MEFA UNIT-3

Market structure refers to the nature and degree of competition in the market for goods and services. The structures
of market both for goods market and service (factor) market are determined by the nature of competition prevailing
in a particular market.

Meaning of Market:

Ordinarily, the term “market” refers to a particular place where goods are purchased and sold. But, in economics,
market is used in a wide perspective. In economics, the term “market” does not mean a particular place but the
whole area where the buyers and sellers of a product are spread.

Market Structure:

Meaning:

Market structure refers to the nature and degree of competition in the market for goods and services. The structures
of market both for goods market and service (factor) market are determined by the nature of competition prevailing
in a particular market.

Determinants:

There are a number of determinants of market structure for a particular good.

1. Number and Nature of Sellers:

2. Number and Nature of Buyers:

3. Nature of Product:

4. Entry and Exit Conditions: .

5. Economies of Scale:

Forms of Market Structure:

On the basis of competition, a market can be classified in the following ways:

1. Perfect Competition

2. Monopoly

3. Duopoly

4. Oligopoly

5. Monopolistic Competition

1. Perfect Competition Market:

A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying
and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of market at
a time. In the words of A. Koutsoyiannis, “Perfect competition is a market structure characterised by a complete
absence of rivalry among the individual firms.” According to R.G. Lipsey, “Perfect competition is a market structure
in which all firms in an industry are price- takers and in which there is freedom of entry into, and exit from,
industry.”

Characteristics of Perfect Competition:

The following are the conditions for the existence of perfect competition:

(1) Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers must be so large that none of them individually is in a
position to influence the price and output of the industry as a whole. The demand of individual buyer relative to the
total demand is so small that he cannot influence the price of the product by his individual action.

Similarly, the supply of an individual seller is so small a fraction of the total output that he cannot influence the
price of the product by his action alone. In other words, the individual seller is unable to influence the price of the
product by increasing or decreasing its supply.

Rather, he adjusts his supply to the price of the product. He is “output adjuster”. Thus no buyer or seller can alter the
price by his individual action. He has to accept the price for the product as fixed for the whole industry. He is a
“price taker”.

(2) Freedom of Entry or Exit of Firms:

The next condition is that the firms should be free to enter or leave the industry. It implies that whenever the
industry is earning excess profits, attracted by these profits some new firms enter the industry. In case of loss being
sustained by the industry, some firms leave it.

(3) Homogeneous Product:

Each firm produces and sells a homogeneous product so that no buyer has any preference for the product of any
individual seller over others. This is only possible if units of the same product produced by different sellers are
perfect substitutes. In other words, the cross elasticity of the products of sellers is infinite.

No seller has an independent price policy. Commodities like salt, wheat, cotton and coal are homogeneous in nature.
He cannot raise the price of his product. If he does so, his customers would leave him and buy the product from
other sellers at the ruling lower price.

The above two conditions between themselves make the average revenue curve of the individual seller or firm
perfectly elastic, horizontal to the X-axis. It means that a firm can sell more or less at the ruling market price but
cannot influence the price as the product is homogeneous and the number of sellers very large.

(4) Absence of Artificial Restrictions:

The next condition is that there is complete openness in buying and selling of goods. Sellers are free to sell their
goods to any buyers and the buyers are free to buy from any sellers. In other words, there is no discrimination on the
part of buyers or sellers.
Moreover, prices are liable to change freely in response to demand-supply conditions. There are no efforts on the
part of the producers, the government and other agencies to control the supply, demand or price of the products. The
movement of prices is unfettered.

(5) Profit Maximisation Goal:

Every firm has only one goal of maximising its profits.

(6) Perfect Mobility of Goods and Factors:

Another requirement of perfect competition is the perfect mobility of goods and factors between industries. Goods
are free to move to those places where they can fetch the highest price. Factors can also move from a low-paid to a
high-paid industry.

(7) Perfect Knowledge of Market Conditions:

This condition implies a close contact between buyers and sellers. Buyers and sellers possess complete knowledge
about the prices at which goods are being bought and sold, and of the prices at which others are prepared to buy and
sell. They have also perfect knowledge of the place where the transactions are being carried on. Such perfect
knowledge of market conditions forces the sellers to sell their product at the prevailing market price and the buyers
to buy at that price.

(8) Absence of Transport Costs:

Another condition is that there are no transport costs in carrying of product from one place to another. This
condition is essential for the existence of perfect competition which requires that a commodity must have the same
price everywhere at any time. If transport costs are added to the price of the product, even a homogeneous
commodity will have different prices depending upon transport costs from the place of supply.

(9) Absence of Selling Costs:

Under perfect competition, the costs of advertising, sales-promotion, etc. do not arise because all firms produce a
homogeneous product.

2. Monopoly Market:

Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others. The
product has no close substitutes. The cross elasticity of demand with every other product is very low. This means
that no other firms produce a similar product. According to D. Salvatore, “Monopoly is the form of market
organisation in which there is a single firm selling a commodity for which there are no close substitutes.” Thus the
monopoly firm is itself an industry and the monopolist faces the industry demand curve.

The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes,
and incomes of his customers. It means that more of the product can be sold at a lower price than at a higher price.
He is a price-maker who can set the price to his maximum advantage.

However, it does not mean that he can set both price and output. He can do either of the two things. His price is
determined by his demand curve, once he selects his output level. Or, once he sets the price for his product, his
output is determined by what consumers will take at that price. In any situation, the ultimate aim of the monopolist
is to have maximum profits.

Characteristics of Monopoly:
The main features of monopoly are as follows:

1. Under monopoly, there is one producer or seller of a particular product and there is no difference between a firm
and an industry. Under monopoly a firm itself is an industry.

2. A monopoly may be individual proprietorship or partnership or joint stock company or a cooperative society or a
government company.

3. A monopolist has full control on the supply of a product. Hence, the elasticity of demand for a monopolist’s
product is zero.

4. There is no close substitute of a monopolist’s product in the market. Hence, under monopoly, the cross elasticity
of demand for a monopoly product with some other good is very low.

5. There are restrictions on the entry of other firms in the area of monopoly product.

6. A monopolist can influence the price of a product. He is a price-maker, not a price-taker.

7. Pure monopoly is not found in the real world.

8. Monopolist cannot determine both the price and quantity of a product simultaneously.

9. Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist can increase his sales only
by decreasing the price of his product and thereby maximise his profit. The marginal revenue curve of a monopolist
is below the average revenue curve and it falls faster than the average revenue curve. This is because a monopolist
has to cut down the price of his product to sell an additional unit.

