UNIT – 3

INTRODUCTION TO MARKETS AND PRICING STRATEGIES

Any business enterprises is engaged in the production of some
goods/services, incurring same expenditure on its production, it must set a price
for the same to sell it in the market
Price Definition : Price denotes the exchanges value of unit of a goods
expressed in terms of money
Price determinants : The price of the product determined by supply and
demand price will be fixed at a point where the supply and demand are at a
equilibrium.
Equilibrium : Equilibrium means the price at which demand and supply of a
commodity equal is known as equilibrium price
D
Price Deman Supply S
d
50 100 200 Price
40 120 180
S D
30 150 150
20 200 110
10 300 50 Quantity

Market: Market is a place where buyer and seller meet goods and services are
offered for the sale and transfer of ownership occurs.
A market may be also defined as the demand made by a certain group of
potential buyers for a goods or service
Different Markets: 1) Perfect Markets or Perfect Competition
2) Imperfect Markets or Imperfect Competition
a) Monopoly Competition
b) Monopolistic Competition
c) Oligopoly
 d) Duopoly
e) Monopsony
f) Duopsony
g) Oligopsony
h) Bilateral Monopoly
I) Perfect Competition: Which market has equal buyers and sellers that market
is called as perfect competition, though, hypothetically present, it a situation
where the market is characterized by homogeneous products, large number of
buyers and sellers with free entry or exit conditions and perfect information about
products, etc.
Features of Perfect Competition :
Large number of buyers and sellers: An important feature of perfect competition
is the existence of very large number of buyers and sellers in the market each
buyer buys so little number goods and each seller sells a little number goods
none of them is in a position to influence the price in the market.
Existence of Homogenous Product: Homogenous product means identical
product available in the market so no seller can charge a price even slightly a
above ruling the market price, because, it he does so, he will lose all his
customers.
Free entry and exit: Any buyers and sellers is free to enter or leave the market of
the commodity.
Perfect Knowledge: All buyers and sellers have perfect knowledge about the
market for the commodity.
No existence of transport cost: Perfectly competitive market also assumes the
non-existence of transport cost.
Indifference: No buyer has preference to buy from a particular seller and no
seller to sell to a particular buyer.
Conditions for attaining Equilibrium of a Firm and Industry under Perfect
Competition:
 Equilibrium is a position where the firm has no incentive either to expand
its output. The firm is said to be in equilibrium when it earns maximum profit.
There are two conditions for attaining equilibrium by a firm and industry.
1) Marginal cost must be equal to marginal revenue i.e., MC = MR
2) Marginal cost curve must cuts the marginal revenue curve from below
Marginal cost is the addition cost incurred by a firm for producing an
additional unit of output. Marginal revenue is the additional revenue accrued to
firm when it sells one additional unit of output.
The horizontal line represents
Y MC
average revenue, marginal
P”
revenue and price. The
Marginal cost curve cuts the P’ P AR/MR/Price
T
Marginal revenue curve from
Revenue S
below at P. At OM output the & Cost
marginal revenue (PM) and
Marginal cost (PM) are equal.
There fore Om output is the X
O M’ M M”
profit maximizing output. Any
Output
output beyond Om will not
maximize profits of the firm. At OM” output for example P”M” is the marginal cost
wile TM” is the marginal revenue obviously the marginal cost greater than the
marginal revenue. If the firm produces OM” output it will suffer a loss indicated
by the area PTP”. The firm will not produce any quantity of output beyond OM
output. At the same time any output less than OM will also not be the profit
maximization output. If the firm produces OM’ output it will not yield maximum
profits. At OM’ output the marginal revenue (P’M’) is greater than the marginal
cost (SM’). That means it is advantageous for the firm to produce beyond OM’
output. The firm could increase its total profits by producing the additional output
M’M. If the firm produces output M’M, it will be securing additional profits
measured area P’PS. The firm will not stop at OM’ output, since we have
assumed that the firm earns maximum profits, it will produce OM output, because
this is the only output at which it can maximize its profits. At this output, the
marginal revenue is equal to the marginal cost. The firm is in equilibrium at the
output OM.
The firm equilibrium more than one point, it is referred to as the case
multiple equilibrium
The MC curve has a peculiar shape, it slopes downwards up to R and then rise
upwards. There are two points Y MC
P P’
at which the firm is in equilibrium
MR/AR/Price
namely P,P’. At point P the firm
MC equal to MR that is firm Revenue R
equilibrium point. But the & Cost
equilibrium at a point P, shall not
be stable equilibrium the reason
X
being that at the point P the MC O M M'
cure cuts the MR curve from Output
above. As pointed out earlier, the second condition for the establishment of a
stable equilibrium is MC curve must cuts the MR curve from below why is the
equilibrium at P unstable.
The reason is that beyond the point P, the MC is lower than MR. So firm
output increase to OM’. In other words, it will pay the firm to produce MM’
additional output because by doing so, it can secure additional profits measured
by the area PRP’. Then the firm earn more profits at a point OP’ also, so the firm
will stop its OM output, it will produce up to OM’ output.
Short Period Equilibrium: In the short period, the firm attains equilibrium with
abnormal profits or minimum losses, when average cost and marginal cost of the
firm are less than the price, the firm earns abnormal profits.
In the figure, SRAC and SRMC are
Y
the short run average cost and
marginal cost curves. PL is the
initial price line. At point I the firm SRMC SRAC
Q1
earns normal profits as its MC and P1 L1
MR and AC and AR equal to each
Revenue S2 Q2
other. When price increases to P1L1 S1
R1
& Cost P L
the firm attains equilibrium at point I
I
Q1R1. The total profits are equal to P2 L2
R2
the area P1Q1R1S1. When the firm
earns abnormal profits, new firms try
X
to enter the industry. Output O M M1
Output
increases and price line comes
down to the original position. Similarly at point R 2 the average cost of the firm is
more than the average revenue. The firm incurs loss per unit equaling to Q 2R2.
The total loss is equal to the area P 2S2Q2R2. This will lead to exclusion of some
firms from the industry, thus supply will come down and the industry again attains
equilibrium.
Long Period Equilibrium : In the long run, the firms attain equilibrium when
long run AC & MC are equal to the long run AR and MR. The firms as well as
industry in the long period enjoy normal profits.
The industry consists of various firms it will be in equilibrium when firms
have no intention either to enter or to leave industry. This will happen when all
the firms or producers are earning normal profits. Firms earn normal profits
when price is equal to AC (AR = AC), It should be noted that cost of production
includes normal profit.
 The price may not be equal to average cost in the short run. But in the
long run, the price will become equal to AC because the time is sufficient for new
firms to enter the industry or the old firm to leave the industry suppose, the price
in the market is higher than the AC, existing firms will make super normal profits.
Thus the industry will be in
equilibrium when price (i.e average Y
MC AC
revenue) is equal to average cost
Q
(AC = AR). The firms will be in P L
equilibrium when marginal cost is AR/MR
equal to marginal revenue (i.e price). Revenue
& Cost
That is MC=MR=AR. So an industry
attains equilibrium if the following
conditions are satisfied. O X
M
MC = MR = AR = AC Output

