2. Pricing in different
types of market
Market is a place where buyers and
sellers of a commodity interact with
each other for the sale and purchase
of goods and services.
It is a form of market where there
is a large number of
buyers and sellers of a commodity.
Homogeneous products are to be
sold with no control over price by
4. Features of Perfect Competition
1. Homogeneous Product :
In perfect competition, a buyer cannot distinguish between the products of two ﬁrms.
2. Large Buyers and Sellers :
In Perfect Competition there are large number of buyers and sellers, every buyer and
seller is the price taker.
3. Free Entry and Exit :
It means that any ﬁrm can close down and the leave the industry or any new ﬁrm can
enter at any time.
4. Perfect knowledge of prices and technology :
In perfect competition, it is assumed that all buyers and sellers have the complete
knowledge of the prevailing price of the product.
5. 5. No transportation cost :
In perfect competition, the buyers and sellers do not incur any transportation costs.
The buyer pays the price that is exactly equal to the price that the seller receives.
6. No Artiﬁcial Restrictions :
In perfect competition, there is no government regulation. In other words, the
government has no interference in this market structure in terms of the tariﬀ,
6. ● In perfect competition, the situation price is decided by the market.
The market brings about a balance between the commodities that
come for sale and those demanded by consumers.
● Therefore, the forces of supply and demand together determine the
price of the good.
● The price at which the supply and demand are equal is the
7. THREE VITAL CONDITIONS
a)Price Taker, not a Price Maker
b)Demand Curve of the ﬁrm is perfectly elastic
c)A Firm earns only normal proﬁts in the long
8. A.FIRM IS A PRICE TAKER, NOT A PRICE MAKER:
Price is determined by the forces of demand and supply. All the ﬁrms in the industry sell their output at a given
price. It is therefore said that a ﬁrm under perfect competition is a price taker not a maker.
It can be explained in terms of following reasons:-
(i)No of Firms:
The number of Firms under perfect competition is so large that no
individual Firm, by changing its sale, can cause any change in the total market supply.
Accordingly, market price remains unaﬀected. Nut
All ﬁrms in the competitive industry produce
homogeneous product. In such a situation if any ﬁrm ﬁxes its price higher than the equilibrium market price
buyers would shift from this ﬁrm to the other .The policy of higher price (higher than equilibrium market price)
will simply fail.
9. (iii) Unnecessary loss if lower prices ﬁxed :
Firm's demand curve under
perfect competition is perfecily elastic. It means that a ﬁrm can sell whatever amount it
wishes to sell at the existing price. In such a situation, the policy of attracting buyers by
lowering the price would result in unnecessary loss.
Thus it is concluded that:-
Under perfect competition it is not possible for an individual ﬁrm to change price of
The ﬁrm is simply a price taker, not a price maker.
10. II DEMAND CURVE OF THE FIRM IS
Demand curve of
the ﬁrm under perfect competition is
perfectly elastic. (Ed = ∞). It means that the
ﬁrm can sell any amount of the commodity
at the prevailing price. Even a fractional rise
in rice would wipe out entire demand of the
product. Firm's demand curve is indicated by
a horizontal straight line-parallel to X axis.
It can be shown in the following ﬁgure:
11. III. A FIRM EARNS ONLY NORMAL PROFIT IN LONG RUN:
It is owing to the fact that there is a freedom for entry and exit under perfect
CASE - 1
EXTRA NORMAL PROFIT:
If extra normal proﬁt, new ﬁrms will be
inducted to join the industry. This increases market supply and lowers market price to
ﬁnally wipe out extra normal proﬁt.
EXTRA NORMAL LOSS:
If extra normal loss, marginal/existing ﬁrms
will quit the industry. This decreases market supply and raises market prices to ﬁnally
wipe out extra normal proﬁt.
is a form of market where there is
a single seller of the product
with no close substitute.
For example Railways in India
are monopoly industry of the
government of India (as a
14. Features of Monopoly
1. Single seller and many buyer :
In a monopoly market, usually, there is a single ﬁrm which produces and/or supplies a
particular product/ commodity. It is fair to say that such a ﬁrm constitutes the
2. Proﬁt Maximization :
There are proﬁt maximization associated with monopoly. The seller are guided by the
need of proﬁt maximization either by expanding sales.
