Price and output decisions under different market structures

1. Price And Output Decisions Under Different Market Structures

2. Market • In economic sense market is a system in which buyers and sellers bargain for price of the product, settle the price and transact their business-buy and sell a product. • Market does not necessarily mean a place. • The buyers must have something they can offer in exchange for there to be a potential transaction.

3. Market Structure

4. Market Structure • It refers to the competitive environment in which the buyer and sellers of the product operate.

5. Classification of the market Structure • Depending on the number of sellers and the degree of Competition • Perfect Competition • Monopoly Competition • Monopolistic Competition • Oligopoly Competition

6. Perfect Competition

7. Perfect Competition • perfect competition describes a market in which no buyer or seller has market power. • perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. • Because the conditions for perfect competition are very strict, there are few perfectly competitive markets.

8. Characteristics of Perfect Competition • Large number of sellers and buyers • Homogeneous Products • Free entry and exit of firms • Perfect mobility of factors of production • Independent Decision making • Perfect knowledge • Indifference among the buyer towards sellers • No Transport cost

9. Perfect Competition • Perfect Competition is an Unrealistic phenomenon • Examples • Share market • Securities and bond market • Agricultural markets • Local Vegetable market

10. Price-Output Determination • Given the conditions of perfect competition, the market price is determined by the market forces (Market demand and Market Supply) • The firm in a perfectly competitive market is a Price-taker not a Price-Maker

11. Price Determination Rule • MC = MR • MC curve must cut MR curve from below

12. Price-Output Determination • Price-Output Determination is analyzed under perfect competition in two time periods • Short Run • Long Run

13. Pricing in the Short-run(Super normal Profit Equilibrium) • In the short-run, it is possible for an individual firm to make a profit.

14. Pricing in the Short-run(Super normal Profit Equilibrium)

15. Pricing in the Short-run(Loss Equilibrium) Loss

16. Pricing in the Long-run(Normal Profit Equilibrium) • In the long period, positive profit cannot be sustained. • The arrival of new firms or expansion of existing firms in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve.

17. Pricing in the Long-run(Normal Profit Equilibrium) • The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). • Its horizontal demand curve will touch its average total cost curve at its lowest point.

18. Pricing in the Long-run(Normal Profit Equilibrium) Normal Profit

19. Short-run & Long-run Equilibrium of Perfectly competitive firms Long-run Equilibrium

20. Monopoly

21. Monopoly • Monopoly is the anti-thesis of Competition • In monopoly market there is a single seller, there are no close substitutes for the commodities and there are barriers to entry

22. Reasons for Monopoly • Legal Restrictions (Indian Railways) • Control over raw materials (Diamond company) • Efficiency • Patent over inventions • High cost of establishing an efficient plant • Exclusive Knowledge of the technology of the firm

23. Characteristics of Monopoly • Single seller and a number of buyers • Absence of Competition • No close substitutes • Cross elasticity of demand is zero • Difficult to enter • Control over the supply of the commodity

24. Monopoly Pricing and output decision: Short-run (Super normal Profit) Super normal Profit

25. Monopoly Pricing and output decision: Long-run (Normal Profit) Normal Profit

26. Monopoly Equilibrium (Supernormal Profit & normal Profit)

27. Price Discrimination • seller price discriminates when it charges different prices to different buyers. • The ideal form of price discrimination, from the seller's point of view, is to charge each buyer the maximum that the buyer is willing to pay.

29. Degrees of Price Discrimination • First Degree Price Discrimination • Second Degree Price Discrimination • Third Degree Price Discrimination

30. First Degree Price Discrimination • The discriminatory pricing that attempts to take away the entire consumer’s surplus. • This is also known as “TAKE-IT-OR-LEAVE-IT” (occur when the monopolist is able to sell each separate unit of the output at a different price to the same buyer.)

31. Second Degree Price Discrimination • In such cases, the goods are divided into different blocks of units and for each block a different price is charged. • It is practiced when there are many customers with different tastes and with varying income levels.

32. Third Degree Price Discrimination • Under this form, different prices are charged for the same homogeneous good for different customers, depending upon various factors (age, gender)

33. When Price Discrimination is Possible? • If there is an imperfection in the market • Different elasticity of demand in the market • Different nature of the product (haircut) • Distance and frontier barriers

34. Monopolistic Competition • Monopolistic competition is a common market form. • Monopolistic competition is a situation which a large number of firms are offering similar but not identical products. • It is a blend of Competition and Monopoly.

35. Monopolistic Competition • Many markets can be considered monopolistically competitive, often including the markets for restaurants, clothing, shoes and service industries in large cities.

36. Characteristics of Monopolistic Competition • The characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on Slight product differentiation).

37. Characteristics of Monopolistic Competition • Large number of sellers • Product differentiation • Non-price competition (More importance to Advertisements) • Free entry and exit • Independent behavior (independent pricing policy) • Producers have a degree of control over price

38. Short-run Pricing Equilibrium in Monopolistic Competition (Super Normal Profit) • A monopolistically competitive firm acts like a monopolist in that the firm is able to influence the market price of its product by altering the rate of production of the product.

39. Short-run Pricing Equilibrium in Monopolistic Competition (Super Normal Profit) • Unlike in perfect competition, monopolistically competitive firms produce products that are not perfect substitutes. • As such, brand X's product, which is different from all other brands' products, is available from only a single producer. • Hence in the short-run a monopolistically competitive firm may get profit or loss.

40. Short-run Pricing Equilibrium in Monopolistic Competition (Super Normal Profit) • In the short-run, the monopolistically competitive firm can exploit the heterogeneity of the market to reap positive economic profit

41. Short-run Pricing Equilibrium in Monopolistic Competition (Super Normal Profit)

42. Short-run Pricing Equilibrium in Monopolistic Competition (Super Normal Profit)

43. Short-run equilibrium of the firm under monopolistic competition - Loss

44. Long-run equilibrium of the firm under monopolistic competition – Normal Profit • In the long-run, however, whatever distinguishing characteristic that enables one firm to reap monopoly profits will be duplicated by competing firms. • This competition will drive the price of the product down and, in the long-run, the monopolistically competitive firm will make zero economic profit

45. Long-run equilibrium of the firm under monopolistic competition – Normal Profit

46. Oligopoly

47. Oligopoly • An oligopoly is a market form in which a market or industry is dominated by a small number of sellers. • A situation were few large firms compete against each other and there is an element of interdependence in the decision making of these firms. Each firm in the oligopoly recognizes this interdependence. • An oligopoly is competition among the few. • An oligopoly selling either homogeneous or differentiated products.

48. Unique Characteristics of an oligopoly • Few Sellers ( to 5 to 10)- Small no of large sellers • Lack of uniformity in the size of the firm • More importance for Advertisement and Selling cost • Uncertainty in the rival behavior • Interdependence in price fixation • Constant war between firms on price • Existence of price rigidity

49. Classification • Product differentiation Perfect/ imperfect • Entry of firms Open/closed • Price leadership partial/full oligopoly • Agreement between firms Collusive- open/secret non collusive

50. Cartel • An organization of independent firms that agree to operate as a shared monopoly by limiting production and monopoly price. • A cartel is a group of companies acting in unison such as OPEC. • Cartels are known to restrict output quantities in order to raise price and consequently profits.