MCom I Semester Managerial Economics price Determinations Oligopoly & Duopoly Study Material Notes

MCom I Semester Managerial Economics price Determinations Oligopoly & Duopoly Study Material Notes: Meaning and Definition of Imperfect Competition Characteristics orf Imperfect Competition or Causes orf perfect Competition Forms of Imperfect Competition Meaning and Definition of Monopolistic Competition Chateristics orf Monopolistic Competition Examples of Monopolistic Competition Price Determination Under Monopolistic Competition Meaning and Definition of Duopoly

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

MCom I Semester Managerial Economics price Determinations Oligopoly & Duopoly Study Material Notes

Perfect competition and perfect monopoly, both are imaginary states of a market. In practical life, no market is perfectly monopolistic. Therefore, Mrs. John Robinson introduced the concept of imperfect competition and Prof. Chamberlin introduced the concept of monopolistic competition.

Imperfect competition is a state of the market in which all the essentials of perfect competition are not present. According to Prof. A. P. Lerner, “Imperfect competition obtains when the seller is confronted with a falling demand curve for his product.” Thus, imperfect competition is a state of the market between perfect competition and monopoly.

CHARACTERISTICS OF IMPERFECT COMPETITION OR CAUSES OF IMPERFECT COMPETITION

(1) Ignorance of Buyers and Sellers. If buyers and sellers do not have perfect knowledge about market conditions, it creates imperfect competition. In practical life, buyers do not have perfect knowledge about sellers and sellers do not have perfect knowledge about buyers.

(2) Product Differentiation. Product differentiation is perhaps the most important factor causing imperfect competition. In real life, products of two producers are never perfectly identical to each other. As a result, consumers fell more inclined to a particular product creates the state of imperfect competition.

(3) Lack of Mobility. Mobility of buyers and sellers is an essential element of perfect competition which does not hold true in practical life. Neither buyers nor sellers are perfectly mobile is practical life. It also causes imperfect competition.

(4) High Transportation Cost. High cost of transportation also causes imperfect competition. It increases the cost of distribution.

FORMS OF IMPERFECT COMPETITION

(1) Duopoly. Duopoly is a state of market in which there are only two producers of a product and they compete with each other.

(2) Oligopoly. Oligopoly is a state of market in which there are a few producers of a product and they compete with each other.

(3) Monopolistic Competition. Monopolistic competition is a state of market in which there is a large number of producers and sellers of a commodity and they sell differentiated product.

MEANING AND DEFINITION OF MONOPOLISTIC COMPETITION

The concept of monopolistic competition was introduct by Prof. Edward Chamberlin. It has been defined as under:

1 “Monopolistic competition is found in the industry where there is a large number of sellers selling diffentiated but close substitute products.” -John S. Bain

2. “Monopolistic competition has today come to mean a state of affairs in which there is a large number of sellers selling non-homogeneous or slightly differentiated products and in which freedom of entry exists.” -H. H. Liebhafsky

3. “Monopolistic competition is market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every or other seller.” -Leftwitch

Thus, monopolistic competition is a state of market in which there is a large number of sellers selling differentiated but close substitute products. There is free entry and exit of firms in industry.

CHARACTERISTICS OF MONOPOLISTIC COMPETITION

(1) Large Number of Sellers and Buyers. There is a large number of sellers and buyers under monopolistic competition. Each firm acts independently. There is no feeling of mutual dependence among them.

(2) Product Differentiation. The product of each firm is different from that of other firms. Difference may be in respect of quality or size or colour or design or packing or after-sale-service etc.

(3) Free Entry and Exit of Firms. There is no restriction upon the entry and exit of firms in the market. A new firm can join the market at any time and an existing firm may leave the market at any time.

(4) Individual Price Policy of Firms. Under monopolistic competition, every firm may have its own price policy.

 (5) Imperfect Knowledge of Market Knowledge of Market. Most of the buyers and sellers do not have perfect knowledge about market conditions.

(6) Non-price Competition. Another important feature of monopolistic ution is non-price competition. All the firms try to capture market

methods may be-free repair, after sale-services, gift scheme with a particular purchase, special discount on a particular purchase etc.

EXAMPLES OF MONOPOLISTIC COMPETITION

There are many popular soaps in the maket: Lux, Hamam, Liril, Pears, Lifebuoy Plus, Johnson etc. All the soaps are different from others in one way or the other. Lux is presented as beauty soap, Lifebuoy Plus as Protection against germs, Johnson as baby soap, Liril as freshness soap etc. Thus, all the brands have their own market. On similar lines, markets of Detergent powder, Toothpaste, T.V. Refrigerator, Scooter etc., are also the examples of monopolistic competition.

PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION

Under monopolistic competition, following points should be considered to understand the process of price determination.

