Market Structure and Forms of Market

• Market Structure is also known as the number of firms

producing identical products. Firm sells goods and services
under different market conditions which economists call
Market Structures.
• A Market Structure describes the key traits of a market,
including the number of firms, the similarity of the products
they sell, and the ease of entry into and exit from, the
market examinations of the business sector of our economy
reveals firms’ operating in different Market Structure.
• Market Structure is best defined as the organizational and
other characteristics of a market. These characteristics affect
the nature of competition and pricing.
 Elements of Market Structure
•1.Number and size, Distribution of Firms
•2. Entry Conditions
•3. Extent of Product Differentiation
• Types of Market Structure influences how a firm behaves regarding the following:
•Price
•Supply
•Barriers to Entry
• Efficiency
• Competition

Determinants of Market Structure

•Freedom of Entry and Exit
•Nature of the Product: Homogeneous or Differentiated
•Control over Supply /Output
•Control over Price
•Control to Entry
 Forms of Market
•Market contains 2 kinds of competition :
•1) Price competition - Seller competes among each other by
setting a lower price.
2) Non-price competition - Sellers compete in area like product
quality, advertising, packaging and service other than price.
•There are 2 types of Market Structure:
1) Perfect Competition
2) Imperfect Competition
a. Monopoly
b. Monopolistic
c. Oligopoly
 1. Perfect Competition
 Perfect Competition is a theoretical Market Structure that
features unlimited contestability (No barriers to enter) and
unlimited number of producers and consumers, and a Perfect
Elastic Demand Curve.
 Perfect competition is a market structure where an infinitely
large number of buyers and sellers operate freely and sell a
homogeneous commodity at a uniform price.
 Features of Perfect Competition
• Infinitely Large number of Buyers and Sellers
• Homogenous Product
• Free Entry in to and Exit from the market
• Perfect Knowledge of Market
 1. Perfect Competition

1.Infinitely Large number of Buyers and Sellers

 When there is very large number of buyers no individual buyer
can influence the market price.
 Similarly when there are a very large number of sellers, each firm
or seller in a perfectly competitive market forms an insignificant part
of the market.
 Therefore, no single seller has the ability to determine the price at
which the commodity is sold.
 It is the forces of Market Demand and Market Supply that
determines the price of the commodity.
 Since each firm accepts the price that is determined by the
market, it becomes a Price Taker.
As the market determines the Price, it is the Price Maker.
 1. Perfect Competition
1.Infinitely Large number of Buyers and Sellers
Market Demand and Supply
Price per Unit (Rs.) Demand (Units) Supply (Units)
10 1000 500
20 900 650
30 800 800
40 700 950
50 600 1100
 1. Perfect Competition
2. Homogenous Product
 In a perfect competitive market, firms sell homogeneous products.
Homogenous products are those that are identical in all respects i.e.
there is no difference in packaging, quality colors etc.
 As the output of one firm is exactly the same as the output of all
others in the market, the products of all firms are perfect substitute
for each other.
3. Free Entry in to and Exit from the market
 Very easy entry into a market means that a new firm faces no
barriers to entry. Barriers can be financial, technical or government
imposed barriers such as Licenses, Permits and Patents.
 while in the short run firms can make either supernormal profits or
losses, in the long run all firms in market earn only normal profits.
4. Perfect Knowledge of Market
Buyers and sellers have complete and perfect knowledge about the
product and prices of other sellers. This feature ensures that the
market achieves a uniform price level.
 2. Monopoly
• Pure Monopoly is the form of market organization in which there is
a single seller of a commodity for which there are no close
substitutes.
• Thus, it is at the opposite extreme from perfect competition
monopoly may be the result of:
1. Increasing returns to scale
2. Control over the supply of raw materials
3. Patents
4. Government Franchise.
Features

5. A Single Seller 4. Price Discrimination

2. No Close substitute 5. Abnormal Profits in the Long run
3. Barriers to the entry 6. Limited Consumer Choice
of new firms 7. Price in Excess of Marginal Cost
 2. Monopoly
1. A Single Seller
 There is only one producer of a product. It may be due to some natural
conditions prevailing in the market, or may be due to some legal restriction in the
form of patents, copyright, sole dealership, state monopoly, etc.
 Since, there is only one seller; any change in supply plans of that seller can have
substantial influence over the market price.
 That is why a Monopolist is called a Price Maker. (A Monopolist’s influence on
the market price is not total because the price is determined by the forces of
Demand and Supply and the Monopolist controls only the supply).