The horizontal line represents both the average revenue and marginal revenue.
Marginal cost curve (MC) cuts the average cost curve (AC) at point Q. At this
point marginal cost, average cost, marginal revenue and average revenue are
the same. This is AR = AC = MA = MR. The firm is in equilibrium as marginal
cost and marginal revenue are equal when output OM is produced. The firm will
be producing output at the lowest average cost. Any firm producing output at
minimum average cost is known as optimum firm. Therefore, under perfect
competition all firms will be of optimum size. Besides, the industry will be in
equilibrium as average cost is equal to average revenue i,e.,price
Price Output Determination Under Perfect Competition:
1) Market period: In this period, the time available to the firm to adjust the supply
of the commodity to its changed demand is extremely short, say a single day or a
very few days. The price determined in this period is known as Market price.
a) Perishable goods: The supply of perishable goods like fish, mil, vegetable etc.
cannot be increased and it cannot be decreased also. As result the supply curve
under market period will be parallel to y-axis or vertical to x-axis supply is
perfectly inelastic.
OD is demand curve SS is supply curve supply is fixed market supply available in
the market is OS. Let us suppose in the fish market the supply of fish in almost
fixed on any particular day in the
Y D1 S
market the price is ON. Now let
D
us suppose that the demand for D2 E
N’
fish increase on that day. Since 1
supply of fish not increase Price N E
2
immediately, its price will go up in D1
N” E
the same way the demand D
3
D2
decreased D2 D2 to the price also
S X
decrease up to ON” M
O
Quantity

