand therefore leads
to
i. Estimating Price sensitivity of market
ii. Estimating and analyzing demand curve
iii. Determining price elasticity of demand.

30. 3. Estimating Costs –
• The company wants to charge a price that
covers its cost of producing, distribution and
selling the product, including a fair return for
its effort and risk.
• A company’s cost take different forms, fixed
and variable, Total costs, Average cost.
• To price intelligently, management needs to
know how its costs vary with different levels
of production.

31. 4. Analyzing competitor’s costs, prices and
offers –
• The firm must take the competitor’s costs,
prices and possible price reactions into
account.
5. Selecting a pricing method –
• WHAT ARE VARIOUS PRICING METHODS?
• There are three pricing methods that can be
employed by a firm:
1. Cost Oriented Pricing
2. Competitor Oriented Pricing
3. Marketing Oriented Pricing

32. 6. Selecting the final Price
• In selecting that price, the company must
consider additional factors,
including psychological pricing, gain and risk
pricing, the influence of other marketing -mix
elements on price, company -pricing policies,
and the impact of price on other parties.

33. Pricing Decisions
• Pricing decisions can be simple or complex.
• Simple pricing involves charging what competitors
charge for similar goods and services.
• This strategy is often used by retailers and wholesalers
selling commodities
• Complex pricing is based on the originality of a
product or service and what customers are willing to
pay for it.
• This type of pricing is determined through negotiation
with the customer and is common for furniture,
artworks and consulting services.

34. Factors to Consider When Setting a Price:
External Factors
i. Total demand for product or
service and its elasticity
ii. Number of competitors or
services
iii. Quality of competing
products or services
iv. Current prices of
competing products or
services
v. Customer’s preferences for
quality versus price
vi. Number of suppliers in the
market
vii. Seasonal demand or
continual demand
viii. Life of product or service
ix. Economic and political
climate
x. Type of industry to which
the product belongs
xi. Governmental guidelines

35. Internal Factors:
• Cost of product or service
• Quality of materials and labour inputs
• Labour intensive or automated process
• Usage of scarce resources
• Firm’s objectives
• Pricing decision as a long-run decision or
short term decision.

36. Factors Influencing Pricing Decisions:
Customers:
• Managers examine pricing problems through the eyes
of their customers. Increasing prices may cause the loss
of a customer.
Competitors:
• A competitor’s aggressive pricing may force a business
to lower its prices to be competitive. On the other
hand, a business without a competitor can set higher
prices.
Costs:
• The lower the cost relative to the price, the greater the
quantity of product the company is willing to supply.

37. Pricing methods
1.Cost-based Pricing:
• some percentage of
desired profit margins is
added to the cost of the
product to obtain the
final price.

38. a.Cost-plus Pricing:
• Refers to the simplest method of determining the price of a product. In
cost-plus pricing method, a fixed percentage, also called mark-up
percentage, of the total cost (as a profit) is added to the total cost .
• For example, XYZ organization bears the total cost of Rs. 100 per unit
for producing a product. It adds Rs. 50 per unit to the price of product
as’ profit. In such a case, the final price of a product of the organization
would be Rs. 150.
• Cost-plus pricing is also known as average cost pricing.
• P = AVC + AVC (M)
• M = Mark-up percentage(% of profit)

39. The advantages of cost-plus pricing method are as
follows:
• a. Requires minimum information
• b. Involves simplicity of calculation
• c. Insures sellers against the unexpected changes
in costs
The disadvantages of cost-plus pricing method are
as follows:
• a. Ignores price strategies of competitors
• b. Ignores the role of customers

40. b.Markup Pricing:
• Refers to a pricing method in which the fixed
amount or the percentage of cost of the
product is added to product’s price to get the
selling price of the product.
• For example, if a retailer has taken a product
from the wholesaler for Rs. 100, then he/she
might add up a markup of Rs. 20 to gain profit.
• Markup as the percentage of
cost= (Markup/Cost) *100

41. 2.Demand-based Pricing:
• If the demand of a product is more, an
organization prefers to set high prices for
products to gain profit;
• whereas, if the demand of a product is less,
the low prices are charged to attract the
customers.

42. 3.Competition-based Pricing:
• Competition-based pricing refers to a method in
which an organization considers the prices of
competitors’ products to set the prices of its own
products.
• The organization may charge higher, lower, or
equal prices as compared to the prices of its
competitors.

43. Other pricing methods
4.Value Pricing:
• Implies a method in which an organization tries
to win loyal customers by charging low prices for
their high- quality products.
• The organization aims to become a low cost
producer without sacrificing the quality.
5.Target Return Pricing:
• Helps in achieving the required rate of return on
investment done for a product. In other words,
the price of a product is fixed on the basis of
expected profit.

44. 6.Going Rate Pricing
• Implies a method in which an organization
sets the price of a product according to the
prevailing price trends in the market.
7.Transfer Pricing
• One department of an organization can sell
its products to other departments at low
prices. Sometimes, transfer pricing is used to
show higher profits in the organization by
showing fake sales of products within
departments.

45. Business Cycles – Stages

46. Business Cycles – Stages
Study growth line

47. Business Cycles
• The business cycle is the natural rise and fall
of economic growth that occurs over time.
• The cycle is a useful tool for analyzing the
economy.
• It can also help make better financial
decisions.

48. • Business Cycles – Stages
1 Expansion
• There is an increase employment, income,
output, wages, profits, demand, and supply of
goods and services.
• Debtors pay their debts on time,
• The money supply is high,
• Investment is high.
• This process continues until economic
conditions become favorable for expansion.

49. 2 Peak
• The economy then reaches a saturation point, or peak, which is the second stage of the
business cycle.
• The maximum limit of growth is attained. The economic indicators do not grow further and
are at their highest. Prices are at their peak.
• This stage marks the reversal in the trend of economic growth.
3 Recession
• The recession is the stage that follows the peak phase.
• The demand for goods and services starts declining rapidly and steadily in this phase.
• Producers do not notice the decrease in demand instantly and go on producing, which creates
a situation of excess supply in the market.
• Prices tend to fall. All positive economic indicators such as income, output, wages, etc.
consequently start to fall.

50. 4 Depression
• There is a rise in unemployment.
• The growth in the economy continues to decline
below the steady growth line, the stage is called
depression.
5 Trough
• The economy’s growth rate becomes negative.
• Demand and supply of goods and services, reach
their lowest.
• There is extensive depletion of national income
and expenditure.

51. 6.Recovery phase
• Consumers increase their rate of consumption, as
they assume that there would be no further
reduction in the prices of products.
• Bankers reduce the lending rate.
• price of factor of production falls.
• As a result, investment and employment
increases.
• Economy again enters into the phase of
expansion.
• Thus, a business cycle gets completed.