2. No Close substitute
• The commodity sold by the Monopolist has no close substitute available for it.
Therefore, if a consumer does not want the commodity at a particular price, he is
likely to get available closely similar to what he is giving up.
• The elasticity of demand for a product since the product has no close
substitutes; demand for a product sold by a monopolist is relatively inelastic.
 2. Monopoly

3. Barriers to the entry of new firms

• There are barriers to entry into industry for the new firms. It may
be due to following reasons:
(i) Ownership of strategic raw material or exclusive knowledge of
production
(ii) Patent Rights
(iii) Government Licensing
(iv) Natural Monopolies

• The implication of barriers to entry is that in the short run,

monopolist may earn supernormal profit or losses. However, in the
long run, barriers to entry ensure that a monopolistic firm earns
only super normal profits.
 2. Monopoly
4. Price Discrimination
Price Discrimination exists when the same product is sold at
different price to different buyers. A monopolist practices price
discrimination to maximize profits. For example Electricity Charges
in Delhi are different for Domestic users and Commercial and
Industrial users.
5. Abnormal Profits in the Long run
Being the single seller, monopolists enjoy the benefit of higher
profits in the long run.
6. Limited Consumer Choice
As they are the single producer of the commodity, in the absence of
any close substitute the choice for consumer is limited.
7. Price in Excess of Marginal Cost
Monopolists fix the price of a commodity (per unit) higher than the
cost of producing one additional unit as they have absolute control
over Price Determination
 3. Monopolistic Competition
 Monopolistic competition is a situation in which the market, basically, is a
competitive market but has some elements of a monopoly.
 In this form of market there are many firms that sell closely differentiated
products. The examples of this form of market are Mobiles, Cosmetics,
Detergents, Toothpastes etc.
Features
1.Large number of buyers and sellers
• While the buyers are as large as it is under perfect competition or monopoly,
the number of sellers is not as large as that under perfect competition.
• Therefore, each firm has the ability to alter or influence the price of the product
it sells to some extent.
2. Product Differentiation
• Under Monopolistic Competition products are differentiated. For example-
soaps, toothpaste, mobile instruments etc.
• It is to create an image in the minds of the buyers that the product sold by one
seller is different from that sold by another seller.
• Products are very similar to each other, but not identical. This allows
substitution of the product of one firm with that of another. Due to a large
number of substitutes being available Demand for a firm’s product is relatively
elastic.
 3. Monopolistic Competition

3. Selling Costs
• As the products are close substitutes of each other, they are
needed to be differentiate for this firms incurs selling cost in
making advertisements, sale promotions, warranties, customer
services, packaging, colors are brand creation.
4. Free Entry and Exit of firm

• Like perfect competition, free entry and exit of firms is possible

under this market form. Since there are no barriers to entry and
exit, firms operating under Monopolistic Competition, in the long
run, earn only normal profits.
 4. Oligopoly Competition
 The term Oligopoly means ‘Few Sellers’. An Oligopoly is an
industry composed of only few firms, or a small number of large
firms producing bulk of its output.
 Since, the industry comprises only a few firms, or a few large
firms, any change in Price and Output by an individual firm is likely
to influence the profits and output of the rival firms.
 Major Soft Drink firms, Airlines and Milk firms can be cited as
an example of Oligopoly.
Features
1. A Few Firms
Oligopoly as an industry is composed of few firms, or a few large
firms controlling bulk of its output.
2. Firms are Mutually Dependent
Each firm in oligopoly market carefully considers how its actions
will affect its rivals and how its rivals are likely to react. This makes
the firms mutually dependent on each other for taking price and
output decisions.
 4. Oligopoly Competition

3. Barriers to the Entry of Firms

The main cause of a limited number of firms in oligopoly is the
barriers to the entry of firms. One barrier is that a new firm may
require huge capital to enter the industry. Patent rights are
another barrier.
4. Non Price Competition
• When there are only a few firms, they are normally afraid of
competing with each other by lowering the prices;
• It may start a Price War and the firm who starts the price war
was may ultimately loose. To avoid price war, the firm uses other
ways of competition like: Customer Care, Advertising, Free Gifts
etc. Such a competition is called non-price competition.
 Summary of Market Structures
S.No. Characteristics Perfect Monopoly Monopolistic Oligopoly
Competition
1 Number of Firms Many One Many Few