b) Non – Perishable goods: In the very short period, the supply of non-
perishable goods like cloth, pen watches etc., cannot be increased. But if price
falls, their supply can be decreased by preserving some stock, if price falls too
much the whole stock will be held back from the market and carrier over to the
next market periods. The price below which the seller will refuse to sell is called
reserve price.
In the given figure quantity is show on x-axis and price on y-axis. SES is the
supply curve. It slope upward up to Y D1 S

the point E. From E it becomes a D

P1 E
vertical straight line, this because D2
1
the quantity existing with sellers is
Price P E
E
OM. The maximum mount hey P3 3 D1
have is thus OM. Till OM quantity P2 E
2 D
(i.e., point E), the supply curve
D2
S S
slopes upward. At the point S, X
O M1 M
nothing is offered for sale. It means Quantity
the sellers withhold the entire stock if the price is OS. Os is thus the reserve
price. As the price rises, supply increases up to point E. At OP price (Point E),
the entire stock offered for sale.
2) Short Period: Short period is a period in which supply can be increased by
altering the variable factors. In this period fixed costs will remain constant. The
supply is increased when price rises and vice versa. So the supply curve slopes
upwards from left to right.
In the given diagram MPS is the market period supply curve. DD is the initial
Y D1 MPS
demand curve. It intersects
MPS curve at E. The price is D
P1 D2 E SPS
OP and output OM. Suppose
1
demand increases, the Price P4 E
E
P E 4
demand curve shifts upwards
P3 3 D1
P2 E
and becomes DD. In the very
2 D
short period, supply remains D2
fixed at OM. The new X
O M2 M M1
demand curve DD intersects Quantity
MPS at E. The price will rise to OP. This is what happens in the very short-
period. As the price rises from OP to OP 1, firms expand output. As firms can
vary some factors but not all, the law of variable proportions operates. This
results in new short-run supply curve SPS. It intersects D 1D1 curve at E4. The
price will fall from OP1 to OP4. If the demand decreases, DD curve shifts
downward and becomes D2D2. It intersects MPS curve at E2. The price will fall
to OP2. This is what happens in market period. In the short period, the supply
curve is SPS. D2D2 curve intersects SPS curve at E3. The equilibrium price
becomes OP3. The short period price is higher than the market period price.
3) Long Period: Market price may fluctuate due to a sudden change either on
the supply side or on demand side. A big arrival of milk may decrease the price
of that production in the market period, similarly garments. This type of
temporary change in supply and demand may cause changes in market price.
In the long period all costs are variable costs so supply will be increased
only when price is equal to average cost. There are three stages of returns.
a) Increase Returns or Decreasing Costs: At this stage, average cost falls due
to an increase in the output. So the supply curve at this stage will slope
downwards from left to right. Y
The long period normal price
determination at this stage D1 MPS
can be explained with the D
help of a diagram. In the
P E
diagram, MPS represents
1 1 SPS
market period supply curve. E
Price P
2
DD is demand curve. DD P2
P E E
cuts LPS, SPS and MPS at 3 3
LPS
point E. At point E the supply
is Om and the price is OP, if D1
D
demand increases from DD X
O M M2 M3
to D1D1 market price Quantity
increases to OP1. In the short period it is OP 2. In the long period supply
increases considerable to OM3. So price has fallen to OP3 which is less than the
price of market period.
b) Constant Returns or Constant Costs: In this case average cost does not
change even though the output Y
increases. Hence long period
supply curve is horizontal to x- D1 MPS
axis. The determination of long D
period normal price can be SPS
explained with the help of the P E
1 1
diagram. In this figure LPS is
Price P E
horizontal to x-axis. MPS 2P 2
E LPS
represents market period supply E
3
curve, and SPS represents short
period supply curve. At point ‘E’ D1
D
the output is OM and price is OP, X
O M M2 M3
Quantity
if demand increases from DD to D 1D1 market price increases to OP 1. In the short
period, supply increases and hence the price will be OP 2. In the long run supply
is adjusted fully to meet increased demand. The price remains constant at OP
because costs are constant at OP and market is a perfect market.
c) Diminishing Returns or Increasing Costs: If the industry is subject to
increasing costs the supply curve slopes upwards from left to right like an
