Business Economics Unit 4

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MEFA
IV UNIT
Markets Theories & Pricing Policies
What is Market? Meaning
Usually, Market means a place where buyer and seller meets together in order to carry on
transactions of goods and services.
But in Economics, it may be a place, perhaps may not be. In Economics, market can exist even
without direct contact of buyer and seller. This fact can be explained with the help of the following
statement.
"Market refers to arrangement, whereby buyers and sellers come in contact with each other
directly or indirectly, to buy or sell goods."
Thus, above statement indicates that face to face contact of buyer and seller is not necessary for
market. E.g. in stock or share market, buyer and seller can carry on their transactions through internet.
Classification or Types ofMarket - Chart
The classification or types of market are depicted below.

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Type ofcompetition
Based on degree of competition, the markets can be divided into perfect market and imperfect
markets. In perfect markets, there is said to prevail perfect completion and in case of imperfects markets,
imperfect completion. Perfect completion is said to exist when certain conditions are fulfilled.
Perfect Competition
Perfect competition is a market system characterized by many different buyers and sellers. In the
classic theoretical definition of perfect competition, there are an infinite number of buyers and sellers.
With so many market players, it is impossible for any one participant to alter the prevailing price in the
market. If they attempt to do so, buyers and sellers have infinite alternatives to pursue.
Imperfect competition:
A competition is said to be imperfect when it is not perfect.
Based on the number of buyers and sellers, the structure of market varies as outlined below: ‘poly’ refers
to seller and ‘psony’ means buyer
Monopoly
A monopoly is the exact opposite form of market system as perfect competition. In a pure
monopoly, there is only one producer of a particular good or service, and generally no reasonable
substitute. In such a market system, the monopolist is able to charge whatever price they wish due to the
absence of competition, but their overall revenue will be limited by the ability or willingness of customers
to pay their price.
Oligopoly
An oligopoly is similar in many ways to a monopoly. The primary difference is that rather than
having only one producer of a good or service, there are a handful of producers, or at least a handful of
producers that make up a dominant majority of the production in the market system. While oligopolists do
not have the same pricing power as monopolists, it is possible, without diligent government regulation,
that oligopolists will collude with one another to set prices in the same way a monopolist would.
Monopolistic Competition
Monopolistic competition is a type of market system combining elements of a monopoly and
perfect competition. Like a perfectly competitive market system, there are numerous competitors in the
market. The difference is that each competitor is sufficiently differentiated from the others that some can
charge greater prices than a perfectly competitive firm. An example of monopolistic competition is the
market for music. While there are many artists, each artist is different and is not perfectly substitutable
with another artist.
Monopsony
Market systems are not only differentiated according to the number of suppliers in the market.
They may also be differentiated according to the number of buyers. Whereas a perfectly competitive
market theoretically has an infinite number of buyers and sellers, a monopsony has only one buyer for a
particular good or service, giving that buyer significant power in determining the price of the products
produced.
Duopoly
If there are two sellers, duopoly is said to exist. If Pepsi and coke are the two companies in soft
drinks, this market is called duopoly.
Duopsony
If there are two buyers, duopsony is said to exist.
Oligopsony
If there are few buyers, oligopsony is said to exist. There are a few news paper publishing
companies in India and all these buy news print from the government of India.