1 In case of monopolistic competition, every firm attempts to maximise its profit. Profit of a firm can be maximum at the point of equilibrium of marginal revenue and marginal cost (MR = MC).

2. Under monopolistic competition, average revenue curve (AR Curve) slopes downwards. It implies that if a monopolistically competitive firm wants to sell more quantity of its porduct, it will have lower the price.

3. Since many firms producing non-homeogeneous product work under monopolistic competition, demand of the product of a particular firm will depend not only upon the tastes and preferences of cosumers but also upon the price-output decisions of competitive producers.

4 Under monopolistic competition, firms do not depend only upon price competition but adopt non-price competition also.

EQUILIBRIUM OF A FIRM UNDER MONOPOLISTIC COMPETITION DURING SHORT-RUN

In Short Run a Firm may ear abnormal Profit or Normal Profit or may suffer loss of the tdemand of the Product of  firm oi sight and there is no  substitute of its product, the firm may earn abnormal profit by fixing higher price for its product. If the demand of product is not so high, the firm will earn only normal profit. If the demand of product is poor, the firm may have to suffer a loss. These three situations, can be illustrated with the help of following diagrams.

In above diagrams, AR is average revenue curve, AC is average cost curve, MC is marginal cost curve, MR is marginal revenue curve and E is equilibrium point. Price will be determined at this point, because MC is equal to MR.

Fig A. Since AR is more than AC and AR-AC = E,P, EP. This will be the abnormal profit of the firm.

Fig. B. At this point, AC is equal to AR, therefore, firm can earn only normal profit.

Fig. C. At this point, AC is more than AR. AC – AREE P E P. This will earn only the normal profit. be the loss suffered by firm.

LONG-RUN EQUILIBRIUM AC OF A FIRM

In long-run, a firm can earn only normal profit because if in short-run a firm earns high profit, it will attract new firms in the industry and only normal profit can be available to the firm. It can be made clear with the help of following

In this diagram, AR is average revenue curve, MR is marginal curve, ACIS average cost curve, MC is marginal cost curve and E is equilibrium point. Price will be determined at this point because MC = MR. At this point, AC – AR. therefore, firm can earn only normal profit.

OLIGOPOLY: AN INTRODUCTION

Oligopoly is a type of imperfect competition. It is market in which a few sellers compete with each other producing either a homogeneous product or differentiated product. ‘Oligopoly’ has been defined by George T. Stigler as under, “Oligopoly is the situation in which a firm bases its market policy in part on the expected behaviour of a few close rivals.”

CHARACTERISTICS OF OLIGOPOLY

(1) A Few Sellers. There are only a few sellers in the market and every seller produces a substantial part of total production of industry. Therefore, every seller is in a position to influence the price of product.

(2) Standardised Product or Differentiated Product. The product under oligopoly may be either standardised or differentiated. When product is standardised, it is called pure oligoply and when product is differentiated, it is called differentiated oligopoly.

(3) Difficult Entry and Exist of Firms : Entry and exist of firms in the market in comparatively difficult.

(4) Advertisement and Sales Promotion Activities. All firm have to depend upon advertisement and other sales promotion activities to increse che sales of their product.

PRICE DETERMINATION UNDER OLIGOPOLY

(1) Independent Pricing. If the product of all firms is differentiated, every firm may have its own pricing policy. Price determined under this situation is almost equal to the monopolist price.

(2) Price Determination Under Collusion. Sometimes oligopoly firms enter into an agreement regarding price and quantity of production so that they may protect their interests. Price determined under such condition also will be equal to monopolist price. It can be illustrated with the help of following diagram :

In this diagram, DD is demand curve. It is known as total average revenue (TAR) also. TMR is total marginal revenue curve. MC, MC, and MC, are marginal cost curves of all the three firms and TMC is total marginal cost curve. TMC and TMR intersect each other at E. It is the point of equilibrium.

KINKY OR KINKED DEMAND CURVE

Normally, an oligopolist does not like to change the price because he feels that: (i) If he reduces the price of his product, his competitors will also reduce the price of their products. As a result, he will not get the benefit of price reduction and ulimately suffer a loss of revenue, (ii) If he increase the price of his product, his competitors will not increase the price suffer a loss of revenue. Thus, in both the cases, he will be a looser and therefore, does not like to change the price.

MEANING AND DEFINITION OF DUOPOLY

Doupoly is a state of market in which there are only two producers or sellers of a commodity. These two have a complete command over market. Generally, they control the supply of commodity through mutual understanding and agreement. There can be two types of duopoly: (i) Duopoly with homogeneous product, and (ii) Duopoly with product differentiation.

PRICE DETERMINATION UNDER DUOPOLY WITH HOMOGENEOUS PRODUCT

Under this form of dupoly, both the producers produce and sell identical products. In such a case, generally there is a collusion between these two. This collusion may be to decide a particular price of a product or to assign quotas or to divide the territry in which each of them is to sell his product. Such collusion creates the conditions of monopoly and the price determined is almost equal to monopoly price.