3. Price discrimination :
In Monopoly, the seller does not discriminate among customers and charge them all
alike for the same product.
15. 4. Price Maker :
Since there is only one ﬁrm selling the product, it becomes the price maker for the
whole industry. The consumers have to accept the price set by the ﬁrm as there
are no other sellers or close substitutes.
5. No close substitutes :
Usually, a monopoly the seller sells a product which does not have any close
substitutes, example, Indian Railways.
6. Entry Barriers :
Monopoly market is restrictions of entry. These restrictions can be of any form like
economical, legal, institutional, artiﬁcial, etc.
16. ● In Monopoly, the leader in
market share gives monopoly
players the power to set and
determine the price of
● The absence of competitors and
substitutes is a major factor that
helps in price setting.
● The price is modulation is
determined on the basis of
demand and supply factors
playing in the market.
It is a form of market where there are
many sellers of the product but the
product many sellers of the product
but the product of each seller is some
from that of the other.
Thus, there are many sellers selling a
diﬀerent shaded product.
For example:- Colgate, Close-up etc.
19. ● Monopolistic competition exists when many companies oﬀer competing products or
services that are similar, but not perfect, substitutes.
● Monopolistic competition exists between a monopoly and perfect competition, combines
elements of each, and includes companies with similar, but not identical, product oﬀerings.
20. Feature of Monopolistic Competition
A) Large no. of buyers and sellers:-
As under perfect competition, there is a large number of buyers and sellers. Also, the
size of each ﬁrm is small. Each ﬁrm has a limited share of market.
A) Diﬀerentiated Product:- It is a situation when producers try to diﬀerentiate their
products in terms of shape, size packaging or brand name.
For example: 'Colgate' and 'Close-up' toothpaste. Because of product diﬀerentiation,
each from can decide its price policy independently. So, that each from has a
partial control over price of its product.
A) Freedom of entry and exit of ﬁrms:-Firms are free to enter and exit. However new
ﬁrms have no freedom of entry into the industry. As, product of some ﬁrm may be
21. D) High Selling Cost:- Each ﬁrm has to incur selling cost as there is a large number of
close substitutes in the market.
E) Non price competition: The ﬁrms may compete with one another without changing
price of their product.
If you buy one packet of surf-excel, you may get one glass tumbles free.
with it. and on the purchase of one packet of tide, you may get one still tea spoon free.
Thus, the ﬁrms compete by oﬀering gifts to the buyer rather the product.
22. Price-output determination under monopolistic competition:
Equilibrium of a ﬁrm : In a monopolistically
competitive market since the product is
diﬀerentiated between ﬁrms, each ﬁrm does not
face a perfectly elastic demand for its products.
Each ﬁrm is a price maker and is in a position to
determine price of its own product.
As such, the ﬁrm is faced with a downward sloping
demand curve for its product. Generally, the less
diﬀerentiated the product is from its competitors,
the more elastic this curve will be.
23. Short run equilibrium of a ﬁrm in Monopolistic
Competition - With losses
The long-term equilibrium of a ﬁrm in
It is a form or market where there are few big
sellers of a commodity and large number of
Since, there are a few sellers in the market,
price and outputdecision of one seller
signiﬁcantly impacts the price and output
decision of other sellers in the market. There
is a cut throat competition in the market.
For example: There are very few
auto-rickshaw producer in the market. Tata,
Mahindra are some well known brands.
25. 1)Few Firms :: There is a large no. of buyers of a commodity the numbers is
so large that no individual buyer can impact market of the product
2)Large number of buyers:: There is a large no. of buyers of a commodity the
number is so large that no individual buyers can impact market of the product.
3)Entry-barriers: There are various barriers to the entry of new ﬁrms. There
barriers are almost similar to those under monopoly. Entry of new ﬁrm is very diﬃcult
4)High-degree of interdependence: There is high degree of interdependence.between
the ﬁrms. Price and output policy of one ﬁrm signiﬁcantly impact price and output
policy of the other ﬁrm. For example: It 'GM' motors reduces price of its cars, 'Ford'
motors may also do the same. Accordingly, while taking action on price or output, a
ﬁrm must take into account the possible reaction of rival ﬁrms in the market.