ordinary supply curve. The determination of long period normal price in
increasing cost industry can be explained with the help of the following diagram.
In this diagram, LPS represents
Y
long period supply curve. The
industry is subject to
D1 MPS
diminishing returns or SPS
D
increasing costs. So, LPS
LPS
slopes upwards from left to P E
right, SPS is short period P1 1 E
Price P
2 2 E
supply curve and MPS is 3P 3
market period supply curve. E
DD is demand curve. It cuts all
the supply curves at E. Here D1
D
the price OP and output is OM. X
If demand increases from DD to O M M2M3
Quantity
D1D1, in the market period supply will not change but the price increases to OP 1.
In the short period, price increase to OP2 as the supply increase form OM to OM2.
In the long period supply increases to OM3 and price increase to OP3. But this
increase in price is less than the price increase in a market period or short
period.
4) Secular Period: In this period, a very long time is available to adjust the
supply fully to change in demand. This is very long period consisting of a
number of decades. As the period is very long it is difficult to lay down principles
determining the price.
II) Imperfect Competition: A competition is said to be imperfect when it not
perfect. In other words, when any or most of the above conditions do not exist in
a given market, it is referred to as an imperfect market.
1) Monopoly: The word monopoly is made up of two syllables, mono and poly.
Mono means single, while poly implies selling. Thus monopoly is a form of
market organization in which there is only one seller of the commodity. There
are no close substitutes for the commodity sold by the seller.
Features of Monopoly:
Single person or a firm: The total supply of the commodity is controlled by a
single per or a firm. There will be no competition for monopoly firm. The
monopolist firm is the only firm in the whole industry.
No close substitutes: The product sold by the monopolist shall not have closely
competing substitute. Even if price of monopoly product increases people will
not go in for substitute
Large Number of Buyers: Under monopoly, there may be a large number of
buyers in the market who compete among themselves
Price Maker: Since the monopolist controls the whole supply of a commodity, he
is a price-maker. He can alter the price.
Supply and price: The monopolist can fix either the supply or the price. He
cannot fix both. If he charges a very high price, he can sell a small amount. If he
wants to sell more, he has to charge a low price. He cannot sell as much as he
wishes for any price he pleases.
Types of Monopoly:
Legal Monopoly: If monopoly arises on account of legal support or as a matter of
legal privilege, it is called legal monopoly Ex: patent rights, trade mark
Government Monopoly: Sometimes the government will take the responsibility of
supplying a commodity and avoid private interference. Ex: Water, Electricity.
Private Monopoly: If the total supply of a single private person produces a good
or firm it called private monopoly. Ex: Hindustan lever Ltd.,
Limited Monopoly: If the monopolist is having limited power in fixing the price of
his product, it called as limited monopoly. It may be due to the fear of distant
substitutes or government intervention or the entry of rivals firms.
Unlimited Monopoly: If the monopolist is having unlimited power in fixing the
price of his goods or services, it is called unlimited monopoly. Ex: A doctor in a
village.
Single price Monopoly: When the monopolist charges same price for all units of
his product, it is called single price monopoly. Ex: Tata company charges the
same price to all the Tata Indica cars of the same product.
Discriminating Monopoly: When a monopolist charges different prices to different
consumers for the same product, it is called discriminating monopoly.
Price output determination under Monopoly at equilibrium point:
The monopolist firm attains equilibrium when its marginal cost becomes
equal to the marginal revenue. The monopolist always desires to make
maximum profits. He makes maximum profits when MC = MR. He goes on
increasing his output if his revenue exceeds his costs. But when the costs
exceed the revenue, the monopolist firm incur losses. Hence, the monopolist
curtails his production. He produces up to that point where additional cost is
equal to the additional revenue (MR = MC). The point is called equilibrium point.
The price output determination under monopoly may be explained with the help
of a diagram.
In the diagram, the quantity supplied or demanded is shown along X-axis. The
Y
cost or revenue are shown along Y-
axis. AC and MC are the average MC AC