If, on the other hand, each seller takes into account the effect of his policy on that of his rival and the reaction of the
rival on himself again, then he considers both the direct and the indirect influences upon the price. Moreover, a rival
seller’s policy may remain unaltered either to the amount offered for sale or to the price at which he offers his
product. Thus the duopoly problem can be considered as either ignoring mutual dependence or recognising it.

3. Oligopoly:

Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products. It is
difficult to pinpoint the number of firms in ‘competition among the few.’ With only a few firms in the market, the
action of one firm is likely to affect the others. An oligopoly industry produces either a homogeneous product or
heterogeneous products.

The former is called pure or perfect oligopoly and the latter is called imperfect or differentiated oligopoly. Pure
oligopoly is found primarily among producers of such industrial products as aluminium, cement, copper, steel, zinc,
etc. Imperfect oligopoly is found among producers of such consumer goods as automobiles, cigarettes, soaps and
detergents, TVs, rubber tyres, refrigerators, typewriters, etc.

Characteristics of Oligopoly:

In addition to fewness of sellers, most oligopolistic industries have several common characteristics which are
explained below:

(1) Interdependence:
There is recognised interdependence among the sellers in the oligopolistic market. Each oligopolist firm knows that
changes in its price, advertising, product characteristics, etc. may lead to counter-moves by rivals. When the sellers
are a few, each produces a considerable fraction of the total output of the industry and can have a noticeable effect
on market conditions.

He can reduce or increase the price for the whole oligopolist market by selling more quantity or less and affect the
profits of the other sellers. It implies that each seller is aware of the price-moves of the other sellers and their impact
on his profit and of the influence of his price-move on the actions of rivals.

Thus there is complete interdependence among the sellers with regard to their price-output policies. Each seller has
direct and ascertainable influences upon every other seller in the industry. Thus, every move by one seller leads to
counter-moves by the others.

(2) Advertisement:

The main reason for this mutual interdependence in decision making is that one producer’s fortunes are dependent
on the policies and fortunes of the other producers in the industry. It is for this reason that oligopolist firms spend
much on advertisement and customer services..

(3) Competition:

This leads to another feature of the oligopolistic market, the presence of competition. Since under oligopoly, there
are a few sellers, a move by one seller immediately affects the rivals. So each seller is always on the alert and keeps
a close watch over the moves of its rivals in order to have a counter-move. This is true competition.

(4) Barriers to Entry of Firms:

As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. However,
in the long run, there are some types of barriers to entry which tend to restraint new firms from entering the industry.

They may be:

(a) Economies of scale enjoyed by a few large firms; (b) control over essential and specialised inputs; (c) high
capital requirements due to plant costs, advertising costs, etc. (d) exclusive patents and licenses; and (e) the
existence of unused capacity which makes the industry unattractive. When entry is restricted or blocked by such
natural and artificial barriers, the oligopolistic industry can earn long-run super normal profits.

(5) Lack of Uniformity:

Another feature of oligopoly market is the lack of uniformity in the size of firms. Finns differ considerably in size.
Some may be small, others very large. Such a situation is asymmetrical. This is very common in the American
economy. A symmetrical situation with firms of a uniform size is rare.

(6) Demand Curve:

It is not easy to trace the demand curve for the product of an oligopolist. Since under oligopoly the exact behaviour
pattern of a producer cannot be ascertained with certainty, his demand curve cannot be drawn accurately, and with
definiteness. How does an individual seller s demand curve look like in oligopoly is most uncertain because a
seller’s price or output moves lead to unpredictable reactions on price-output policies of his rivals, which may have
further repercussions on his price and output.
The chain of action reaction as a result of an initial change in price or output, is all a guess-work. Thus a complex
system of crossed conjectures emerges as a result of the interdependence among the rival oligopolists which is the
main cause of the indeterminateness of the demand curve.

If the oligopolist seller does not have a definite demand curve for his product, then how does he affect his sales.
Presumably, his sales depend upon his current price and those of his rivals. However, a number of conjectural
demand curves can be imagined.

For example, in differentiated oligopoly where each seller fixes a separate price for his product, a reduction in price
by one seller may lead to an equivalent, more, less or no price reduction by rival sellers. In each case, a demand
curve can be drawn by the seller within the range of competitive and monopoly demand curves.

Leaving aside retaliatory price movements, the individual seller’s demand curve under oligopoly for both price cuts
and increases is neither more elastic than under perfect or monopolistic competition nor less elastic than under
monopoly. It may still be indefinite and indeterminate.

This situation is shown in Figure 1 where KD1 is the elastic demand curve and MD is the less elastic demand curve.
The oligopolies’ demand curve is the dotted kinked KPD. The reason is quite simple. If a seller reduces the price of
his product, his rivals also lower the prices of their products so that he is not able to increase his sales.

So the demand curve for the individual seller’s product will be less elastic just below the present price P (where
KD1and MD curves are shown to intersect). On the other hand, when he raises the price of his product, the other
sellers will not follow him in order to earn larger profits at the old price. So this individual seller will experience a
sharp fall in the demand for his product.

Thus his demand curve above the price P in the segment KP will be highly elastic. Thus the imagined demand curve
of an oligopolist has a comer or kink at the current price P. Such a demand curve is much more elastic for price
increases than for price decreases.

(7) No Unique Pattern of Pricing Behaviour:

The rivalry arising from interdependence among the oligopolists leads to two conflicting motives. Each wants to
remain independent and to get the maximum possible profit. Towards this end, they act and react on the price-output
movements of one another in a continuous element of uncertainty.

On the other hand, again motivated by profit maximisation each seller wishes to cooperate with his rivals to reduce
or eliminate the element of uncertainty. All rivals enter into a tacit or formal agreement with regard to price-output
changes. It leads to a sort of monopoly within oligopoly.

They may even recognise one seller as a leader at whose initiative all the other sellers raise or lower the price. In this
case, the individual seller’s demand curve is a part of the industry demand curve, having the elasticity of the latter.
Given these conflicting attitudes, it is not possible to predict any unique pattern of pricing behaviour in oligopoly
markets.

