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8/7/2019 Pricing and Output Decisions (2)
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PRICING AND OUTPUT
DECISIONS
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Determinants of Price
There are five basic determinants of
the price of a commodity-
the demand for itits cost of production
objective of its producers
nature of the competition in its marketgovernment policy pertaining to it
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What is Market Structure?
Market structure is the competitive
environment.
Number of buyers and sellers.
Potential entrants.Barriers to entry and exit, etc. .
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MARKETS
Perfect Competition
Imperfect Competition
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IMPERFECT
COMPETITION
MONOPOLYMONOPOLISTIC
COMPETITIONOLIGOPOLY
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PERFECT COMPETITION
CHARACTERISTICS
Large number of buyers and sellers
Homogeneous product
Free entry and exitPerfect knowledge
No discrimination
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Under such a market, no single buyer
or seller plays a significant role in
price determination.
All of them jointly determine the
price.
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MONOPOLY
(Characteristics)
Single seller
No close substitutes
Price makerEntry barriers
Price cum output determination
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Monopolistic Competition
Monopolistic Competition
Characteristics
Many buyers and sellers.Product heterogeneity.
Free entry and exit.
Perfect information.Opportunity for normal profits in long-
run equilibrium.
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Oligopoly
Oligopoly Market CharacteristicsFew sellers.
Homogenous or unique products.
Blockaded entry and exit.Imperfect dissemination of information.
Opportunity for above-normal (economic)profits in long-run equilibrium.
Examples of OligopolyNational markets for aluminum, cigarettes,electrical equipment, filmed entertainment,ready-to-eat cereals, etc.
Local retail markets for gasoline, food,
specialized services, etc.
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Product Differentiation
Product differentiation is a process by
which a product being sold or
manufactured by a seller/ firm has
some special features.
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Types of Product differentiation
Real Product differentiation
Imaginary Product differentiation
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Real Product differentiation is a
process in which some real changes
are made in a product, so that it can
be made different from the other
products.
Imaginary Product differentiation is aprocess in which there is no real
change in a product, but only the
presentation of the product isdifferent.
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Price discrimination under
Monopoly
Price discrimination is a situation
where a seller charges different prices
from different customers for the same
product.
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Price discrimination is possible when
the following conditions prevail-
Monopoly market
Elasticity of demand is different in the
two markets
The commodity or service being sold
is not transferable between persons
and markets
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Regulation of Monopoly
Removing barriers to entry
Price control
Taxation of Monopolist Nationalisation
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Models of Oligopolistic Market
Paul Sweezys kinked demand curve
theory
According to this theory a firmsdemand curve under oligopoly is
downward sloping from left to right but
it is kinked (it is neither a straight line
nor a curved one)
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The reason for this unique type of
demand curve is the assumptionabout the other firms behaviour.
As a result, his products become
relatively expensive and demand for
his products decreases substantially.
The best option for the firm is to stick
to the present price.
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Cournot Model
Augestine Cournot a French economist &
engineer had developed this model of
duopoly behaviour. In this model he had
assumed- That the cost of production was almost nil
for both the sellers and
Each seller had assumed that the rival
seller will keep his output unchanged on
account of any change of output by him.
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Cartels and Collusion- Agreements
Cartel- Firms operating with a formal
agreement to fix prices and output.
Collusion- A covert, informalagreement among firms in an industry
to fix prices and output levels.
All firms in an Oligopoly market could
benefit if they formally or informally
got together and set prices to
maximize industry profits.
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Price Leadership Model
Price Leadership exists in an
oligopoly market when there is one
strong dominant firm and others are
small firms.
In such a situation the dominant firm
decides the price of the product & the
other small firms follow the price.
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Game Theory
Game theory is a theory for the studyof rational behaviour by individuals &
firms for interactive decision problems.
Game theory is attributed to JamesVon Neumann and Oskar Morgenstern
who published the book Theory of
Games and Economic Behaviour in1944.
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Game theory concepts have wide
application in the study of imperfectcompetition.
In competitive games, the outcome
for each firm depends upon the
strategies conducted by all
competitors.
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Terms used in Game theory
Game
StrategyPayoff
Equilibrium (saddle point)