cost and marginal cost curves Q

P
respectively. AR and MR curves
slope downwards from left to right. S AR
R
Revenue
AC and MC are U shaped curves. & Cost E
The monopolistic firm attains MR
equilibrium when its marginal cost is
equal to marginal revenue (MC = X
O M
Output
MR). Under monopoly, the MC curve may cut the MR curve from below or from
a side. In the diagram, the above condition is satisfied at point E. At point E,
MC=MR. The firm is in equilibrium. The equilibrium output is OM.
In the above diagram (Average revenue) = MQ or OP
Average cost = MR
Profit per unit = Average Revenue – Average Cost
= MQ – MR = QR
Total profit = Profit per unit x Quantity = QR x OM
= QR x SR = PQRS
The area PQRS represents the maximum profit earned by the monopoly firm.
But it is not always possible for a monopolist to earn super normal profits if he
demand and cost situations are not Y SRMC SRAC
favorable, the monopolist may
realize short run losses.
Though the monopolist is a price B
C
maker, due to weak demand and A
P
high costs, he suffers a loss equal to Price
PABC. E
AR

MR
X
O Q
If AR > AC Output

Abnormal or super normal Profits

If AR = AC Normal profits
If AR < AC Loss
In the long run the firm has time to adjust his plant size or to use existing plant so
as to maximize profits.
Discriminating Monopoly: So far we have proceeded on the assumption that
the monopoly firm charges one single uniform price for all units of its product
from all the customers. But sometimes the monopolist charges different prices
from different customers for the same product at the same time when the
monopoly firm resorts to this type of practices, it is called discriminating
monopoly or price discriminations.
Method of Price Discrimination:
Quality of sales: The monopolist may charges different prices according to the
different conditions of sales, say according to the quantity purchased. He may
charge Rs.3/- for a tooth paste in the wholesale market and Rs.3.50 paisa for the
same product in the retail market.
Customers Income level: A medical practitioner, for example, may charges
Rs.50/- for the rich patients and Rs.30/- from poor patients.
Time of Sale: Based on time of sale the monopolist charges different prices from
different customer for example, a doctor charges higher fees for visit at night and
lower fees for his visits during daytime.
Transportation: The monopolist sells his product at the same price in all markets
of the country despite difference in costs of transportation, it will be clear case of
price discrimination.
Dumping: He may sells his product at higher price in the protected domestic
market and same product at lower price in the foreign markets. The letter type of
sale is called dumping in technical language.
Purpose of use: An electric supply company charges higher rates for domestic
uses and lower rates for industrial uses of electricity.
Service: The Indian railway system charges higher fare per kilometer from short-
distance passengers and a lower fare per kilometer from long-distance
passengers.
2) Monopolistic Competition: In actual life it is almost impossible to discover a
single which is exchanged under conditions of perfect competitions, and it is
equally difficult to discover examples of pure monopoly. The large majority of
markets in real life display the characteristics of both monopoly and perfect
competition, in some, the monopoly situations, where neither pure monopoly nor
prefect competition prevails, are referred to by the economists as imperfectly
competitive markets.
In other wards, monopolistic competition is that market situation which lies
between the two extremes of perfect competition and pure monopoly.
Characteristics of Monopolistic Competition:
Existence of Many firms: The first feature of monopolistic competition is that
there should be a large number of firms in the market, with the largest firms
accounting for a very small share of total output of industry. Ex: service
industries like shoe-repairing shops, petrol situation.
Large number of buyers: There are a large number buyers in the market. But
the buyers have their own brand preferences. So the sellers are able to exercise
a certain degree of monopoly over them.
Product Differentiation: Product differentiation means that products are different
in some ways, but not altogether so. The products are not identical but at the
same time they will not be entirely different from each other. It really means that
there are various monopolist firms competing with each other.
Free entry and exit of firms: As in the perfect competition, in the monopolistic
competition too, there is freedom of entry and exit. That is, there is no barrier as
found under monopoly.
Selling costs: Since the products are close substitutes much effort in needed to
relation the existing consumers and to create new demand so each firm has to
spend a lot an selling cost.
The Group: Under perfect competition, the term industry refers to the collection
of firms producing a homogeneous product. But under monopolistic competition
the products of various firms are not identical though they are close substitutes.
Price output determination under Monopolistic Competition at equilibrium
point:
Short period equilibrium: Different firms produce different varieties of products
different price for tem will be determined in the market depending upon the
demand and cost conditions. Each firm will set the price and output of its own
product. Here also the profit will be maximized when MR is equal to MC.
In short-run the firm is in equilibrium when MR = MC. AR is average revenue
Y
curve, MR marginal revenue
SMC SAC