4. Monopolistic Competition:

Monopolistic competition refers to a market situation where there are many firms selling a differentiated product.
“There is competition which is keen, though not perfect, among many firms making very similar products.” No firm
can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by
their actions. Thus monopolistic competition refers to competition among a large number of sellers producing close
but not perfect substitutes for each other.
It’s Features:

The following are the main features of monopolistic competition:

(1) Large Number of Sellers:

In monopolistic competition the number of sellers is large. They are “many and small enough” but none controls a
major portion of the total output. No seller by changing its price-output policy can have any perceptible effect on the
sales of others and in turn be influenced by them. Thus there is no recognised interdependence of the price-output
policies of the sellers and each seller pursues an independent course of action.

(2) Product Differentiation:

One of the most important features of the monopolistic competition is differentiation. Product differentiation implies
that products are different in some ways from each other. They are heterogeneous rather than homogeneous so that
each firm has an absolute monopoly in the production and sale of a differentiated product. There is, however, slight
difference between one product and other in the same category.

Products are close substitutes with a high cross-elasticity and not perfect substitutes. Product “differentiation may be
based upon certain characteristics of the products itself, such as exclusive patented features; trade-marks; trade
names; peculiarities of package or container, if any; or singularity in quality, design, colour, or style. It may also
exist with respect to the conditions surrounding its sales.”

(3) Freedom of Entry and Exit of Firms:

Another feature of monopolistic competition is the freedom of entry and exit of firms. As firms are of small size and
are capable of producing close substitutes, they can leave or enter the industry or group in the long run.

(4) Nature of Demand Curve:

Under monopolistic competition no single firm controls more than a small portion of the total output of a product.
No doubt there is an element of differentiation nevertheless the products are close substitutes. As a result, a
reduction in its price will increase the sales of the firm but it will have little effect on the price-output conditions of
other firms, each will lose only a few of its customers.

Likewise, an increase in its price will reduce its demand substantially but each of its rivals will attract only a few of
its customers. Therefore, the demand curve (average revenue curve) of a firm under monopolistic competition slopes
downward to the right. It is elastic but not perfectly elastic within a relevant range of prices of which he can sell any
amount.

(5) Independent Behaviour:

In monopolistic competition, every firm has independent policy. Since the number of sellers is large, none controls a
major portion of the total output. No seller by changing its price-output policy can have any perceptible effect on the
sales of others and in turn be influenced by them.

(6) Product Groups:

There is no any ‘industry’ under monopolistic competition but a ‘group’ of firms producing similar products. Each
firm produces a distinct product and is itself an industry. Chamberlin lumps together firms producing very closely
related products and calls them product groups, such as cars, cigarettes, etc.
(7) Selling Costs:

Under monopolistic competition where the product is differentiated, selling costs are essential to push up the sales.
Besides, advertisement, it includes expenses on salesman, allowances to sellers for window displays, free service,
free sampling, premium coupons and gifts, etc.

(8) Non-price Competition:

Under monopolistic competition, a firm increases sales and profits of his product without a cut in the price. The
monopolistic competitor can change his product either by varying its quality, packing, etc. or by changing
promotional programmes

PRICE OUTPUT DETEREMINATION IN PERFECT COMPETETION

In perfect competition, sellers and buyers are fully aware about the current market price of a product. Therefore,
none of them sell or buy at a higher rate. As a result, the same price prevails in the market under perfect competition.

Under perfect competition, the buyers and sellers cannot influence the market price by increasing or decreasing their
purchases or output, respectively. The market price of products in perfect competition is determined by the industry.
This implies that in perfect competition, the market price of products is determined by taking into account two
market forces, namely market demand and market supply.

In the words of Marshall, “Both the elements of demand and supply are required for the determination of price of a
commodity in the same manner as both the blades of scissors are required to cut a cloth.” As discussed in the
previous chapters, market demand is defined as a sum of the quantity demanded by each individual organizations in
the industry.

On the other hand, market supply refers to the sum of the quantity supplied by individual organizations in the
industry. In perfect competition, the price of a product is determined at a point at which the demand and supply
curve intersect each other. This point is known as equilibrium point as well as the price is known as equilibrium
price. In addition, at this point, the quantity demanded and supplied is called equilibrium quantity. Let us discuss
price determination under perfect competition in the next sections.

Demand under Perfect Competition:

Demand refers to the quantity of a product that consumers are willing to purchase at a particular price, while other
factors remain constant. A consumer demands more quantity at lower price and less quantity at higher price.
Therefore, the demand varies at different prices.

Figure-1 represents the demand curve under perfect competition:

As shown in Figure-1, when price is OP, the quantity demanded is OQ. On the other hand, when price increases to
OP1, the quantity demanded reduces to OQ1. Therefore, under perfect competition, the demand curve (DD’) slopes
downward.

Supply under Perfect Competition:

Supply refers to quantity of a product that producers are willing to supply at a particular price. Generally, the supply
of a product increases at high price and decreases at low price.

Figure-2 shows the supply curve under perfect competition:

In Figure-2, the quantity supplied is OQ at price OP. When price increases to OP1, the quantity supplied increases to
OQ1. This is because the producers are able to earn large profits by supplying products at higher price. Therefore,
under perfect competition, the supply curves (SS’) slopes upward.

Equilibrium under Perfect Competition:

As discussed earlier, in perfect competition, the price of a product is determined at a point at which the demand and
supply curve intersect each other. This point is known as equilibrium point. At this point, the quantity demanded and
supplied is called equilibrium quantity.

Figure-3 shows the equilibrium under perfect competition:

In Figure-3, it can be seen that at price OP1, supply is more than the demand. Therefore, prices will fall down to OP.
Similarly, at price OP2, demand is more than the supply. Similarly, in such a case, the prices will rise to OP. Thus, E
is the equilibrium at which equilibrium price is OP and equilibrium quantity is OQ

Price and Output Determination under Monopoly

Monopoly refers to a market structure in which there is a single producer or seller that has a control on the entire
market.

This single seller deals in the products that have no close substitutes and has a direct demand, supply, and prices of a
product.

Therefore, in monopoly, there is no distinction between an one organization constitutes the whole industry.

Demand and Revenue under Monopoly:

In monopoly, there is only one producer of a product, who influences the price of the product by making Change m
supply. The producer under monopoly is called monopolist. If the monopolist wants to sell more, he/she can reduce
the price of a product. On the other hand, if he/she is willing to sell less, he/she can increase the price.

As we know, there is no difference between organization and industry under monopoly. Accordingly, the demand
curve of the organization constitutes the demand curve of the entire industry. The demand curve of the monopolist is
Average Revenue (AR), which slopes downward.