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Perfect competition and perfect Market
A perfect market is one where there is perfect competition. This is a model market. It implies
absence of rivalry.
According to Boulding, “the competitive market may be defend as a large number of buyers and
sellers all engaged in the purchase and sale of identically similar commodity, who are in close contact
with one anotherand who buy and sell freely among themselves”.
Features ofPerfect Competition
1. Large number:
In perfect competition, there must be large number of buyers and sellers. Each buyer buys a small
quantity of the total amount. Each seller is so large that no single buyer or seller can influence the price
and affect the market. According to Scitovsky buyers and sellers are price takers in the purely competitive
market. Each seller (or firm) sells its products at the price determined by the market. Similarly, each
buyer buys the commodity at the price determined by the market.
2. Homogeneous product:
Under perfect competition, the product offered for sale by all the seller must be identical in every
respect. The goods offered for sale are perfect substitutes of one another. Buyers have no special
preference for the product of a particular seller. No seller can raise the price above the prevailing price or
lower the price below the prevailing price.
3. Free entry and exit:
Under perfect competition, there will be no restriction on the entry and exit of both buyers and
sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market
freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur
existing sellers may leave the market. However, such free entry or free exit is possible only in the long
run, but not in the short-run.
4. Perfect knowledge:
Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the
market conditions. As results, no buyer will be prepared to pay a price higher than the prevailing price.
Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has
no scope.
5. Perfect mobility offactors of production:
The second perfection mobility of factors of production from one use to another use. This feature
ensures that all sellers or firms get equal advantages so far as services of factors of production are
concerned. This is essential to enable the firms and industry to achieve equilibrium.
6. Absence oftransport cost:
Under perfect competition transport, cost does not exist. Since commodities have, the same price
it logically follows that there will be no transport cost. In the event of the presence of cost of transport,
there will be no single price in the market. Transport cost occurs when there is no perfect knowledge of
the market conditions on the part of buyers and sellers.
7. No attachment:
There is no attachment between the buyers and sellers under perfect competition. Since products
of all sellers are identical and their prices are the same a buyer is free to buy the commodity from any
seller he likes. He has no special inclination for the product of any seller as in case of monopolistic
competition or oligopoly. Theoretically, perfect competition is irrelevant. In reality, it does not exist. So it
is a myth.
8. Each firm is a price taker
An individual firm can alter its rate of production or sales without significantly affecting the
market price of the product. A firm in a perfect market cannot influence the market through its own
individual actions

Monopoly
The term monopoly is derived from Greek words 'mono' which means single and 'poly' which
means seller. So, monopoly is a market structure, where there only a single seller producing a product
having no close substitutes.
This single seller may be in the form of an individual owner or a single partnership or a Joint
Stock Company. Such a single firm in market is called monopolist. Monopolist is price maker and has a
control over the market supply of goods. But it does not mean that he can set both price and output level.
A monopolist can do either of the two things i.e. price or output. It means he can fix either price or output
but not both at a time.
Monopoly can be interpreted in two ways. When there is a sole supplier, it is a case of pure
monopoly. In this case, the firm and industry are one and the same. For instance, the RBI is the sole
supplier of currency notes in India. Another context is where the firm supplying a half of the total market
may have a greater market power, if the rest of the market is shared by a number of small firms.
Characteristics / Features ofMonopoly
Following are the features or characteristics of Monopoly
1. A single seller has complete control over the supply of the commodity.
2. There are no close substitutes for the product.
3. There is no free entry and exit because of some restrictions.
4. There is a complete negation of competition.
5. Monopolist is a price maker.
6. Since there is a single firm, the firm and industry are one and same i.e. firm coincides the
industry.
7. Monopoly firm faces downward sloping demand curve. It means he can sell more at lower price
and vice versa. Therefore,elasticity of demand factor is very important for him.
8. The products and services provided by the monopolist bear inelastic demand
9. Monopoly is commonly characterized by control of information or production technology not
available to others. Monopoly may be created through statutory grant of special privileges such as
licenses, permits, patent rights and so on.
In case of monopoly, the marginal revenue (MR) is always less than the average revenue (AR)
because of quantitative discounts or concessions.
What causes Monopoly?
There can be several factors that lead to Monopoly
Horizontal integration occurs when two businesses in same industry at the same stage of
production become one.
Vertical Integration involves acquiring a business in the same industry but at different stages of
the supply chain - for example oil company owning drilling and extraction businesses together with
refining, distribution and retail subsidiaries.
Monopoly power also comes from the ownership of Patents and Copyright protection or the
exclusive ownership of assets (e.g. De Beers - diamonds).
The government may also give legal monopoly power to some business through nationalization
or government awarded franchises and licenses.
Monopoly power for existing firms within a business can come more organically through the
internal growth of a firm, taking advantage for example of internal economies of scale.
Through Research and Development and latest techno logy, the firm can replace its old products
with superior ones.
Control over key inputs such as raw materials, skilled labour, technology, financial resources and
so on lead to monopoly.
Monopolistic competition
Pure monopoly and perfect competition are two extreme cases of market structure. In reality,
there are markets having large number of producers competing with each other in order to sell their
product in the market. Thus, there is monopoly on one hand and perfect competition on other hand. Such
a mixture of monopoly and perfect competition is called as monopolistic competition. It is a case of
imperfect competition.

