UNIT-4 INTRODUCTION TO MARKETS AND PRICING POLICIES

Market is defined as an area over which buyers and sellers negotiate their exchange of a well defined product or service On the other hand, it is a physical location by which buyers and sellers can meet each other which buyers and firms of exchange of goods or services

SIZE OF THE MARKET:The size of the market depends on many factors such as nature of products, nature of their demand tastes and preferences of the customers. Their income level, state of technology, extent of infrastructure, including Telecommunication and information technology.

MARKET STRUCTURE:Market Structure refers to the characteristics of a market that influence the behavior and performance of firms that sell in the market. The structure of market is based on the following features: The degree of seller concentrations. The degree of buyers concentrations The degree of product differentiations. The conditions of entry into the market.

TYPES OF CONCENTRATIONS:Basically it depends on degree of competition. It is divided into a) Perfect competition based on perfect market where all conditions are fulfilled b) Imperfect competition based on imperfect market in todays market conditions.

a)PERFECT COMPITITION:- A market structure in which all firms in one industry are price
factors and which there is freedom to entry into and exit from the industry A perfect competition is characterized by Large number of buyers and sellers. Homogeneous products or services. Both the sellers and buyers are highly informed about the market prices and market conditions. Perfect mobility of factors of production. Each firm is a price taker.

In case perfect competition, average price, marginal price and price are equal. AR =MR=price It is because of the price prevailing at a given time. Total revenue (TR) = price per unit (P) No. of units produced and sold (Q). Thus TR = PQ

Average revenue is the revenue earned for unit scales. In other words, average revenue (AR) = total revenue (TR)/ No. of units produced and sold (Q) Thus AR =TR/ Q AR = (PQ)/Q AR=P Marginal revenue (MR) refers to the change in revenue by producing and selling one more unit. But TR = (PQ) / Q

b)IMPERFECT COMPITITION:Imperfect competition is said to exist when there is no perfect competition. There are different Variations or versions of imperfect competition. Based on the number of sellers, the imperfect markets are categorized as (i) (ii) (iii) (iv) Monopoly Monopolistic competition Diopoly Oligopoly

Based on number of buyers, the imperfect markets can be classified as (i) (ii) (iii) Monopsony Diopsony Oligopsony

(i)MONOPOLY: - Here a single seller completely controls the entire industry. E.g.: Marti Suzuki.

(ii) MONOPOLISTIC COMPITITION: - when large number of sellers produces

differentiated products, monopolistic competition is said to exist. A product is said to be differentiated when its important features vary. It may be differentiated based on real or perceived differences.

Ex: different features in camera like yashica, kodak,canon etc., (iii)DIOPOLY: - If there are two sellers, diopoly is said to exist. Ex: mahanagar telephone nigam limited (MTNL)
Videsh sanchar nigam limited (VSNL)

(iv)OLIGOPSONY: - If there is competition among few sellers, oligopsony is said to exist Ex: Times of India, Hindu, Deccan chronicles etc., (i) MONOPSONY: - If there is only one buyer, monopsony market is said to be exist. Ex: FCI (ii) DIOPSONY: - If there are two buyers. (iii)OLIGOPSONY: - If there are few buyers oligopsony is said to be exist. Ex: computer firms like company HP, HCL, LENOVA etc., are purchased some articles from
Microsoft.

PRICE OUTPUT DETERMINATION IN CASE OF PERFECT COMPETITION:Price is the deterministic factor in perfect condition where industry price and selling price are accountable. Hence it can be determined by both short run and long run.

DEMAND CURVE:-

The price and output is a relation between the demand and supply of industries product. The firms demand curve is horizontal at the price determined in the industry (MR=AR=PRICE). It is because of all the units sold at the same price. So firms revenue is equal to price. From the above figure, when AR=MR or average revenue =marginal cost which is horizontal to firms cost, then MR and AR cross each other at point D. This point shows the price of entire sells. Again from the figure OC=QD price of selling OF =QE average cost OQ=FE equilibrium output Therefore profit=OC-OF and QD-DE Or profit =price-average cost Therefore DE is the average profit and the

angular CDEF is the total profit.

SUPPLY CURVE:-

From the above figure in point E, it is called as the point of equilibrium where MR=MC. In this diagram if the price is P, or more, then the firm willing to sell. If the price is less than P1 the firm refuses to sell as the price is less than the average variable cost. The firms supply curve is that position of the marginal cost curve which begins from point F.

LONG RUN:-

In the long run the firm will be in a position to enjoy only normal profit but not any supernormal profits. Normal profits are the profits that are just sufficient for the firm for its survival, because it is due to average cost. In the above fig it is showing the long run equilibrium position of the firm under perfect competition. Here it must be fulfilled with the condition of ME=MC and AR=AC and AC must be tangential to AR at its lowest point. QE is the price and also the long run average cost curve (LAC) at point E, while passing through the marginal revenue curve. Here E is the equilibrium point and produces OC output. We can confine that the profit is normal in case o long run. MONOPOLY: I is an imperfect competition. It refers to a situation where a single firm is in a position to control either supply or price of a particular product or services. It cannot control or determine both price and supply as it cannot control demand. It should be concentrate in quality and price of a particular product as required. Monopoly exists where there are certain restrictions on the entry of other firms into business or where there are no close substitute for a given product as services. Monopoly can be interpreted on two ways. When there is a sole supplier-pure monopoly. EX:- RBI Another a firm has more number of shares, remaining shareholders are small firm. Then it can be controlled by big firm.

FEATURES OF MONOPOLY:1. 2. There is a single firm dealing in a particular product or service. There is no close substitutes and no competitors.

EX:- Indian railways s other transporters. 3. The monopolistic can divide either the price or quality, not both. 4. And services provided by the monopolistic bear inelastic demand. 5. The monopoly can be created through statutory provisions like licenses, permits, patent rights and so on.