2 Types of Product Homogeneous Unique/ Differentiated Differentiated

Single/
Limited

3 Entry condition Very Easy Impossible Easy Difficult

4 Pricing Price Taker Price Price Taker Price Maker

Maker

5 Innovative Weak Potentially Moderate Very Strong

Behavior strong

6 Examples Agriculture, Stock Public Retail Trade Steel, Oil, Milk,

Market, Currency activities Soft Drinks,
Market, Bond Airlines
 Pricing Methods
Considerations while formulating price policy
1. Objectives of business
2. Competitive situation
3. Product & promotional policies
4. Nature of Price sensitivity
5. Conflicting interests of manufacturers and middlemen
6. Influence of Government and Non-business groups
Objectives of Pricing Policy
7. Maximization of profits for the entire product line
8. Promotion of long range welfare of the firm
9. Adaptation of prices based on competitive situation
10. Price flexibility based on economic conditions affecting consumer
industries
11. Stabilization of prices and margins
 Pricing Methods
There are 2.types of pricing methods
1. Cost-oriented
a. Cost-plus or Full-cost pricing
b. Pricing for a rate of return/Target pricing
c. Marginal cost pricing
2. Competition-oriented
a. Going rate pricing
b. Customary pricing
c. Sealed bid pricing

a. Cost-plus Pricing
 It is to cover the costs of material, labour and overheads plus a pre
determined % of profit
 The % of profit varies from company to company and also varies in
industry
 The dis-advantages are that it ignored demand
 It fails to consider forces of competition
 Allocation of overheads is arbitrary and it becomes difficult in multi-
product firm
 It ignores marginal or incremental cost concepts
 Pricing Methods
b. Pricing for a Rate of Return
• Revision of prices to maintain constant % of mark-up over costs
• Revision of prices to maintain profits as a % of total sales
• Revision of prices to maintain constant return on invested capital
c. Marginal Cost Pricing
• The Firm fixes prices to maximize the contribution to fixed costs and
profits
• For each product the contribution to fixed cost is calculated and price is
fixed
• The firm is bale to segment the markets and charge higher price in some
segments and lower in others
Advantages :
• Competitive prices
• Reflects future
• Aggressive pricing policy and leads to higher sales and productivity
• Useful for pricing over life cycle of the product
 Pricing Methods
2. Competition Oriented
a. Going Rate Pricing
• The emphasis is on the market and not on the cost
• Follow the leader pricing in the market
• It is less risky and safer
b. Customary pricing
• Prices are fixed because as the products are there for considerable time
• When a product is discontinued and a new replacement product priced
same as discontinued product.
• Even if the costs are lower the price remains the same because a lesser
price might result in price war
• If the prices need to be increased it has to be tested in limited market to
check the results
c. Sealed Bid Pricing
• In case of contracts and bidding the prices are sealed.
• Depending the terms of bidding either the highest price (Buyer) or the
Lowest price (Seller) is awarded the contract
• It is competition based and there is possibility of collusion.
 Price discrimination

• Price discrimination is the practice of discriminating

among buyers on the basis of the price charged for the
same good or service
• A seller charges different prices to maximize the
revenue
• Prerequisites for Price discrimination:
 Market control
 Division of market
 Different price elasticities of demand in different
markets
• Base of Price discrimination
 Personal- 1. demographic 2. Paying capacity 3. Need
 Geographical
 Time
 Purpose of use
 Product Line Pricing
PRODUCT LINE
• A group of products that are clearly related because they function in a similar
manner are sold to the same customer groups, are marketed through the
same type of outlets or fall within given price ranges
PRODUCT LINE PRICING
• Product line pricing refers to the practice of reviewing and setting prices for
multiple products in coordination with one another.
• It is the process that retailers use to separate goods into various cost
categories creating different quality levels in the minds of their customers.
• Product line pricing is more effective when there are ample price gaps
between each category so that the consumer is well informed of the quality
differentials.
• Pricing different products within the same product range at different price
points. The greater the features and the benefit obtained the greater the
consumer will pay.
• This form of price discrimination assists the company in maximizing turnover
and profits.
• In Tourism hospitality Industry Example: The same category of rooms having
different rates because of Amenities and facilities. Example: The same
sightseeing place experienced by different package rates because of optional
services or luxuries.
 Product Line Pricing
• This strategy is used for setting the price for entire
product line.
• In many companies now days develop product line
instead of a single product so product line pricing is
setting the price on the basis of cost difference
between different products in a product line.
• Marketer also keeps in mind the customer evolution
of different features and also competitive prices.
• There are five common product line pricing strategies
• Captive pricing
• Leader pricing,
• Bait pricing,
• Price lining, and
• Price bundling.
 Product Line Pricing
Captive Pricing
• The idea behind captive pricing is that a company will have a basic
product that they sell at a low price or given away for free.
• However, in order to receive the full benefit of the item they received,
they have to buy additional products. The company might lose money
on the
base product, but they make a fairly good profit on the additional
products.
Ex: Gillette vector Handle +Cartridge
Leader Pricing
• The idea behind leader pricing is to generate store traffic. The items
used to get customers into the store are known as Loss leaders.
• When customers come into the store to purchase the loss leaders, they
usually end up purchasing extra items at full retail price.
• The retailer makes their profit off of the unplanned purchases bought
with the loss leaders.
 Product Line Pricing
Bait Pricing
• This type of strategy is usually viewed as unethical and sometimes
illegal, but retailers will still use it.
• The customer will then come into the store to purchase the
advertised item then find the exact item is out of stock. They will
then be encouraged to purchase a similar, higher-priced item that is
available in store.
Price Lining
• Price lining is a strategy retailers use when pricing different items at
one specific price point.
• The items are usually at a different level of quality or have different
features. This strategy usually makes it easier for a retailer to buy
specific products, predict what their profits will be, and market to a
certain consumer.
EX: Apple’s i-Pads.
 Product Line Pricing