Monopolistic competition has been introduced by American economist Prof. Edward Chamberlin,
in his book 'Theory of Monopolistic Competition' published in 1933.
Features ofMonopolistic Competition ↓
The following are the features or characteristics of monopolistic competition:-
1. Large Number ofSellers
There are large numbers of sellers producing differentiated products. So, competition among
them is very keen. Since number of sellers is large, each seller produces a very small part of market
supply. So no seller is in a position to control price of product. Every firm is limited in its size.
2. Product Differentiation
It is one of the most important features of monopolistic competition. In perfect competition,
products are homogeneous in nature. On the contrary, here, every producer tries to keep his product
dissimilar than his rival's product in order to maintain his separate identity. This boosts up the competition
in market. So, every firm acquires some monopoly power.
3. Freedom ofEntry and Exit
This feature leads to stiff competition in market. Free entry into the market enables new firms to
come with close substitutes. Free entry or exit maintains normal profit in the market for a longer span of
time.
4. Selling Cost
It is a unique feature of monopolistic competition. In such type of market, due to product
differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost
includes sales promotion expenses,advertisement expenses,salaries of marketing staff, etc.
But on account of homogeneous product in perfect competition and zero competition in monopoly, selling
cost does not exist there.
5. Absence ofInterdependence
Large numbers of firms are different in their size. Each firm has its own production and
marketing policy. So no firm is influenced by other firm. All are independent.
6. Dimensional Competition
Monopolistic competition has two types of competition aspects viz.
i. Price competition i.e. firms compete with each other on the basis of price.
ii. Non price competition i.e. firms compete on the basis of brand, product quality advertisement.
7. Concept ofGroup
In place of Marshallian concept of industry, Chamberlin introduced the concept of Group under
monopolistic competition. An industry means a number of firms producing identical product. A group
means a number of firms producing differentiated products which are closely related.
8. Resource Mobility
Monopolistically competitive firms, like perfectly competitive firms, are free to enter and exit an
industry. The resources might not be as "perfectly" mobile as in perfect competition, but they are
relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to
entry.
Features ofoligopoly:
The term oligopoly is derived from two Greek words, Oleg’s and 'Pollen'. Oleg’s means a few and Pollen
means to sell thus. Oligopoly is said to prevail when there are few firms or sellers in the market producing
and selling a product. Oligopoly is often referred to as “competition among the few". In brief oligopoly is
a kind of imperfect market where there are a few firm in the market, producing either and homogeneous
product or producing product which are close but not perfect substitutes of each other.
Characteristics ofOligopoly:
1. Interdependence:
The firms under oligopoly are interdependent in making decision. They are interdependent
because the number of competition is few and any change in price & product etc by an firm will have a
direct influence on the fortune of its rivals, which in turn retaliate by changing their price and output.
Thus under oligopoly a firm not only considers the market demand for its product but also the reactions of
other firms in the industry.