Figure-9 shows the AR curve of the monopolist:

In Figure-9, it can be seen that more quantity (OQ2) can only be sold at lower price (OP2). Under monopoly, the
slope of AR curve is downward, which implies that if the high prices are set by the monopolist, the demand will fall.
In addition, in monopoly, AR curve and Marginal Revenue (MR) curve are different from each other. However, both
of them slope downward.

The negative AR and MR curve depicts the following facts:

i. When MR is greater than AR, the AR rises

ii. When MR is equal to AR, then AR remains constant

iii. When MR is lesser than AR, then AR falls

Here, AR is the price of a product, As we know, AR falls under monopoly; thus, MR is less than AR.

Figure-10 shows AR and MR curves under monopoly:

In figure-10, MR curve is shown below the AR curve because AR falls.

Table-1 shows the numerical calculation of AR and MR under monopoly:

As shown in Table-1, AR is equal to price. MR is less than AR and falls twice the rate than AR. For instance, when
two units of

Output are sold, MR falls by Rs. 2, whereas AR falls by Re. 1.

Monopoly Equilibrium:

Single organization constitutes the whole industry in monopoly. Thus, there is no need for separate analysis of
equilibrium of organization and industry in case of monopoly. The main aim of monopolist is to earn maximum
profit as of a producer in perfect competition.

Unlike perfect competition, the equilibrium, under monopoly, is attained at the point where profit is maximum that
is where MR=MC. Therefore, the monopolist will go on producing additional units of output as long as MR is
greater than MC, to earn maximum profit.

Let us learn monopoly equilibrium through Figure-11:

Monopoly Equilibrium in Case of Zero Marginal Cost:

In certain situations, it may happen that MC is zero, which implies that the cost of production is zero. For example,
cost of production of spring water is zero. However, the monopolist will set its price to earn profit.

Figure-12 shows the monopoly equilibrium when MC is zero:

In Figure-12, AR is the average revenue curve and MR is the marginal revenue curve. In such a case, the total cost is
zero; therefore, AR and MR are also zero. As shown in Figure-12, equilibrium position is achieved at the point
where MR equals zero that is at output OQ and price P.We can see that point M is the mid-point of AR curve, where
elasticity of demand is unity. Therefore, when MC = 0, the equilibrium of the monopolist is established at the output
(OQ) where elasticity of demand is unity.

Short-Run and Long-Run View under Monopoly:

Till now, we have discussed monopoly equilibrium without taking into consideration the short-run and long- run
period. This is because there is not so much difference under short run and long run analysis in monopoly.
In the short run, the monopolist should make sure that the price should not go below Average Variable Cost (AVC).
The equilibrium under monopoly in long-run is same as in short-run. However, in long-run, the monopolist can
expand the size of its plants according to demand. The adjustment is done to make MR equal to the long run MC.

In the long-run, under perfect competition, the equilibrium position is attained by entry or exit of the organizations.
In monopoly, the entry of new organizations is restricted.

The monopolist may hold some patents or copyright that limits the entry of other players in the market. When a
monopolist incurs losses, he/she may exit the business. On the other hand, if profits are earned, then he/she may
increase the plant size to gain more profit.

Pricing under monopolistic and oligopolistic competition -

Introduction

Pricing decisions tend to be the most important decisions made by any firm in any kind of market structure. The
concept of pricing has already been discussed in unit . The price is affected by the competitive structure of a market
because the firm is an integral part of the market in which it operates.

We have examined the two extreme markets viz. monopoly and perfect competition in the previous unit. In this unit
the focus is on monopolistic competition and oligopoly, which lie in between the two extremes and are therefore
more applicable to real world situations.

Monopolistic competition normally exists when the market has many sellers selling differentiated products, for
example, retail trade, whereas oligopoly is said to be a stable form of a market where a few sellers operate in the
market and each firm has a certain amount of share of the market and the firms recognize their dependence on each
other. The features of monopolistic and oligopoly arediscussed in detail in this unit.

MONOPOLISTIC COMPETITION

Edward Chamberlin, who developed the model of monopolistic competition, observed that in a market with large
number of sellers, the products of individual firms are not at all homogeneous, for example, soaps used for personal
wash. Each brand has a specific characteristic, be it packaging, fragrance, look etc.,though the composition remains
the same. This is the reason that each brand is sold Pricing Decisions individually in the market. This shows that
each brand is highly differentiated in the minds of the consumers. The effectiveness of the particular brand may be
attributed to continuous usage and heavy advertising. As defined by Joe S.Bain ‘Monopolistic competition is found
in the industry where there are a large number of sellers, selling differentiated but close substitute products’. Take
the example of Liril and Cinthol. Both are soaps for personal care
but the brands are different. Under monopolistic competition, the firm has some freedom to fix the price i.e. because
of differentiation a firm will not lose all customers when it increases its price. Monopolistic competition is said to be
the combination of perfect competition as well as monopoly because it has the features of both perfect competition
and monopoly. It is closer in spirit to a perfectly competitive market, but because of product differentiation, firms
have some control over price. The characteristic features of monopolistic competition are as follows:

● A large number of sellers: Monopolistic market has a large number of sellers of a product but each seller
acts independently and has no influence on others.

● A large number of buyers: Just like the sellers, the market has a large number of buyers of a product and
each buyer acts independently.

● Sufficient Knowledge: The buyers have sufficient knowledge about the product to be purchased and have a
number of options available to choose from.
For example, we have a number of petrol pumps in the city. Now it depends on the buyer and the ease with which
s/he will get the petrol decides the location of the petrol pump. Here accessibility is likely to be an important
factor. Therefore, the buyer will go to the petrol pump where s/he feels comfortable and gets the petrol filled in the
vehicle easily.

● Differentiated Products: The monopolistic market categorically offers differentiated products, though the
difference in products is marginal, for example, toothpaste.

● Free Entry and Exit: In monopolistic competition, entry and exit are quite easy and the buyers and sellers
are free to enter and exit the market at their own will.Nature of the Demand Curve

The demand curve of the monopolistic competition has the following characteristics:

● Less than perfectly elastic: In monopolistic competition, no single firm dominates the industry and due to
product differentiation, the product of each firm seems to be a close substitute, though not a perfect
substitute for the products of the competitors. Due to this, the firm in question has high elasticity of
demand.

