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Market Structure and Pricing

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Market Structure and Pricing Learning outcomes By studying this section students will be able to: understand how and why firms come to be price takers, price makers ... – PowerPoint PPT presentation

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Title: Market Structure and Pricing


1
Market Structure and Pricing
2
(No Transcript)
3
Learning outcomes
  • By studying this section students will be able
    to
  • understand how and why firms come to be price
    takers, price makers or price shapers
  • analyse the pricing strategies that result from
    different market situations

4
Market Structures
  • Type of market structure influences how a firm
    behaves
  • Pricing
  • Supply
  • Barriers to Entry
  • Efficiency
  • Competition

5
Market Structures
  • Degree of competition in the industry
  • High levels of competition Perfect competition
  • Limited competition Monopoly
  • Degrees of competition in between

6
Market Structure
  • Determinants of market structure
  • Freedom of entry and exit
  • Nature of the product homogenous (identical),
    differentiated?
  • Control over supply/output
  • Control over price
  • Barriers to entry (by laws or cost of entry)

7
Pricing in the private sector
  • Private sector organizations which seek to
    maximize profits will attempt to minimize their
    costs and maximize their revenue.
  • Revenue is composed of price multiplied by
    quantity sold
  • The price that an organization can charge for its
    product depends largely on the type of market
    within which it is operating.

8
Price takers Perfect competition
  • Market conditions
  • many buyers, many sellers
  • identical products
  • freedom of entry and exit in the market
  • perfect knowledge about prices and products in
    the market.

9
Price takers Perfect competition
  • Firms which operate in this type of market have
    to accept the market price.
  • This is because any attempt to increase their own
    price over and above market price will lead to
    consumers purchasing identical goods or services
    from competitor firms.

10
Price makers Monopoly
  • literally defined as one seller
  • monopoly power is maintained by ensuring that
    barriers to entry into the industry are
    maintained.
  • the firms demand curve is the same as the
    industry demand curve. Why?
  • the firm is the industry
  • because of this, the monopolist is in a position
    to be a price maker.

11
Price makers Monopoly
  • a monopoly producer faces a trade-off
  • it can raise prices but as it does so demand
    falls (but does not disappear as would be the
    case under perfect competition).
  • so what is the best price to charge?
  • that price that will maximise total revenue
  • where demand is inelastic will it pay to increase
    or decrease price?
  • increase

12
Which of the following is a monopoly?
  • BA Airline, or
  • BA London Eye
  • Ans London Eye
  • Why?
  • No close substitute
  • What does this mean for pricing strategy?
  • Where demand is inelastic it pays to raise prices

13
Price shapers
  • Firms operating in markets between these two
    extremes can exert some influence on price. Such
    firms are called price shapers
  • The two main market types which will be examined
    are
  • oligopoly
  • monopolistic competition

14
Oligopoly
  • An oligopoly is a market dominated by a few large
    firms.
  • Ex. AIS DTAC True

15
Oligopoly
  • Oligopoly makes pricing policy more difficult to
    analyse since firms are interdependent, but not
    to the extent as in the perfectly competitive
    model.
  • The actions of firm A may cause reaction by firms
    B and C, leading firm A to reassess its pricing
    policy and thus perpetuating a chain of action
    and reaction.
  • For these reasons firms operating in
    oligopolistic markets often face a kinked demand
    curve.

16
Kinked Demand Curve
a price rise will cause consumers to purchase
from competitors demand elastic
P
l
k
demand curve kinked at this point
m
a price fall will be matched by competitors
demand inelastic
D
a
b
c
17
Kinked demand curve
  • With a kinked demand curve it is clearly not in
    the interests of individual firms to cut prices,
    and these markets tend to be characterized by
    price rigidities.

18
Kinked demand curve
  • Marketing and competition under oligopoly
    conditions are often based around
  • advertising
  • free gifts and offers
  • quality of service or value added
  • follow-the-leader pricing pricing is based on
    the decisions of the largest firm
  • informal price agreements
  • price wars occasionally break out if one firm
    thinks it can effectively undercut the opposition

19
Monopolistic competition
  • This is a common type of market structure,
    exhibiting some features of perfect competition
    and some features of monopoly.
  • The competitive features are freedom of entry and
    exit and the existence of a large number of
    firms.
  • However products are not identical
  • E.g. hotels

20
Monopolistic competition
  • The more inelastic a firm is able to make its
    demand curve, the more influence it will have on
    price, and thus firms will attempt to minimize
    competition by
  • product differentiation
  • acquisitions and mergers
  • cost and price leadership

21
Market types
22
Pricing in the public sector
  • Prices of public sector goods and services will
    depend upon the market situation which prevails
    in a particular industry as well as the
    objectives set for a particular organization.
    These might be
  • profit maximization?
  • break-even pricing
  • social cost/benefit pricing

23
Pricing and the macroeconomy
  • The condition of the economy at large also has an
    influence on firms pricing policy.
  • If the demand in the economy is growing quickly,
    there may be temporary shortages of supply in the
    economy and firms will take advantage of boom
    conditions to increase prices and profits.
  • Similarly, during a recession there may well be
    over-capacity in the economy and demand may be
    static or falling. These conditions will force
    firms to have much more competitive pricing
    policies to attract consumers.

24
  • The End
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