2. Importance ofadvertising and selling costs:
The firms under oligopolistic market employ aggressive and defensive weapons to gain a greater
share in the market and to maximise sale. In view of this firms have to incur a great deal on advertisement
and other measures of sale promotion. Thus advertising and selling cost play a great role in the
oligopolistic market structure. Under perfect competition and monopoly expenditure on advertisement
and other measures is unnecessary. But such expenditure is the life-blood of an oligopolistic firm.
3. Group behaviour:
Another important feature of oligopoly is the analysis -of group behaviour. In case of perfect
competition, monopoly and monopolistic competition, the business firms are assumed to behave in such a
way as to maximize their profits. The profit-maximizing behaviour on his part may not be valid. The
firms under oligopoly are interdependent as they are in a group.
4. Indeterminatenessofdemand curve:
This characteristic is the direct result of the interdependence characteristic of an oligopolistic
firm. Mutual interdependence creates uncertainty for all the firms. No firm can predict the consequence of
its price-output policy. Under oligopoly a firm cannot assume that its rivals will keep their price
unchanged if he makes charge in its own price. As a result, the demand curve facing an oligopolistic firm
losses its determinateness.
5. Elements ofmonopoly:
There exist some elements of monopoly under oligopolistic situation. Under oligopoly with
product differentiation each firm controls a large part of the market by producing differentiated product.
In such a case it acts in its sphere as a monopolist in lining price and output.
6. Price rigidity:
Under oligopoly there is the existence price rigidity. Prices lend to be rigid and sticky. If any firm
makes a price-cut it is immediately retaliated by the rival firms by the same practice of price-cut. There
occurs a price-war in the oligopolistic condition. Hence under oligopoly no firm resorts to price-cut
without making price-output decision with other rival firms. The net result will be price -finite or price-
rigidity in the oligopolistic condition.
Price Determination under Oligopoly:
The non-collusive oligopoly model of Sweezy, and to the collusive oligopoly models relating to
cartels and price leadership.
Non-Collusive Oligopoly: Sweezy’s Kinked Demand Curve Model:
One of the important features of oligopoly market is price rigidity. And to explain the price
rigidity in this market, conventional demand curve is not used. The idea of using a non-
conventional demand curve to represent non-collusive oligopoly (i.e., where sellers compete with
their rivals) was best explained by Paul Sweezy in 1939. Sweezy uses kinked demand curve to
describe price rigidity in oligopoly market structure.
The kink in the demand curve stems from the asymmetric behavioural pattern of sellers. If a
seller increases the price of his product, the rival sellers will not follow him so that the first seller
loses a considerable amount of sales. In other words, every price increase will go unnoticed by
rivals.
On the other hand, if one firm reduces the price of its product other firms will follow the first
firm so that they must not lose customers. In other words, every price will be matched by an
equivalent price cut. As a result, the benefit of price cut by the first firm will be inconsiderable.
As a result of this behavioural pattern, the demand curve will be kinked at the ruling market
price.

Suppose, the prevailing price of an oligopoly product in the market is QE or OP of Fig. 5.19. If
one seller increases the price above OP, rival sellers will keep the prices of their products at OP.
As a result of high price charged by the firm, buyers will shift to products of other sellers who
have kept their prices at the old level. Consequently, sales of the first seller will drop
considerably.
That is why demand curve in this zone (dE) is relatively elastic. On the other hand, if a seller
reduces the price of his product below QE, others will follow him so that demand for their
products does not decline. Thus, demand curve in this region (i.e., ED) is relatively inelastic.
This behavioural pattern thus explains why prices are inflexible in the oligopoly market — even
if demand and costs change.
The kink in the demand curve at point E results in a discontinuous MR curve.
The MR curve has two segments :
At output less than OQ the MR curve (i.e., dA) will correspond to DE portion of AR curve, and,
for output larger than OQ, the MR curve (i.e., BMR) will correspond to the demand curve ED.
Thus, discontinuity in MR curve occurs between points A and B. In other words, between these
two points, MR curve is vertical.
Equilibrium is achieved when MC curve passes through the discontinuous portion of the MR
curve. Thus the equilibrium output is OQ, to be sold at a price OP.
Suppose, costs rise. As a result, MC curve will shift up from MC1 to MC2. The resulting price
and output remain unchanged at OP and OQ, respectively. This fact explains stickiness of prices.
In other words, in oligopolistic industries price is more stable than costs.
At first sight, the model seems to be attractive since it explains the behaviour of firms
realistically. But the model has certain limitations. Firstly, it does not explain how the ruling
price is determined. It explains that the demand curve has a kink at the ruling price.

In this sense, it is not a theory of pricing. Secondly, price rigidity conclusion is not always
tenable. Empirical evidence suggests that higher costs force a further price rise above the kink.
Despite these limitations, the model is popular among textbook authors.
Collusive Oligopoly Model: Price Leadership Model:
Non-collusive oligopoly model (Sweezy’s model) presented in the earlier section is based on the
assumption that oligopoly firms act independently even though firms are interdependent in the
market. A vigorous price competition may result in uncertainty.
The question that arises now is: how do oligopoly firms remove uncertainty? In fact, firms enter
into pricing agreements with each other instead of adopting competition or price war with each
other. Such agreement—both explicitly (or formal) and implicit (or informal)—may be called
collusion.
Always, every firm has the inclination to achieve more strength and power over the rival firms.
As a result, in the oligopolist industry, one finds the emergence of a few powerful competitors
who cannot be eliminated easily by other powerful firms.
Under the circumstance, some of these firms act together or collude with each other to reap
maximum advantage. In fact, in oligopolist industry, there is a natural tendency for collusion.
The most important forms of collusion are: price leadership cartel and merger and acquisition.
When a formal collusive agreement becomes difficult to launch, oligopolists sometimes operate
on informal tacit collusive agreements. One of the most common form of informal collusion is
price leadership. Price leadership arises when one firm—may be a large as well as dominant
firm—initiates price changes while other firms follow.
An example of dominant firm price leadership is shown in Fig. 5.20 where DT is the industry
demand curve. Since small firms follow the leader—the dominant firm—they behave as “price-
takers”. MCs is the horizontal summation of the MC curves of all small firms.
Suppose, the dominant firm sets the price at OP1 (where DT and MCs intersect each other at
point C). The small firms meet the entire demand P1C at the price OP1. Thus, the dominant firm

