price economics

1. Price
Managerial Economics
Group 6 - Neha,Shruti,Aman,Sonali

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.

3. Perfect
competition
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
an individual.

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,
subsidies, etc.

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
equilibrium price.

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
run

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
(ii)Homogeneous Product:
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
product.
The firm is simply a price taker, not a price maker.

10. II DEMAND CURVE OF THE FIRM IS
PERFECTlY ELASTIC
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
competition.
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.
Case Il
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.

13. Monopoly
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
bulk carrier)

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
entire industry.
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
commodities.
● 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.

18. Monopolistic
Competition
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
what different
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
legally patented.

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.
example;
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
monopolistic competition

24. OLIGOPOLY:
It is a form or market where there are few big
sellers of a commodity and large number of
buyers.
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
under oligopoly
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
group.

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
firm.
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
particular firm:-
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
list firm.

31. Summary

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
strategy.
● 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
customer’s perspective.
● 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
for growth.

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
markets.
● 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
enter.

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
your competitors.
● 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
models.
● 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
individuals.
● 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
physical products.

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.