26. 5)Not possible to determine Firm's demand curve:- It is not possible to
determine Firm's demand curve under oligopoly. It is so because, it is not possible to
predict change in prices when a ﬁrm lowers its price, demand for its product may not
increase because the rival ﬁrms may also lower the price.
6)Formation of Cartels:- With a view of avoiding completion, ﬁrms may form
a cartel. It is a formal agreement among the ﬁrms to avoid competition. It is a situation
of collusive oligopoly. Under it output quotes and prices are ﬁxed by various ﬁrms as a
27. Types of Oligopoly
1)Pure oligopoly or perfect oligopoly: It occures when the product dealt is
homogeneous in nature, e.g. Aluminum industry. Diﬀerentiated or imperfect oligopoly
is based on product diﬀerentiation, e.g. Talcum powder.
2)Open and closed oligopoly: In the open oligopoly new ﬁrms can enter the market
and compete with the existing ﬁrms. But in closed oligopoly entry is restricted.
3)Collusive and Competitive oligopoly: When few ﬁrms of the oligopolist market come
to a common understanding or act in collusion with each other in ﬁxing price and
output, it is collusive oligopoly. When there is a lack of understanding between the
ﬁrms and they compete with each other it is called competitive oligopoly.
28. Partial or full oligopoly: Oligopoly is partial when the industry is dominated by one
large ﬁrm which is considered or looked upon as the leader of the group. The
dominating ﬁrm will be the price leader. In full oligopoly, the market will be
conspicuous by the absence of price leadership.
Syndicated and organized oligopoly: Syndicated oligopoly refers to that situation
where the ﬁrms sell their products through a centralized syndicate. Organized
oligopoly refers to the situation where the ﬁrms organize themselves into a central
association for ﬁxing prices, output, quotas, etc.
29. Price and output decisions in an oligopolistic market:
Because of interdependence an oligopolistic ﬁrm cannot assume that its rival ﬁrms will
keep their prices and quantities constant, when it makes changes in its price and/or
quantity. When an oligopolistic ﬁrm changes its price, its rival ﬁrms will retaliate or
react and change their prices which in turn would aﬀect the demand of the former
Therefore, an oligopolistic ﬁrm cannot have sure and deﬁnite demand curve, since it
keeps shifting as the rivals change their prices in reaction to the price changes made by
it. Now when an oligopolist does not know his demand curve, what price and output
he will ﬁx cannot be ascertained by economic analysis. However, economists have
established a number of price-output models for oligopoly market depending upon the
behaviour pattern of the members of the group.
30. Kinked Demand Curve :
Kinked Demand curve serves as an operational tool
for determination of equilibrium in oligopolist
market. the concept behind kinked DD curve is
that since oligopolists recognise mutual
interdependence but act without collusion, where a
1)Raises its price, other ﬁrms do not follow and do
not raise their prices and ﬁrm moves according to
its expected DD curve.
2)Lowes its price, other ﬁrms will follow and lower
their prices as well. Hence the ﬁrm moves along
actual DD curve and not expected DD curve.
• At a price higher than P; ﬁrm sells according to its
expected DD curve 'd' as no ﬁrms follow to raise price.
• At a price lower than P, ﬁrm sells according to actual
DD curve 'D' as other ﬁrms will also lower their prices.
• The highlighted upper portion of 'd' and lower
portion of 'D' show Kinked DD curve for an oligopoly
32. Pricing Strategies
● A business can use a variety of pricing strategies when selling a product or
service. To determine the most eﬀective pricing strategy for a company,
senior executives need to ﬁrst identify the company's pricing position,
pricing segment, pricing capability and their competitive pricing reaction
● Pricing strategies refer to the processes and methodologies businesses use
to set prices for their products and services.
● If pricing is how much you charge for your products, then product pricing
strategy is how you determine what that amount should be.
33. ● There are diﬀerent pricing strategies to choose from but some of the more
common ones include:
1. Value Based Pricing
2. Competitive Pricing
3. Price Skimming
4. Penetration Pricing
5. Economy Pricing
6. Dynamic Pricing
7. Bundle Pricing
8. Premium Pricing
9. Cost plus pricing strategy
34. Value Based Pricing
● In this model, a company bases its
pricing on how much the customer
believes the product is worth.