has nothing to sell in the market. At a price of OP3, the small firm will supply nothing. It is
obvious that price will be set in between OP1 and OP3 by the leader.
The demand curve faced by the leader firm of the oligopoly industry is determined for any
price—it is the horizontal distance between industry demand curve, DT, and the marginal cost
curves of all small firms, MCS. In Fig. 5.20, DL is the leader’s demand curve and the
corresponding MR curve is MRL.
Being a leader in the industry, the dominant firm’s supply curve is represented by the
MCL curve. Since it enjoys a cost advantage, its MC curve lies below the MCS curve.
A dominant firm maximizes profit at point E where its MCL and MRLintersect each other. The
corresponding output of the price leader is OQL. Price thus determined is OP2. Small firms
accept this price OP2and sell QLQT (=AB) amount – industry demand the OQT output.
In actual practice, the analysis of price leadership is complicated, particularly when new firms
enter the industry and try to become the leader or dominant.
Pricing policies
Methods ofpricing:
Pricing is not an exact science. Pricing is not important exercise. Under pricing will result in
losses and over pricing will make the customers runaway. To determine pricing in a scientific manner, it
is necessary to understand the pricing objectives, pricing methods, pricing policies and pricing
procedures.
Pricing new products and services is relatively a difficult task. It is because there is no prior
information or guideline available to fix the price. In case of existing products, fixing price maybe easy
because there is a lot of information about the prices prevailing in the market and the experiences of the
traders.
Pricing objectives
Pricing objectives refer to the general and specific objectives. Which a firm sets for itself in
establishing the price of its products and services and these are not much different from the marketing
objectives or firms overall business objectives.
Generally the following are the objectives of pricing
a. To maximize profits
b. To increase sales
c. To increase the market share
d. To satisfy customers
e. To meet the competition
Pricing policy
The firm has to formulate its pricing policies, particularly when it deals in multiple products. The
pricing policies are intended to bring consistency in the pricing pattern. For instance, to maintain price
differentials between the deluxe models and basic models and so on. Pricing policy defines how to handle
complex issues such as price discrimination and so forth.
Pricing methods
Marginal cost pricing
In marginal cost pricing, selling price is fixed in such way that it covers fully the variable or marginal
cost and contributes towards recovery of fixed cost fully or partly, depending upon the market situations.
In time of stiff competition marginal cost offers a guide line as to how far the selling price can be
lowered.
This is also called break even pricing or target profit pricing