● Demand curve slopes downward: In monopolistic competition, the demand curve facing the firm slopes
downward due to the varied tastes and preferences of consumers attached to the products of specific sellers.
This implies that the demand curve is not perfectly elastic.

PRICE AND OUTPUT DETERMINATION INSHORT RUN

In monopolistic competition, every firm has a certain degree of monopoly power i.e.every firm can take
initiative to set a price. Here, the products are similar but notidentical, therefore there can never be a unique
price but the prices will be in agroup reflecting the consumers’ tastes and preferences for differentiated
products.In this case the price of the product of the firm is determined by its cost function,demand, its
objective and certain government regulations, if there are any.

As the price of a particular product of a firm reduces, it attracts customers from its rival groups (as defined
by Chamberlin). Say for example, if ‘Samsung’ TV reduces its price by a substantial amount or offers
discount, then the customers from the rival group who have loyalty for, say ‘BPL’, tend to move to buy
‘Samsung’ TV sets. As discussed earlier, the demand curve is highly elastic but not perfectly elastic
and slopes downwards.

The market has many firms selling similar products, therefore the firm’s output is quite small as compared
to the total quantity sold in the market and so its price and output decisions go unnoticed. Therefore, every
firm acts independently and for a given demand curve, marginal revenue curve and cost curves, the firm
maximizes profit or minimizes loss when marginal revenue is equal to marginal cost. Producing an output
of Q selling at price P maximizes the profits of the firm -

the short run, a firm may or may not earn profits. Figure shows the firm, which is earning economic profits. The
equilibrium point for the firm is at price P and quantity Q and is denoted by point A. Here, the economic profit is
given as area PAQR. The difference between this and the monopoly case is that here the barriers to entry are low or
weak and therefore new firms will be attracted to enter. Fresh entry will continue to enter as long as there are profits.
As soon as the super normal profit is competed away by new firms, equilibrium will be attained in the market and no
new firms will be attracted in the market. This is the situation corresponding to the long run and is discussed in the
next section.

PRICE AND OUTPUT DETERMINATION INLONG RUN

We have discussed the price and output determination in the short run. We now discuss price and output
determination in the long run. You will notice that the long run equilibrium decision is similar to perfect
competition. The core of the discussion under this head is that economic profits are eliminated in the long run, which
is the only equilibrium consistent with the assumption of low barriers to entry. This occurs at an output where price
is equal to the long run average cost. Thedifference between monopolistic competition and perfect competition is
that in monopolistic competition the point of tangency is downward sloping and does not occur at minimum of the
average cost curve and this is because the demand curve is downward sloping.

Looking at figure , under monopolistic competition in the long run we see that LRAC is the long run average cost
curve and LRMC the long run average marginal curve. Let us take a hypothetical example of a firm in a
typical monopolistic situation where it is making substantial amount of economic profits.

Here it is assumed that the other firms in the market are also making profits. This situation would then attract new
firms in the market. The new firms may not sell the same products but will sell similar products. As a result, there
will be an increase in the number of close substitutes available in the market and hence the demand curve would
shift downwards since each existing firm would lose market share. The entry of new firms would continue as long as
there are economic profits.

The demand curve will continue to shift downwards till it becomes tangent to LRAC at a given price P1 and output
at Q1 as shown in the figure. At this point of equilibrium, an increase or decrease in price would lead to losses. In
this case the entry of new firms would stop, as there will not be any economic profits.

Due to free entry, many firms can enter the market and there may be a condition where the demand falls below
LRAC and ultimately suffers losses resulting in the exit of the firms. Therefore under the monopolistic competition
free entry and exit must lead to a situation where demand becomes tangent to LRAC, the price becomes equal to
average cost and no economic profit is earned. It can thus be said that in the long run the profits peter out
completely.

One of the interesting features of the monopolistically competitive market is the variety available due to product
differentiation. Although firms in the long run do not produce at the minimum point of their average cost curve, and
thus there is excess capacity available with each firm, economists have rationalized this by attributing the higher
price to the variety available. Further, consumers are willing to pay the higher price for the increased variety
available in the market.

OLIGOPOLISTIC COMPETITION

We define oligopoly as the form of market organization in which there are fewsellers of a homogeneous or
differentiated product. If there are only two sellers, we have a duopoly. If the product is homogeneous, we have a
pure oligopoly. If the product is differentiated, we have a differentiated oligopoly.

While entry into anoligopolistic industry is possible, it is not easy (as evidenced by the fact that thereare only a few
firms in the industry).

Oligopoly is the most prevalent form of market organization in the manufacturingsector of most nations, including
India. Some oligopolistic industries in India areautomobiles, primary aluminum, steel, electrical equipment, glass,
breakfast cereals,cigarettes, and many others. Some of these products (such as steel and aluminum)are
homogeneous, while others (such as automobiles, cigarettes, breakfast cereals,and soaps and detergents) are
differentiated.

Oligopoly exists also whentransportation costs limit the market area. For example, even though there aremany
cement producers in India, competition is limited to the few local producers ina particular area.Since there are only a
few firms selling a homogeneous or differentiated product inoligopolistic markets, the action of each firm affects the
other firms in the industryand vice versa.

For example, when General Motors introduced price rebates in thesale of its automobiles, Ford and Maruti
immediately followed with price rebates oftheir own. Furthermore, since price competition can lead to ruinous price
wars,oligopolists usually prefer to compete on the basis of product differentiation,advertising, and service.

These are referred to as nonprice competition. Yet, evenhere, if GM mounts a major advertising campaign, Ford and
Maruti are likely tosoon respond in kind. When Pepsi mounted a major advertising campaign in theearly 1980s
Coca-Cola responded with a large advertising campaign of its own inthe United States.From what has been said, it is
clear that the distinguishing characteristic ofoligopoly is the interdependence or rivalry among firms in the industry.

