Download
1 / 37
E N D
Market • In general, the word ‘market’ refers to a place or an area where buyers and sellers generally meet to buy and sell a particular commodity. • In Economics, we make use of the term ‘market’ in a different sense. It refers to a particular commodity that is sold and purchased rather than a place or an area. • For example, cotton market, tea market etc. • The essentials of a market are the following: 1. The market does not confine to a particular place but the whole area wherein buyers and sellers of a commodity are spread over; 2. There must be buyers and sellers, so a physical presence is unnecessary. In modern days, we sell goods through websites or electronic shopping markets or telephonic media; 3. There must be a commodity that is bought and sold; and 4. There should be free interaction between buyers and sellers so that only one price is agreed upon for the commodity.
Here, we are going to learn the classification of the market based on competition criteria. Markets are classified based on competition among buyers and sellers. • Perfect Competition: It is a wider concept than pure competition. There are a large number of buyers and sellers having full knowledge of markets. Either buyers or sellers have no control over the price of a commodity. The price of a commodity is the same all over. There are no transport costs. Factors of production are perfectly mobile. There is free entry for firms. Any firm can leave the industry, or any firm can enter the industry. Such perfect markets are rarely found in real life. Therefore, it is said that perfect competition is a myth. • Monopoly: It refers to a market with only one producer or seller for a commodity. Therefore, he has full control over supply and price. • Monopsony: When there are large numbers of producers or sellers but there is only one buyer, it is monopsony. A single buyer becomes extra powerful to control the prices. • Duopoly: In this market, there are two sellers facing a large number of buyers, producing homogeneous or differentiated products. • Oligopoly: It is a market form where a few firms control the supply. Each firm will be producing a substantial proportion of output in the industry. They produce goods, which may be close substitutes.
Perfect Competition • Perfect competition is a market structure characterised by a complete absence of rivalry among individual firms. Thus perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. • In practice, businessmen use the word competition as synonymous with rivalry. In theory, perfect competition implies no rivalry among firms. • A market is said to be perfect when there are many buyers and sellers of the product, and there is a complete absence of rivalry among the firms. The firms sell homogeneous products.
Characteristics of perfect competition • Many buyers and sellers • Homogeneous (identical) products • Free entry and exit • Perfect information • Perfect mobility of resources • No government intervention • Firms are price takers • Profit maximization objective
MONOPOLY • The word ‘Monopoly’ has been derived from the two Greek words, ‘Monos’ which means single, and ‘polus’ which means a seller. • Monopoly is a market situation where there is single seller of a product and he has full control over the supply of that commodity. • He produces such a product which has no close substitutes.
Monopoly market has the following features • There is a single seller of the product. • There are no close substitutes of the commodity produced by monopoly seller. • There is restriction on entry or exit of other firms. • There is no distinction between a firm and an industry under monopoly. • Seller is a price maker. • A monopoly firm earns abnormal profits both in short and long run. • Selling costs are negligible. • A monopolist is capable of following price discrimination, which means it can charge • Different prices for its products from different buyers.
What causes of monopoly? • Monopoly can be the result of exclusive ownership of important raw materials or knowledge of production techniques. • Patent rights acquired by a firm for its product. • Foreign trade barriers imposed by the government, which prevents any foreign company to enter the industry. • A price policy adopted by the existing firms which prevents new firms to enter.
Monopolistic Competition • In a monopolistic competitive market the number of sellers is large but each seller has a product differentiated from those of his rivals. • What one firm produces is not quite like what any other firm produces. In fact, each firm has a kind of limited monopoly of its own product and hence the name “monopolistic competition”.
Features of the monopolistic competitive market • Large number of firms: The number of firms which constitutes an industry is fairly large. • Product Differentiation: Under monopolistic competition each firm produces a differentiated product. The form or the quality of a product can be differentiated by using different kinds of raw materials, through workmanship, colour, packing, design, durability, etc. For example, different firms produce soft drinks like coca cola, limca, sprite, thums up etc. Though the ingredients are same, products carry a different brand name. • Free Entry and Exit: Firms under monopolistic competition are free to enter and leave the industry at any time. • Individual Pricing by a Firm: In this type of market, every individual producer has his own independent price policy.
5. Selling Costs: Every firm tries to promote its sales through expenditure on advertisement and on other promotional activities such as sales men’s incentives, gifts etc. 6. Under monopolistic competition, both price and non-price competition prevails.