● How do you know what a customer
perceives a product to be worth? It’s
hard to get an exact price, but you
can use certain marketing
techniques to understand the
● Ask for customer feedback during
the product development phase, or
host a focus group. Investing in your
brand can also help you add
“perceived value” to your product.
35. Competitive Pricing
● When you use a competitive
pricing strategy, you're setting
your prices based on what the
competition is charging. This
can be a good strategy in the
right circumstances, such as
a business just starting out, but
it doesn't leave a lot of room
36. Price Skimming
● Skimming involves setting high prices
when a product is introduced and then
gradually lowering the price as more
competitors enter the market.
● This type of pricing is ideal for
businesses that are entering emerging
● It gives companies the opportunity to
capitalize on early adopters and then
undercut future competitors as they
join an already-developed market.
● A successful skimming strategy hinges
largely on the market you’re looking to
37. Penetration Pricing
● Pricing for market penetration is
essentially the opposite of price
skimming. Instead of starting high
and slowly lowering prices, you
take over a market by undercutting
● Once you develop a reliable
customer base, you raise prices.
● Many factors go into deciding on
this strategy, like your business’s
ability to potentially take losses
upfront to establish a strong
footing in a market.
38. Economy Pricing Strategy
● An economy pricing strategy involves targeting customers who want to save as
much money as possible on whatever good or service they’re purchasing.
● Big box stores, like Walmart and Costco, are prime examples of economy pricing
● Like premium pricing, adopting an economy pricing model depends on your
overhead costs and the overall value of your product.
39. Dynamic Pricing Strategy
● Dynamic pricing allows you to change
the price of your items based on the
market demand at any given moment.
● Uber’s surge pricing is a great example
of dynamic pricing.
● During low periods, Ubers can be
quite an aﬀordable option.
● But, when a rainstorm hits during the
morning rush hour, the price of an
Uber will skyrocket, given that
demand is also likely to rise.
● Smaller merchants can do this too,
depending on seasonal demand for
your product or service.
40. Bundle Pricing Strategy
● When companies pair several products
together and sell them for less money
than each would be individually, it’s
known as bundle pricing.
● Bundle pricing is a good way to move a
lot of inventory quickly.
● A successful bundle pricing strategy
involves proﬁts on low-value items
outweighing losses on high-value items
included in a bundle.
41. Premium Pricing Strategy
● Premium pricing is for businesses that
create high-quality products and
market them to high-income
● The key with this pricing strategy is
developing a product that is high
quality and that customers will
consider to be high value.
● You’ll likely need to develop a “luxury”
or “lifestyle” branding strategy to
appeal to the right type of consumer.
42. Cost Plus Pricing Strategy
● This is one of the simplest pricing
strategies. You just take the product
production cost and add a certain
percentage to it. While simple, it is
less than ideal for anything but
43. Reliance Jio: Marching Toward Monopoly
The case is about the growing dominance of Indian telecommunications company
Reliance Jio Infocomm Limited (Jio) in the Indian telecom sector. Jio entered the
Indian market in 2016 with a host of freebies, including unlimited calling and data
plans. Its entry revolutionized the telecommunication sector across the country. Its
aggressive and innovative tariﬀ plans helped Jio become the fourth-largest telecom
provider in India within six months of its launch. Even after the freebie period ended
on March 31, 2017,
Jio continued to oﬀer the cheapest data plans as compared to its rivals. This helped it
maintain its competitive edge in the market. Joi’s dominance continued, and it soon
surpassed other major players in the market
44. the Supreme Court of India gave a ruling directing Airtel and
Vodafone Idea to pay dues amounting to Rs. 410 billion and Rs.400
billion respectively toward licensing fees and spectrum charges. Given
the ﬁnancial condition of these companies, they would ﬁnd it diﬃcult
to pay the dues. These companies were desperately looking to the
government for some relief measures that would enable them to stay
on in the market.
The competitors’ problems gave Jio ample time to execute its plans
and consolidate its position at their cost. Jio’s cheap pricing seemed
attractive in the short run, but given the ﬁrm’s investment in network
coverage, quality, and technology, it was doubtful whether it could
continue to oﬀer low prices in the long run..
Jio’s continuous strong run changed the dynamics of the Indian
telecom industry, with experts opining that it would soon monopolize
India’s telecom sector.