This is the natural result of fewness. Since an oligopolist knows that its own actions will have a significant impact
on the other oligopolists in the industry, each oligopolist mustconsider the possible reaction of competitors in
deciding its pricing policies, the degree of product differentiation to introduce, the level of advertising to
be undertaken, the amount of service to provide, etc. Since competitors can react in many different ways (depending
on the nature of the industry, the type of product, etc.) We do not have a single oligopoly model but many-each
based on the particular behavioural response of competitors to the actions of the first. Because of this
interdependence, managerial decision making is much more complex under oligopoly than under other forms of
market structure. In what follows we present some of the most important oligopoly models. We must keep in mind,
however, that each model is at best incomplete. The sources of oligopoly are generally the same as for monopoly.
That is,

(1) economies of scale may operate over a sufficiently large range of outputs as to leave only a few firms supplying
the entire market;

(2) huge capital investments and specialized inputs are usually required to enter an oligopolistic industry
(say, automobiles, aluminum, steel, and similar industries), and this acts as an important natural barrier to entry;

(3) a few firms may own a patent for the exclusive right to produce a commodity or to use a particular production
process;

(4) established firms may have a loyal following of customers based on product quality and service that new firms
would find very difficult to match;

(5) a few firms may own or control the entire supply of a raw material required in the production of the product; and

(6) the government may give a franchise to only a few firms to operate in the market.

The above are not only the sources of oligopoly but also represent the barriers to other firms entering the market in
the long run. If entry were not so restricted, the industry could not remain oligopolistic in the long run. A
further barrier to entry is provided by limit pricing, whereby, existing firms charge a price low enough to discourage
entry into the industry. By doing so, they voluntarily sacrifice short-run profits in order to maximize long-run
profits. As discussed earlier oligopolies can be classified on the basis of type of product produced. They can be
homogeneous or differentiated. Steel, Aluminium etc. come under homogeneous oligopoly and television,
automobiles etc. come under heterogeneous oligopoly.
 The type of product produced may affect the strategic behaviour of oligopolists. According to economists, two
contrasting behaviour of oligopolists arise that is the cooperative oligopolists where an oligopolist follows the
pattern followed by rival firms and the non-cooperative oligopolists where the firm does not follow the pattern
followed by rival firms. For example, a firm raises price of its product, the other firms may keep their prices low so
as to attract the sales away from the firm, which has raised its price. But as stated above, price is not the only factor
of competition. As a matter of fact other factors on the basisof which the firms compete include advertising, product
quality and other marketing strategies. Therefore, we normally have four general oligopolistic market structures, two
each under cooperative as well as non-cooperative structures.

We have firms producing homogeneous and differentiated products under each of the two basic structures. All these
differences exist in the oligopolistic market. This shows that each firm tries to make an impact in the existing market
structure and have an effect on the rival firms. This tends to be a distinguishing characteristic of anoligopolistic
market.Price Rigidity: Kinked Demand CurveOur study of pricing and market structure has so far suggested that a
firmmaximizes profit by setting MR = MC. While this is also true for oligopoly firms, itneeds to be supplemented
by other behavioural features of firm rivalry.

This becomes necessary because the distinguishing feature of oligopolistic markets is interdependence. Because
there are a few firms in the market, they also need toworry about rival firm’s behaviour. One model explaining why
oligopolists tend notto compete with each other on price, is the kinked demand curve model of PaulSweezy. In order
to explain this characteristic of price rigidity i.e. prices remainingstable to a great extent, Sweezy suggested the
kinked demand curve model for theoligopolists. The kink in the demand curve arises from the asymmetric behaviour
ofthe firms. The proponents of the hypothesis believe that competitors normallyfollow price decreases i.e. they show
the cooperative behaviour if a firm reducesthe price of its products whereas they show the non-cooperative
behaviour if a firmincreases the price of its products.Let us start from P1 in Figure .

If one firm reduces its price and the other firmsin the market do not respond, the price cutter may substantially
increase its sales.This result is depicted by the relative elastic demand curve, dd. For example, aprice decrease from
P1 to P2 will result in a movement along dd and increase salesfrom Q1 to Q2 as customers take advantage of the
lower price and abandon othersuppliers. If the price cut is matched by other firms, the increase in sales will be less.
lSince other firms are selling at the same price, any additional sales must result from increased demand for the
product. Thus the effect of price reduction is a movement down the relatively inelastic demand curve, DD, then the
price reduction from P1 to P2 only increases sales to Q2.

Here we assume that P1 is the initial price of the firm operating in a noncooperative oligopolistic market structure
producing Q1 units of output. P is also the point of kink in the demand curve and is the initial price and DD is the
relatively elastic demand curve above the existing price P1.

When the firm is operating in the non-cooperative oligopolistic market it results in decline in sales if it changes
its price to P1. Now if the firm reduces its price below P1 say P2, the other firms operating in the market show a
cooperative behaviour and follow the firm. This is shown in the figure as the curve below the existing price P1.

The true demand curve for the oligopolistic market is dD and has the kink at the existing price P1. The demand
curve has two linear curves, which are joined at price P. Associated with the kinked demand curve is a marginal
revenue function. This is shown in Figure . Marginal Revenue for prices above the kink is given by MR1 and below
the kink as MR2.

At the kink, marginal revenue has a discontinuity at AB and this depends on the elasticities of the different parts of
the demand curve. Therefore, in the presence of a kinked demand curve, firm has no motive to change its price. If
the firm is a profit maximizing firm where MR=MC, it would not change its price even if the cost changes. This
situation occurs as long as changes in MC fall within the discontinuous range i.e. AB portion.

The firm following kinked model has a U-shaped marginal cost curve MC. The new MC curve will be MC1 or
MC2 and will remain in the discontinued area and the equilibrium price remains the same
at

MANAGERIAL THEORIES OF THE FIRM

Growth Maximisation Theory of Marris: Assumptions, Explanation and Criticisms!

Robin Marris in his book The Economic Theory of ‘Managerial’ Capitalism (1964) has developed a dynamic
balanced growth maximising model of the firm. He concentrates on the proposition that modem big firms are
managed by managers and the shareholders are the owners who decide about the management of the firms.

The managers aim at the maximisation of the growth rate of the firm and the shareholders aim at the maximisation
of their dividends and share prices. To establish a link between such a growth rate and the share prices of the firm,
Marris develops a balanced growth model in which the manager chooses a constant growth rate at which the firm’s
sales, profits, assets, etc. grow.

If he chooses a higher growth rate, he will have to spend more on advertisement and on R & D in order to create
more demand and new products. He will, therefore, retain a higher proportion of total profits for the expansion of
the firm. Consequently, profits to be distributed to shareholders in the form of dividends will be reduced and the
share prices will fall. The threat of take-over of the firm will loom large among the managers.

