pricing under imperfect competition

Topics: Monopoly, Economics, Perfect competition Pages: 38 (11493 words) Published: November 1, 2014
Managerial Economics

Unit 10

Unit 10

Pricing under Imperfect Competition

Structure:
10.1 Introduction
Case Let
Objectives
10.2 Monopoly
10.3 Price Discrimination under Monopoly
10.4 Bilateral Monopoly
10.5 Monopolistic Competition
10.6 Oligopoly
10.7 Collusive Oligopoly and Price Leadership
10.8 Duopoly
10.9 Industry Analysis
10.10 Summary
10.11 Glossary
10.12 Terminal Questions
10.13 Answers
10.14 Case Study
Reference/E-Reference

10.1 Introduction
In the previous unit, we studied about price determination under perfect competition. We learnt how prices are determined in markets that are perfectly competitive. We also learnt about the functions of markets and how individual firms are different from industry. Although the theory of perfectly competitive markets is well rounded and robust, such markets are seldom found in the real world. Most markets are imperfect due to the variations in market characteristics. Conditions of entry and exit are quite different across markets and consumers possess dissimilar levels of information. The strong emergence of brands, proprietary technologies, increasing influence of media, government regulations and relative concentration of financial power have contributed to the prevalence of imperfect markets. In this unit, we will learn about pricing under imperfect competition and how prices are determined in imperfect markets. We will also explore related issues that influence business firms and consumers.

Sikkim Manipal University

Page No. 260

Managerial Economics

Unit 10

Case Let (Continued from Unit 9)
Ramesh made attempts to learn the pricing practices that were prevalent in the industry in which his firm operated. He learnt that, in most instances, firms fixed their product prices by considering the prices of competitors’ products and the costs incurred in producing and delivering the products. However, he could not understand why the same product, with a few minor enhancements, was priced differently in different markets. He also observed that products which were sold only by one or two firms were priced relatively higher than those products which were sold by most firms. He met his superior, who asked him to learn about pricing practices in markets that were not perfectly competitive, and where customers did not have full information on all the products in the market and their prices.

Objectives:
After studying this unit, you should be able to:


explain how firms operating in imperfectly competitive markets maximise their out put



formulate realistic estimates of profit maximisation



examine how price discrimination can be applied



describe the working of oligopoly in practice

10.2 Monopoly
Meaning and definition
Monopoly means existence of a single seller in the market. Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitutes. Monopoly may be defined, as a condition of production in which a single firm has the power to fix the price of the commodity or the output of the commodity. It is a situation there exists a single control over the market producing a commodity having no substitutes with no possibilities for any one to enter the industry to compete.

Sikkim Manipal University

Page No. 261

Managerial Economics

Unit 10

Features of monopoly
 Anti-thesis of competition – Absence of competition in the market creates a situation of monopoly and hence, the seller faces no threat of competition.
 Existence of a single seller – There will be only one seller in the market who exercises single control over the market.
 Absence of substitutes – There are no close substitutes for the seller’s product with a strong cross elasticity of demand. Hence, buyers have no alternatives.
 Control over supply – Seller will have complete control over output and supply of the commodity.
 Price maker – The monopolist is the...

References: Stonier, A.W. and Hague, D.C. (1980). A textbook of economic theory,
5th Ed, Longman, (1980).
Sweezy, P. (1939). "Demand Under Conditions of Oligopoly" The
Journal of Political Economy, Vol
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