Limit pricing:
A firm (firms) may also try to establish a price that reduces or eliminates the threat of entry of
new firms into the industry. This is called ‘limit pricing’. For limit price to be effective some sort of
collusion is necessary among existing firms.
It is used by monopolists to discourage entry into a market, and is illegal in many countries.[1]
The
quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be
optimal for a monopolist, but might still produce higher economic profits than would be earned
under perfect competition.
Market skimming pricing:
When the product is introduced for the first time in the market, the company follows this method.
Under this method the company fixes a very high price for the product. The main idea is to charge the
customer maximum possible. This strategy is mostly found in case of technology products. When sony
introduces a particular TV model, it fixes a very high price. As the time passes by, the price comes down
and more people can afford to buy.
This method can be followed only when I. the demand for the product is inelastic, II. There is no
threat from the competitors, III. A high price is coupled with high technology or quality.
Market penetration pricing:
This is exactly opposite to the market skimming method. Here the price of the product is fixed so
low that the company can increase its market share. The company attains profits with increasing volumes
and increase in the market share. More often the companies believe that it is necessary to dominate the
market in the long run than making profits in the short run. This method is more suitable where market is
highly price sensitive. In such a case, a low price stimulates more rapid growth. It will be more
appropriate in cases where the costs are likely to fall with increase in output. A low price may not attract
significant degree of competition also.
Bundling pricing:
In a bundle pricing, companies sell a package or set of goods or services for a lower price than
they would charge if the customer bought all of them separately. Common examples include option
packages on new cars, value meals at restaurants and cable TV channel plans. Pursuing a bundle pricing
strategy allows you to increase your profit by giving customers a discount.
Bundle pricing is built on the idea of consumer surplus. Every customer has a price that he is
willing to pay for a particular good or service. If the price you set is equal to or lower than what the
customer is willing to pay, the customer will buy, as he considers the price a bargain. The difference
between what the customer pays and what the customer was willing to pay is known in economics as the
consumer surplus. Bundle pricing is an attempt to capture more of your customers' consumer surplus.
Peak load pricing:
Peak Load Pricing is a pricing strategy that implies price will be set at the highest level during
times when demand is at a peak. The pricing strategy is an attempt to shift demand, or at least
consumption of the good or service, to accommodate supply. The idea is that pricing higher when demand
is at its peak will balance out the supply and demand so that there is no shortage on either end of the
spectrum. If a good is priced at a high cost and many demand it, a capacity will be balanced. This is a
type of price discrimination; a firm discriminates between high-traffic, high usage or high demand times
and low usage time periods. The consumer that purchases during high usage times has to pay a higher
price than that of the consumer that can delay his purchase or demand.
Internet pricing models
Internet pricing models:
In the past computer was useful to only rich class of people and business. However the
development of internet made this device useful to an ordinary man and also to a small business unit.
Now internet has become a public utility item like electricity.
Access to the internet is provided by a number of commercial entities known as internet service
providers (ISPs), who constitutes ‘Internet backbone’. The role of an ISP is that of a mediator between
user and internet.

The ISPs are generally classified into
 Smaller ISP, who offers service to individual users by purchasing the same from larger ones.
 Larger ISP, who offer services directly to the users and sell some of their resources to the smaller
ISPs
The most challenging to the ISPs is to adopt a most appropriate pricing strategy. The following are the
basic internet access pricing models practiced by various ISPs.
1. Flat rate pricing:
To start more number of ISPs adopted flat rate pricing strategy. A flat fee for a certain period of time.
Individual bits sent/received are not priced. The user does not pay any additional amount for usage of any
new applications. Initially number of ISPs adopted this strategy. It worked well in the beginning but it
became very difficult to continue with this strategy. Particularly when the internet usage has increased
tremendously and that effected the flow of internet traffic.
2. Usage sensitive pricing:
In this model the fee paid by the user divided into two portions. The first portion of the fee is for the
connection and the second portion of fee is for the usage of each bit sent or received.
3. Transaction based pricing:
Like usage sensitive pricing in this model also first portion of fee is for connection and second portion of
fee is charged on the characteristics of transaction not by the volume of bits sent/received.
4. Priority pricing:
In this model the user choose the quality of services that they want and pay a fee for the same. Users can
prioritize their sending or receiving packets. This pricing allows the ISPs to charge more for important
items by depends on the paying capacity of users.
Adoption of new pricing strategies by ISPs is the only alternative to ease the growing congestion.
Two modern pricing schemes have been suggested to overcome the challenges of growing internet traffic.
5. Precedence Model (Bohn et al – 1994)
To protest existing environment from varied applications and users this initiates a process to restrict new
applications. In this model a process is set to prioritize the different applications in the precedence field of
the different data packets. Based on the precedence numbers would be prioritized. Precedence model
logically decides which packets should be hold up or not to send. This model requires continuous
development with the change of products and applications.
6. Smart market mechanismmodel (Mackie & Varian – 1993)
By depends on the level of network congestion, the price of sending a packet varies from minute to
minute. Each packet has a bid field in its header. Users indicate their maximum willingness to pay for
processing each packet. Higher bided packets processed earlier than the lower bided packets in the event
of congestion. This model helps in efficient handling of congestion problem.

Business Economics Unit 4

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