Oligopoly • Oligopoly is a market structure where there are only a few producers/sellers of a commodity (but more than two producers) competing with one another. • “Few” means enough number of firms that can keep watch on the actions of rivals and behave accordingly. • A firm cannot take independent action without thinking of in what way its opponent firms will react. • Precisely, few may mean three or four or twenty or thirty firms, including some major players while others small producers. • Automobile companies making two-wheelers (Bajaj, Hero Honda, Kinetic, Yamaha etc) or four- • wheelers (Ambassadar, Maruti, Tata, Mahindra & Mahindra etc); TV manufacturers (BPL,Videocon, Onida, LG, Samsung, Sony etc) etc are the examples of oligopoly.
Oligopoly is of two kinds: Pure Oligopoly • It is a market where the products are homogenous. • There is mutual interdependence between firms. Any change in price by one firm has a substantial effect on the sales of other and cause them to change their price. • Examples of pure oligopoly are found in such industries as cement, coal, gas, steel, etc. Differentiated Oligopoly • Under differentiated oligopoly, products are close substitutes for each other. • Price change by one firm has less direct effect upon rival firms. • Examples of differentiated oligopoly are refrigerators, television sets, air-conditioners, automobiles, scooters, motorbikes, instant coffee, etc.
Characteristics of Oligopoly • Interdependence: • There is complete interdependence among sellers in this market. Since, there are few firms producing a considerable fraction of the total output of the industry, so the actions taken by one seller affect the others. • By reducing or increasing the price for the whole oligopolist market, one seller can sell more or less quantity and can affect the profits of the other sellers. • This also implied that in this type of market, each seller is conscious of the price moves of the other sellers and is aware of its impact on his profit. • In addition to this he also knows the action of rivals due to the influence of his price moves. Thus, there is full interdependent among the sellers in this market with respect to their price output policies/ decisions.
2. Advertisement: • Due to the interdependence of sellers in this market, it becomes very important of each individual seller to highlight his product and tell the consumers about the different features of his product. • Thus, it becomes necessary for the firms in an oligopolistic market to spend much on advertisements and customer services, so that he can attract more market for his product and can give a tough competition to his rivals. 3. Competitions: • Since under oligopoly, there are a few sellers, thus a move by one seller immediately affects the rivals and is followed by their counter moves. Thus we can say that there exists a tough competition among all the sellers in an oligopolistic market.
4. Barriers to entry of firms: • Due to the intense competition in an oligopolistic market, there are no barriers to entry into the market or exit from it. However, in the long run, the types of barriers to entry which have a tendency to restrain new firms from entering into the industry are economies of scale, high capital requirement, exclusive patents and licenses etc. • Thus, when entry is restricted/ blocked by such natural and artificial barriers, the oligopolist industry can earn long run super natural profits. 5. Lack of uniformity: • There exists lack of uniformity in the size of oligopolist firms. • It can be small or very large, such situation is also known as asymmetrical with firms of a uniform size is rare.
6. Demand curve: • It is not easy to sketch the demand curve for the product of an oligopolist seller because unless the exact behavior pattern of a producer can be curtained with certainty, his demand curve cannot be drawn accurately with definiteness. • And since an oligopolist seller do not show a unique pricing pattern/behavior, therefore, it is difficult to trace the demand curve for an oligopolist seller. • However, some of the economists have sketched the demand curves based on certain assumptions, which are explained in the following sections.
7. No unique pattern of pricing behavior: • Oligopolists are interdependent, creating rivalry among sellers. • Each seller wants independence and aims for maximum profit. • Uncertainty about competitors’ price and output decisions leads firms to consider cooperation. • To reduce uncertainty, firms may form formal agreements on price and output. • Such agreements can create a monopoly-like situation within an oligopoly. • Sometimes one firm becomes the price leader, and others follow its pricing decisions. • Because of these conflicting behaviors, predicting a single pricing pattern in oligopoly markets is difficult.
Price determination under oligopoly can be done under two models • Non collusive oligopoly model of Sweezy (the kinked demand curve). • The collusive oligopoly models related to cartel and price leadership.