Bundled Pricing
• Products that have several different options or
accessories available are sold using bundled pricing.
• Instead of a consumer having to purchase each item
separately, the items are packaged together and priced
as one item.
• This is usually at a discount than what it would have been
priced at when purchasing each item separately.
• Ex: Cars/ Bikes: When you are purchasing a new car/bike,
you can get extra features
by bundling them with the car when you purchase it
instead of purchasing them later
 Skimming and Penetration Pricing Strategies
SKIMMING PRICING STRATEGY
• Skimming is a pricing strategy which companies adopt when they launch a
new product, with a high price for a product initially and then reduce the
price as time passes by so as to recover cost of a product quickly.
• Example : Mobiles and 3D televisions
Advantages of Price Skimming
• High profit margin. The entire point of price skimming is to generate an
outsized profit margin.
• Cost recovery. If a company competes in a market where the product life span
is short, price skimming may be the only viable method available for ensuring
that it recovers the cost of developing products.
• Dealer profits. If the price of a product is high, then the percentage earned by
distributors will also be high, which makes them happy to carry the product.
• Quality image. A company can use this strategy to build a high-quality image
for its products, but it must deliver a high-quality product to support the
image created by the price.
 Skimming and Penetration Pricing Strategies
Disadvantages of Price Skimming

• Competition. There will be a continual stream of competitors challenging

the seller's extreme price point with lower-priced offerings.
• Sales volume. A company that uses price skimming is limiting its sales,
which means that it cannot lower costs by building sales volume.
• Consumer acceptance. If the price point remains very high for too long, it
may defer or entirely prevent acceptance of the product by the general
market.
• Annoyed customers. Early adopters of the product may be highly
annoyed when the company later drops its price for the product, thereby
generating bad publicity and a very low level of customer loyalty.
• Cost inefficiency. The very high profit margins engendered by this
strategy may cause a company to avoid making the cost cuts required to
keep it competitive when it eventually lowers its prices.
 Skimming and Penetration Pricing Strategies
PENETRATION PRICING STRATEGY

•Penetration pricing is the pricing technique of setting a relatively low initial entry price,
often lower than the eventual market price, to attract new customers.
•The strategy works on the expectation that customers will switch to the new brand
because of the lower price. Penetration pricing is most commonly associated with a
marketing objective of increasing market share or sales volume, rather than to make
profit in the short term.
Advantages of Penetration Price
•It can result in fast diffusion and adoption. This can achieve high market penetration
rates quickly. This can take the competitors by surprise, not giving them time to react.
• It can create goodwill among the early adopters segment. This can create more trade
through word of mouth.
• It creates cost control and cost reduction pressures from the start, leading to greater
efficiency.
• It discourages the entry of competitors. Low prices act as a barrier to entry
• It can create high stock turnover throughout the distribution channel. This can create
critically important enthusiasm and support in the channel.
• It can be based on marginal cost pricing, which is economically efficient.
 Skimming and Penetration Pricing Strategies

• The main disadvantage with penetration pricing is that it

establishes long term price expectations for the product, and
image preconceptions for the brand and company. This makes it
difficult to eventually raise prices.
Price penetration is most appropriate where:
• Product demand is highly price elastic.
• Substantial economies of scale are available.
• The product is suitable for a mass market (i.e. enough demand).
• The product will face stiff competition soon after introduction.
• There is not enough demand amongst consumers to make price
skimming work.
• In industries where standardization is important. Eg : Microsoft
Windows
END OF UNIT- 6