Mod-4

Market Structure and Pricing Decisions

 Describe perfect competition and monopoly Evaluate Competition and Oligopoly

Light Light Thinking

What is market? What is a market system? What is nature and degree of competition? How to determine nature and competition?

 Market is a system by which buyer and seller bargain for a product and settle the price and transact their business. The number of sellers of a product in a market determines the nature and degree of competition in the market. The nature and degree of competition make the structure of market.

Types of market structures

Market structure No of firms and degree of product differentiation Large no of firms with homogenous products Nature of industry Control over price None Method of marketing Market exchange or auction 1. Perfect competition 2. Imperfect competition A. Monopolistic competition Many firms with real or perceived product differentiation Little or no product differentiation A single product without close substitute Manufacturing Ex:- toothpaste, tea, refrigerators etc Ex:- aluminum, steel, cars etc Some Competitive advertising, quality rivalry. Competitive advertising, quality rivalry. Promotional advertising if supply is large Financial markets

B. Oligopoly

Some

C. Monopoly

Ex:- electricity, gas, fuel etc

Considerable but usually regulated

Market structures and pricing decisions

Market structure determines a firms power to fix the price of the product. The degree of competition determines a firms degree of freedom in determining the price of its product. Rule:- The higher the degree of competition, the lower the firms degree of freedom in pricing decision and control over the price of its own product and vice versa.

Characteristics of perfect competition

A large no of buyers and sellers Homogenous products Perfect mobility of factors of production Free entry and free exit of forms Perfect knowledge Absence of collusion or artificial restraint No government intervention

PRICE and OUTPUT

Price determination under perfect competition is analyzed under three different time periods: Market period or very short period Short run and Long run

Market shares of the largest brewers

1985 (%) Bass Allied Lyons (Carlsberg) Grand Met (Watneys) Whitbread Scottish and Newcastle Courage Others 22 13 12 11 10 9 23 100 2002 (%) ScottishCourage Interbrew UK Coors CarlsbergTetley Diageo (Guinness) Others 27 20 18 12 7 16 100

Sources of oligopoly
Huge capital investment Economies of scale Patent rights Control over certain raw materials Mergers and takeovers

Features of oligopoly
Small number of sellers Interdependence of decision making Barriers to entry Indeterminate price and output