If there is no agreement between the two, they will have to face price war. Since there is no product differentiation, the same price must be charged by both otherwise the one charging higher price will be out. Therefore, the profitability depends upon cost efficiency of both. Both of them will be able to earn only the normal profit. Therefore, the general experience is that they fix monopoly price and share the market and profit.

PRICE DETERMINATION UNDER DUOPOLY WITH PRODUCT DIFFERENTIATION

If there is product differentiation, there is almost no problem of price determination. Both the producers can fix the price of their product independently. They have their own clientage and goodwill. There is almost no possibility of price war. The firm with better product can earn more profit.

MEANING AND DEFINITION OF PRICE DISCRIMINATION OR DISCRIMINATING MONOPOLY

Price discrimination means the sale of same product by same producer or seller to different customers at different prices. When a producer or seller sells a single product or service to different buyers at different prices without any ground, it is called price discrimination. It is a common phenomenon of monopoly. Since a monopolist has complete control over the supply of his product, he can sell his product in different markets or to different buyers different prices. Thus, price discrimination and discriminating monopoly, are synonyms. It has been defined as under:

1 The act of selling the same articles, produced under a single control, ar different prices to different buyers, is known as price discrimination. -Mrs. John Robinson

2. “Price discrimination may be defined as the sales of technically similar products at prices which are not proportional to marginal costs.

-Prof. Stigler Thus, price discrimination is a marketing strategy in which a producer sells his product at different prices. He charges different prices of same product from different consumers.

TYPES OF PRICE DISCRIMINATION

(1) Tarritorial Discrimination. When a producer charges different prices of his product in different areas, it is called territorial discrimination. Example- A number of medicines are sold at different prices in different areas. Such policy is adopted mainly when the transportation cost is very high.

(2) Class Discrimination. When different classes are created for a service, it is called class discrimination. Exmaple-Different fare is charged for journey in different classes of railways and airways.

(3) Use Discrimination. When different rates are charged for different uses, it is called use discrimination. Example-Institute of Chartered Accountants provides its journal to students and professionals at different rates.

(4) Time Discrimination. When different rates are charged for a service at different times, it is called time discrimination. Example-Different rates of trunk calls in day and night.

price Determinations Oligopoly & Duopoly

EXAMPLES OF PRICE DISCRIMINATION OR DISCRIMINATING MONOPOLY

1 Difference in the rates of electricity for domestic and industrial purposes.

2. Difference in the rates of cooking gas for domestic and commercial purposes.

3. Charging high fees from high income patients and no fees or nominal fees from low income patients by a doctor.

4. Difference in rates for the buyers who purchase in bulk quantity.

5. Difference in fees charged by educational institutions from the students of scheduled castes and scheduled tribes and the students of general category.

5. Difference in subscription rates of the journal of Institute of Chartered Accountants of India for students and professsionals.

7. Difference in rates of vegetables by a vendor in posh localities and other localities.

8. Difference in freight rates of Indian Railways for different goods.

ESSENTIALS OF PRICES DISCRIMINATION OR DISCRIMINATING MONOPOLY

1 Price discrimination can be successful only under imperfect competition (monopoly or oligopoly or duopoly) in the market.

2. Price elasticity of demand of different buyers or markets should be different.

3. Segmentation of market should be possible. In other words, sellers should be able in dividing the market of product into sub-parts.

4. Nature of goods and services should be such that they cannot be resold easily.

PRICE DETERMINATION UNDER PRICE DISCRIMINATION

Main object of a discriminating monopolist is to earn maximum profit like perfect competition or monopoly. A discriminating monopolist can maximise his profit only when two conditions are satisfied : (i) Aggregate Marginal Revenue and Aggregate Marginal Cost are equal (AMR = AMC), and (ii) Marginal Revenue of all the markets are equal i.e., MR = MR = MR3 = …… Thus, a discriminating monopolist will fix the price of his product in the manner that both the conditions are satisfied. It can be illustrated with the help of following diagram :

Above diagram is based on the assumption that he sells his product only in two markets: A and B. Total sale of these two markets has been presented as total market: A + B. Elasticity of demand of market A, B and A + B respectively. Since total production is being carried out under the same organization, marginal cost has been presented for total market only as AMC.

AMR and AMC curves interest each other at the point E. This is the point of equilibrium for total market. At this point, quantity of total output is OM. A Vertical line ET’ is drawn from equilibrium point which intersects MR, and MR, at Eand E2 points respectively. These are the equilibrium points for individual markets. OM, and OM, are equilibrium output for individual markets. EM, and EM2 are the marginal incomes for individual markets. Thus, at equilibrium point,