As the managers are concerned more about their job security and growth of the firm, they will choose that growth
rate which maximises the market value of shares, give satisfactory dividends to shareholders, and avoid the take-
over of the firm. On the other hand, the owners (shareholders) also want balanced growth of the firm because it
ensures fair return on their capital. Thus the goals of the managers may coincide with that of owners of the firm and
both try to achieve balanced growth of the firm.

Assumptions:

The Marris model is based on the following assumptions:

1. It assumes a given price structure.

2. Production costs are given.

3. There is no oligopolistic interdependence.

4. Factor prices are constant.

5. Finns are assumed to grow through diversification.

6. All major variables such as profits, sales and costs are assumed to increase at the same rate.

Given these assumptions, the objective of the firm is to maximise its balanced growth rate, G. The G itself depends
on two factors: First, the rate of growth of demand for the firm’s product, GD; and second, the rate of growth of
capital supply, GS. Thus G = GD == GS.

Despite the fact that in modem big firms ownership is divorced from management, owners and managers have a
common goal of balanced growth of the firm. According to Marris, there are two different utility functions for the
manager and the owner of the firm. The utility function of the manager consists of his emoluments, status, power,
job security, etc. On the other hand, the utility function of the owner includes profits, capital, output, market share,
etc.

Thus the manager of a firm aims at maximising his utility, and his utility depends upon the rate of growth of the
firm. Though promoting the growth of the firm is the main aim of the manager, yet he is also motivated by his job
security. The manager’s job security depends upon the satisfaction of shareholders who are concerned to keep the
firm’s share prices and dividends as high as possible.

Thus the manager aims at maximising the rate of growth of the firm and the shareholders (owners) aim at
maximising their profits in the form of dividends and share prices. Marris analyses the means by which the firm tries
to achieve its growth-maximisation goal.

The firm may grow in size through the creation of new products which create new demands. Marris calls it
differentiated diversification. The introduction of new products depends upon the rate of diversification, advertising
expenses, R&D expenditures, etc.

Marris establishes the relationship between growth and profits on the demand side through diversification into new
products. The links between growth and profits are different at different levels of growth. In this growth-profits
relationship, growth determines profits. When the rate of growth of the firm is low, the relationship is a positive one.

As new products are introduced, the firm expands (grows) and profits increase. With the further increase in the
growth rate due to greater diversification into new products, the growth-profits relationship becomes negative. This
is because there is the managerial constraint which sets a limit on the rate of managerial growth that restricts the
growth of the firm.

The firms’ managerial ability to cope with a great number of changes at once is limited. It is not possible to develop
a larger management team for the development and marketing of new products. The higher rate of diversification
requires higher expenditures on advertising and R &D. As a result, beyond a certain growth rate, the higher growth
rate leads to a lower rate of profit. This is illustrated in Figure 4 where the GD curve first rises, reaches the highest
point M

The other aspect of the growth-profits relationship is the rate of growth of capital supply. The aim of the
shareholders is to maximise the growth rate of capital stock. The main source of finance for its growth is profits.
Thus profits determine growth on the supply side.

A higher level of profits provides more funds directly for reinvestment. It also allows more funds to be raised on the
capital markets. It, therefore, allows a higher rate of growth to be funded. This gives a direct and positive
relationship between profits and growth. This is shown in Figure 4 as a straight line GS from the origin.

For the equilibrium of the firm, the growth-demand and growth-supply relationship must be satisfied. This is
achieved when the two curves GD and GS intersect at a point where the growth-profits combination gives the
optimum solution. Suppose in the figure the GS2 curve intersects the GD curve at point M where profits are
maximised.

This point does not provide an optimum solution because the managers desire more growth than is consistent with
long-run profit maximisation. The extent to which they can increase the growth rate beyond point M depends upon
their desire for job security. Their job security is threatened if the shareholders feel that the share prices and
dividends are falling and there is the threat of take-over by other firms. This will affect the growth rate of capital
supply (GS). Thus it is the financial constraint which sets a limit to the growth of the firm on the supply side.

According to Marris, it is the retention ratio which determines the growth rate of capital supply. The retention ratio
is the ratio of retained profits to total profits. If the retention ratio is very low, it means that almost all profits have
been distributed to the shareholders. As a result, there are limited funds available with the managers for the growth
of the firm and the growth rate will be very low.
The growth-supply curve will be very steep as shown by GS1 curve. The firm’s equilibrium will be at point L where
the GS1 curve intersects the GD curve. This is again not the optimal equilibrium point of the firm because here the
growth rate is low and profits are below the maximum level.

Larger retained profits are required by managers to invest larger funds for the growth of the firm. These raise the
retention ratio which, in turn, leads to higher profits and higher growth rates until point M of maximum profits is
reached.

This is again not the optimum equilibrium point of the firm because the managers feel that this combination of
higher growth rate and higher profits is approved by the shareholders and there is no threat to their job security.
They will, therefore, be encouraged to raise the retention ratio further, invest more funds, expand and increase the
growth rate of the firm.

As a result, the growth-supply curve will become flatter and take the shape of GS3 curve as in the figure where it
intersects the DS curve at point E. At this point, distributed profits to shareholders fall. But they are adequate to
satisfy the shareholders so that there is no fear of fall in the prices of shares and of the threat of take-overs. There is
also job security for managers.

Thus point E is the optimal equilibrium point of the firm. If the managers adopt a higher retention ratio than this, the
distributed profits will fall further and the shareholders will not be satisfied which will endanger the job security of
managers. The existing shareholders may decide to replace the managers. If the distribution of low profits to
shareholders brings a fall in the market prices of shares, it may lead to take-over of the firm.

Criticisms:

Marris’s growth-maximisation model has been severely criticised for its over-simplified assumptions by
Koutsoyiannis and Hawkins.

1. Marris assumes a given price structure for the firms. He, therefore, does not explain how prices of products are
determined in the market. This is a serious weakness of his model.

2. Another defect of this model is that it ignores the problem of oligopolistic interdependence of firms in non-
collusive market.

3. This model also does not analyse interdependence created by non-price competition.

4. The model assumes that firms can grow continuously by creating new products. This is unrealistic because no
firm can sell anything to the consumers. After all, consumers have their preferences for certain brands which also
change when new products enter the market.

5. According to Koutsoyiannis, “Marris’s model is applicable basically to those firms which produce consumers’
goods. The model is not appropriate for analysing the behaviour of manufacturing businesses or traders.”

6. Marris lumps together advertising and R&D expenses in his model. This is a serious shortcoming of the model
because the effectiveness of these two variables is not the same in any given period.