1. Non collusive oligopoly model of Sweezy (the kinked demand curve). • In 1939, Sweezy introduced the kinked demand curve to explain price rigidity in oligopoly. • If a firm lowers its price, rivals also lower their prices to avoid losing customers. • Because rivals match price cuts, the firm’s demand becomes relatively inelastic in this range. • If a firm raises its price, rivals do not follow, causing the firm to lose many customers. • This makes the demand curve relatively elastic when the firm raises its price. • The demand curve therefore develops a kink at the current market price. • The kink creates a discontinuous (gap) marginal revenue curve. • Marginal cost can change within this gap without affecting the equilibrium price and quantity. • As a result, prices tend to be rigid (sticky) in oligopolistic markets.
Assumptions • There are a few firms in oligopolistc market. • Products of one firm are close substitute for other firms. • No product differentiation. • No advertising expenditures. • Each sellers’ attitude depends on the attitude of his rivals. • All the sellers are satisfied at the prevailing market price of the product. • A reduction in the price by any seller (to increase his sales) will be followed by the other rivals in terms of reducing their prices as well. • An increase in the price of one seller will not be followed by the other sellers and they will not increase their prices. • The marginal cost curve will pass through the dotted portion of the marginal • revenue curve so that even if the marginal costs would change due to any reason, it will not affect the output and price.
2. Collusive Oligopoly Model • In collusive oligopoly, all firms of a particular industry join together as a single entity in order to maximize their joint profits or to share the market in a certain amount. • This is also known as cartel. There is one more type of collusion which is known as leadership, under which one firm acts as the price leader (or dominant firm) and fixes the price for the product while other firms follow it.
Pricing Methods • Pricing refers to the process of determining the amount of money a firm should charge for its product or service. • Pricing decisions directly affect sales, profits, and market share. • The commonly used pricing methods are: 1. Cost-Based Pricing 2. Demand-Based Pricing 3. Competition-Based Pricing.
1. Cost-Based Pricing Method Cost-based pricing sets the price of a product by adding a desired profit margin to the total cost of production. Types of Cost-Based Pricing • Cost-Plus (Mark-Up) Pricing: A fixed percentage is added to the cost of production. • Full Cost Pricing: Both fixed and variable costs are considered while fixing the price. • Target Return Pricing: Price is set to achieve a specific rate of return on investment.
Advantages of Cost-Based Pricing 1. Easy to understand and implement 2. Guarantees cost recovery 3. Reduces pricing uncertainty 4. Useful when demand is stable • Limitations of Cost-Based Pricing 1. Ignores consumer demand and preferences. 2. Does not consider competitors’ prices. 3. Inefficient cost control may raise prices. 4. May result in uncompetitive pricing.
2. Demand-Based Pricing Method • Demand-based pricing focuses on customers rather than costs. • Under this method, prices are fixed according to the level of demand, customers’ willingness to pay, and perceived value of the product. Types of Demand-Based Pricing • Skimming Pricing: A high price is charged initially to skim maximum profit from customers willing to pay more. Prices are gradually reduced over time. Example: New and innovative products, Technology and electronics.
Advantages: • High initial profits • Quick recovery of investment Limitations: • Attracts competitors • Limited market coverage initially
2. Penetration Pricing: A low price is charged initially to attract a large number of customers and gain market share quickly. Advantages: • Rapid market penetration • Discourages competitors Limitations: • Low initial profits • Risk of being perceived as low quality
3. Perceived Value Pricing: Price is determined by how customers perceive the value of the product, rather than its cost. Example, Luxury brands charge premium prices due to brand image and status. • Advantages of Demand-Based Pricing 1. Customer-oriented approach 2. Helps maximize revenue and profit 3. Flexible and market-responsive • Limitations of Demand-Based Pricing 1. Difficult to measure demand accurately 2. Requires extensive market research 3. Risky in unstable markets
3. Competition-Based Pricing Method Competition-based pricing sets prices by considering competitors’ prices rather than internal costs or demand conditions. Types of Competition-Based Pricing • Going-Rate Pricing: Price is fixed at the prevailing market price. Example, Cement, steel, petroleum products. • Leader Pricing: Prices are set by following the market leader. • Competitive Bidding: Prices are determined through tenders and bids.
Advantages of Competition-Based Pricing 1. Simple and practical 2. Suitable for highly competitive markets 3. Reduces pricing risks • Limitations of Competition-Based Pricing 1. Ignores cost structure 2. Profit margins may shrink 3. Lack of product differentiation