In monopoly always AR average revenue is higher than MR marginal revenue. It is always MR<AR.

Causes of Monopoly:Monopoly is not basically describe as a) It may feed to inefficient allocation of resources. b) Of levels to exploitation of consumers c) Of may enlarge the gap between the rich and poor. d) It does not provide a check against unfair trade practices. e) The monopolistic may prefer the restrict output to maintain a given price. f) It may restrict the scope of research and development.

PRICE-OUTPUT DETERMINATION IN MONOPOLY:-

In monopoly AR curve is always downward sloping. The MR is less then the AR. Because monopolistic realness the price for giving more profit. So it is the demand increases and price verses. In monopoly the marginal revenue is less than the average revenue. In otherworlds, the MR is lies bellows AC. The seller has continued its sell as long as maximize his profit. To achieve maximum profit it is necessary that the marginal revenue should be more than the marginal cost. From the above figure at point f, where MR=MC, profits will be maximized. Profits will be diminished if the production is below this profit. From this curve demand curve are average revenue curve is AR, marginal curve revenue is MR, AVERAGE COST ac, marginal cost MC. OQ is the equilibrium output, OA is the equilibrium output, OA is equilibrium price, QC is the average cost and BC is the average profit. Up to OQ output, MR is greater than MC and beyond OQ, MR is less than MC. Therefore the monopolistic will be in equilibrium at output OQ where MR=MC and profits are maximum. OA is the corresponding price to the output level of OQ. The rectangular position ABCD is the profits earned in equilibrium in short run.

MONOPOLISTIC COMPETITION:Monopolistic competition is said to exist where there are many sellers and there is a freedom of entry, but in which each firm sells a product same what differentiated from that of other firms, giving it some control over its price. Monopolistic competition is said to be exist when there are many firms and each one produce such goods and services that are close substitute to each other. They are similar but not identical.

FEEATURES:1. 2. 3. 4. 5. Freedom of entry and exist. Products can be differentiated through quality and quantity. Products can be highlighted by means of any promotion mix. It is providing better and unique facilities to the customer. Competitions are very natural and identical.

PRICE OUTPUT RELATION IN MONOPOLISTIC COMPETITION:Every firm want to maximize its profit by all conditions so they want to stay with equilibrium position (MC=MR). The demand curve for the firm in case of monopolistic competition is just similar to that of monopolistic. As the products are differentiated by the quality and quantity, the demand curve has a downward slope. So it is a limited control over price.

SHORT RUN:-In short run the firm can enjoy the supernormal or normal profits or even losses
for the firm has to concentrate on 1. MC=MR 2. AR<AC From the above fig the demand curve is downward slopping because of product differentiation of the point C. The marginal cost (MC) is equal to marginal revenue (MR) extended to B. On the average revenue (AR) and point Q on X-axis. EQ is the equilibrium output QA=QB=Equilibrium price and QC is the average cost. *Average profit = Average Revenue - Average Cost* BC is the Average profit OR Total Profit = Profit x Quantity Demand The area ABCD is supernormal profit.

Long Run:In the long run every firm in the monopolistic competitive industry will earn only normal profit which is just sufficient to stay in the business. It is to be noted that normal profit are part of average costs. In long run in order to achieve equilibrium position. The firm has to fulfill the following conditions 1) MR = MC 2) AR =AC at the equilibrium level of output.

Thus the firm has to fulfill dual equilibrium. But when compared to long run equilibrium position of a perfectly competitive firm even though AR = AC, AC will not be at its minimum point at equilibrium level of output. Also MR is not equal to either AR or AC; MR is will Below AR in case of monopolistic competitive firm.

Primary Strategies:It is strategy of a companys internal and external business decision. This decision can undertake by method of market price competition and offerings with respect to elements and supply. There are certain objectives of primary strategies as follows: To maximize the profit To increase sales To increase the market shares To satisfy customer To meet the competition

Primary Methods:1. Cost based primary 2. Competition - Oriented primary 3. Demand - Oriented primary 4. Strategy based primary 1) Cost Based Primary
Cost based primary of two types a) Cost plus primary where a profit margin (measured as percentage of cost or selling price) is added to the total cost or full east to arrive at the selling price b) Marginal cost primary- Here selling price is fixed in such a may that it covers fully the variable or marginal cost and contributes towards recovery of fixed costs fully or partly depending upon the market situation.

2) Competition Oriented Primary:a) Sealed bid primary where the buyers quote their price in a sealed cover. Wherever quotes lower will be considered as the buyer b) Going rate primary refer to primary the products and service as per the rate preventing in the market.

3) Demand Based Primary:a) Differential primary refers to where the seller has the ability to offer the product and service at different prices to the customers of different profit this is also called price discrimination. b) Perceived value primary refers to where the price is fixed on the bases of the perception of the buyer of the value of the product.

4) Strategies -Based Primary:a) Skimming pricing refers to the proactive where the products are offered at the highest possible price, Which only the creamy layer of the customers can afford . Once the demand from that segment starts fading then the price will be slowly reduced to Lake Product available to his next segment of the creamy layer. This method is more prevalent in primary new product and services. b) Penetration primary where the products are priced so low to start with perhaps to familiar. The product and as the market picks up, the price is slowly raised. C) Blocking primary where certain number of units of the products is offered as a package with a special price in such a way that there is consumer surplus.

Primary Strategy With Competitions:There are certain primary strategies which are helpful in the times of stiff price competition. They are Price Matching StrategyLower the with respect to competition Promotion Of Brand Loyalty Increase the advertisement cost by creating brand awareness. Times To Time Primary:It is refers to the market demand Target Pricing:It is concerned to target of individual product with market competition

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