Professional Documents
Culture Documents
The objective
Learn
How
Pricing
strategies
The Coverage
Price and output determination in
2. Sellers
4. Price
Market classification
By the area
By the nature of transaction
By the volume of business
By the nature of competition
Number of
Firms
Nature of Product
Price
elasticity of
demand for
Degree of
control
a) Perfect
competition
A large no.
of firms
Homogeneous Product
Infinite
None
b) Imperfect
competition
A large no.
of firms
Differentiated products
(but) they are close
substitutes of each other
Large
Some
i) Monopolistic
competition
A large no.
of firms
Product differentiation by
each firm
Large
Some
ii) Pure
oligopoly
Few firms
Homogeneous Product
Small
Some
iii)
Differentiated
oligopoly
Few firms
Differentiated products
Small
Some
c) Monopoly
One
Very Small
Considerable
Perfect competition
Infinite buyers
and sellers
Perfect
knowledge and
information
Identical
products
No barriers on
entry or exit
Maximum profits
or minimum
losses
No transportation
cost
All are price
takers
Types of firms
Efficient (least cost) and profit
making firms
Efficient but breaking even firms
Inefficient but operating firms
Inefficient and closing down firms
Monopoly
One seller
Barriers on entry
No substitutes
Market power
Through elasticity of demand
Learner (Abba) index = P MC/P or
MR = P(1+1/E)
Learner index = -1/E
Cross price elasticity of demand
Monopolistic competition
Many alternative suppliers
Differentiated product
Easy entry
(e.g.
cosmetics,
medicines, grocers,
restaurants)
detergents,
barbershops,
Oligopoly
Few interdependent sellers
Standardized
or
differentiated
oligopoly
Restricted entry
(e.g.
steel,
aluminum,
fertilizes, petrol and cars).
cement,
Oligopoly in different
forms
Kinked demand curve
Collusive oligopoly
Price leadership
Joint profit maximizing cartel
Market sharing cartel
Dominant firm
Price leadership
Joint profit maximizing cartel
Market sharing cartel
OPEC
OPEC is a joint profit maximizing
cartel
Saudi Arabia is a dominant
producer and price leader within
the cartel
OPEC
Initially OPEC was increasingly in conflict
OPEC
As long as demand is price inelastic this
OPEC
Other cartels
During mid-1970s International Bauxite
Association (IBA) quadrupled bauxite
prices
A secretive international uranium cartel
pushed up uranium prices
From 1928-1970s Mercurio Europe kept
the prices of mercury close to monopoly
levels
A cartel monopolized the iodine market
from 1878-1939
Tin, coffee, tea and cocoa cartels failed
Pricing decisions
How do we set prices relative to costs?
How do we change them?
To what extent should we try to
protect our market?
Strategy to lead to the highest profit
rate.
Lowering prices in response to
potential competition.
from
Price discrimination
Meaning
Changing different prices for the same
product
Charging same price for different
products when costs differ.
Possibility of differences in
financial status
educational status
age of the customer
time of purchase
practice
of
posting
schedule
of
declining
different
ranges
of
discrete
prices
for
quantities.
Information
regarding
demand
Separate markets
elasticity
of
Price discrimination
Essential conditions
Separate markets
7
5
DX
MRX
MRX
DX
MRT
3000 Q
0
2000
1000
Q 0
Q
a) Market X
b) Market Y
c) Total (market X+Y)
Profit-maximizing output under third-degree price discrimination
Block pricing
All or none decision
Block pricing provides a means by
which the firm can get one consumer
to pay the full value of the blocked
units.
Consumers decision - buying all
units (blocked) or buying nothing.
(hiring a bus, a pack of three soaps)
Commodity Bundling
Bundling two or more different products and selling
them at a single bundle price.
Example - travel companies package deal,
computer, monitor, software deal
Consumer Valuation of
computer
1
20,000/-
Valuation of
monitor
2,000/-
Total
22,000/-
15,000/-
3,000/-
18,000/-
Total
35,000/-
5,000/-
40,000/-
Peak-load pricing
Objective- to reduce costs and increase
profits if
the same facilities are used to provide a
product or service at different periods
of time.
the product or service is not storable.
demand characteristics vary from
period to period.
The theory of peak-load pricing suggests
that peak-period users should pay most
capacity costs while off-peak user may
be required to pay only variable costs.
tariff
CEGB uses less efficient power stations during
peak load hours MC
Capacity Charges to directly recoup costs of
building plants and electricity charges on the
basis of KWh used. In addition energy charges
to cover short run MC of extra plants
1986-87 - Complex structure of energy charges
1.4 pence/KWh at night during weekends
3.8 pence/KWh at breakfast time on week days
Further surcharge of 2.5 pence/KWh (hourly)
during heaviest demand.
TIME
PERIOD
8 AM - 1 PM
1 PM - 5 PM
5 PM - 1 AM
1 AM - 8 AM
8 AM - 5 PM
5 PM - 8 AM
COST PER
MIN.(Rs.)
3
6
1
0.2
1
0.2
Case
Peak load pricing of Computer time
CPU
Usage
After pricing
Before pricing
Time of Day
Midnight
6 AM
Noon
6 PM
Midnight
Cross subsidies
A strategy which uses profits made with one
product to subsidize sales of another
product
Relevant in situations where a firm has cost
complementarities and demand for a
product independence
Economies of scope - saving in producing
jointly or using excess capacity to produce
another products
Example - computer & software
Advantage
It permits the firm to sell multiple
products.
If the two products have
independent demands, the firm
can induce consumers to buy
more of each product than they
would otherwise.
1.
2.
3.
4.
5.
Limit pricing
Pricing joint products
Price matching
Inducing brand loyalty
Randomized pricing
Limit pricing
Reduce price to discourage the
entry of new firms- initially enjoy
profit and face competition.
Increasing
returns
to
scale
provides cost advantages for large
firms.
Limit pricing
Used when
To influence expectations of entrants
To protect margins
Entrants have limited information of
market.
Present V/s future prices.
Convince new firms of low cost and
charge less.
Give misleading information
Price matching
A strategy in which a firm
advertises a price and promises
to match any lower price offered
by a competitor.
Advertisement
Our price is P. If you find a
better price in the market, we will
match that price. We will not be
undersold.
Randomized pricing
A firm varies its prices frequently hour to hour or day to day