7. Marris assumes that firms have their own R&D department on which they spend much for creating new products.
But, in reality, most firms do not have such departments. For product diversification, they imitate the inventions of
other firms and in case of patented inventions they pay royalties for using them.

8. The assumption that all major variables such as profits, sales and costs increase at the same rate is highly
unrealistic.

9. It is also doubtful that a firm would continue to grow at a constant rate, as assumed by Marris. The firm might
grow faster now and slowly later on.

10. It is difficult to arrive at the growth rate which maximises the market value of the firm’s shares and the rate at
which the take-over is likely to take place.
Despite these criticisms, Marris’s theory is an important contribution to the theory of the firm in explaining how a
firm maximises its growth rate.

Williamson’s Model of Managerial Discretion

Williamson argues that managers have discretion in pursuing policies which maximise their own utility rather than
attempting the maximisation of profits which maximises the utility of owner-shareholders.

Profit acts as a constraint to this managerial behaviour, in that the financial market and the shareholders require a
minimum profit to be paid out in the form of dividends, otherwise the job security of managers is endangered.

The managerial utility function includes such variables as salary, security, power, status, prestige, professional
excellence. Of these variables only the first (salary) is measurable. The others are non-pecuniary and if they are to be
operational they must be expressed in terms of other variables with which they are connected and which are
measurable. This is attained by the concept of expense preference, which is defined as the satisfaction which
managers derive from certain types of expenditures.

In particular, staff expenditures on emoluments (slack payments), and funds available for discretionary investment
give to managers a positive satisfaction (utility), because these expenditures are a source of security and reflect the
power, status, prestige and professional achievement of managers. Staff increases are to a certain extent equivalent
to promotion, since they increase the range of activity and control of managers over resources. Being the head of a
large staff is a symbol of power, status and prestige, as well as a measure of professional success, because a
progressive and increasing staff implies successful expansion of the particular activity for which a manager is
responsible within a firm.

Managers’ prestige, power and status are to a large extent reflected in the amount of emoluments or slack they
receive in the form of expense accounts, luxurious offices, company cars, etc. Emoluments are economic rents
accruing to the managers; they have zero productivity in that, if removed, they would not cause the managers to
leave the firm and seek employment elsewhere.

They are discretionary expenditures which are made possible because of the strategic position that managers have in
the running of the business. Emoluments are probably less attractive than salary payments since there are certain
restrictions in the way in which they may be spent. However, they may have tax advantages (since they are tax
deductible) and furthermore they are less visible remunerations to the managers than salary, and hence are less likely
to attract the attentions and cause dissatisfaction of the shareholders or the labour force of the firm.

Finally the status and power of managers is associated with the discretion they have in undertaking investments
beyond those required for the normal operation of the firm. These minimum investment requirements are included in
the minimum profit constraint together with the amount of profits required for a satisfactory dividend policy.
Discretionary investment expenditure gives satisfaction to the managers because it allows them to materialise their
personal favourite projects. This is an obvious measure of self-fulfillment for managers and top executives.

Staff expenditures, emoluments and discretionary investment expenses are measurable in money terms and will be
used as proxy-variables to replace the non-operational concepts (power, status, prestige, professional excellence)
appearing in the managerial utility function. Thus the utility function of the managers may be written in the form

The managerial utility function includes such variables as salary, security, power, status, prestige, professional
excellence. Of these variables only the first (salary) is measurable. The others are non-pecuniary and if they are to be
operational they must be expressed in terms of other variables with which they are connected and which are
measurable. This is attained by the concept of expense preference, which is defined as the satisfaction which
managers derive from certain types of expenditures.

In particular, staff expenditures on emoluments (slack payments), and funds available for discretionary investment
give to managers a positive satisfaction (utility), because these expenditures are a source of security and reflect the
power, status, prestige and professional achievement of managers. Staff increases are to a certain extent equivalent
to promotion, since they increase the range of activity and control of managers over resources. Being the head of a
large staff is a symbol of power, status and prestige, as well as a measure of professional success, because a
progressive and increasing staff implies successful expansion of the particular activity for which a manager is
responsible within a firm.

Managers’ prestige, power and status are to a large extent reflected in the amount of emoluments or slack they
receive in the form of expense accounts, luxurious offices, company cars, etc. Emoluments are economic rents
accruing to the managers; they have zero productivity in that, if removed, they would not cause the managers to
leave the firm and seek employment elsewhere.

They are discretionary expenditures which are made possible because of the strategic position that managers have in
the running of the business. Emoluments are probably less attractive than salary payments since there are certain
restrictions in the way in which they may be spent. However, they may have tax advantages (since they are tax
deductible) and furthermore they are less visible remunerations to the managers than salary, and hence are less likely
to attract the attentions and cause dissatisfaction of the shareholders or the labour force of the firm.

Finally the status and power of managers is associated with the discretion they have in undertaking investments
beyond those required for the normal operation of the firm. These minimum investment requirements are included in
the minimum profit constraint together with the amount of profits required for a satisfactory dividend policy.
Discretionary investment expenditure gives satisfaction to the managers because it allows them to materialise their
personal favourite projects. This is an obvious measure of self-fulfillment for managers and top executives.

Staff expenditures, emoluments and discretionary investment expenses are measurable in money terms and will be
used as proxy-variables to replace the non-operational concepts (power, status, prestige, professional excellence)
appearing in the managerial utility function. Thus the utility function of the managers may be written in the form

PRICING STRATEGIES

LIMIT PRICING

A limit price (or limit pricing) is a price, or pricing strategy, where products are sold by a supplier at a price of
which is lower than the average cost of production or at a price low enough to make in unprofitable for other players
to enter the market

MARKET SKIMMING PRICING

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will
pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-
sensitive segment.

FLAT RATE PRICING

A flat fee, also referred to as a flat rate or a linear rate, refers to a pricing structure that charges a single fixed fee
for a service, regardless of usage. Rarely, it may refer to a rate that does not vary with usage or time of use.

Usage sensitive pricing is the selection of usage charging rates based on actual usage of services or resources.
Usage sensitive pricing may vary based on the time of day, the duration of data transfer or call, or the type of media
transferred

TRANSACTION PRICE
Price of a certain quantity of a good or service expressed in terms of (relative to) the quantity of some other good or
service. Therefore, if all prices rise at the same rate, the absolute prices change but the transaction prices remain the
same