Q
P
S AR
R
curve, SMC short-run marginal cost curve, SAC short-run marginal cost curve,
MR and SMC intersect at point E where output is OM and Price MQ (i.e., OP).
Thus the equilibrium output or the maximum profit output is OM and price MQ or
Op. When the price is above AC a firm will be making supernormal profit. From
the figure it can be seen that AR is above AC in the equilibrium point. As AR is
above AC, this firm is making abnormal profits in the short-run. The abnormal
profit per unit is QR, i.e., the difference between AR and AC at equilibrium point
and the total supernormal profit is QR x OM. This total abnormal profit is
represented by the rectangle PQRS.
If the demand and cost conditions are less favorable, the monopolistically
competitive firm may incur loss in the short- Y SRMC SRAC
run. A firm incurs loss when the price is
less than the average cost of production.
MQ is the AC and OS (i.e.,MR) is the price B
C
per unit at equilibrium output OM. QR is P A
the loss per unit. The total loss at an output Price
OM is QR x OM. The rectangle PQRS E
AR
represents the total loss area in the short
run. MR
X
O Q
Output

Long Period Equilibrium:

A monopolistically competitive firm Y MC AC
will be equilibrium in long-run at the
output level where marginal cost is
E
equal to marginal revenue. P F
Monopolistically competitive firm in Price AR
& Cost
long run earns only normal profits
K
and will not incur any loss, the firm in MR
the long-run attains equilibrium
where MC = MR and AC = AR.
X
O M
Output
3) Oligopoly: The term oligopoly is derived from two Greek words, oligos
meaning a few, and pollen meaning to sell. Oligopoly is that form of imperfect
competition where there are a few firms in the market, either producing an
homogeneous product or producing products which are close but not perfect
substitutes of each other.
Characteristics of Oligopoly:
Few Firms: There are only a few firms in the industry. Each firm contributes a
sizeable share of the total market. Any decision taken by one firm influences the
actions of other firms in the industry. The various firms in the industry compete
with each other.
Interdependence : As there are only very few firms, any steps taken by one firm
to increase sales, by reducing price or by changing product design or by
increasing advertisement expenditure will naturally affect the sales of other firms
in the industry.
Indeterminate Demand Curve: The interdependence of the firms make their
demand cure indeterminate. When one firm reduces price other firms also will
make a cut in their prices. So the firm cannot be certain about the demand for its
product.
Advertising and Selling Costs: Advertising plays a greater role in the oligopoly
market when compared to other market systems. It is only under oligopoly that
advertising comes fully into its own. A huge expenditure on advertising and sales
promotion techniques is needed both to retain the present market share and to
increase it.
Price Rigidity: In the oligopoly market price remains rigid. If one firm reduces
price it is with the intention of attracting the customers of other firms in the
industry. In order to retain their consumers they will also reduce price. Thus the
pricing decision of one fir results in a loss to all the firms in the industry.
4) Duopoly: Duopoly refers to a market situation in which there are two sellers.
As there are only two sellers any decision taken by one seller will have reaction
from the other. Ex: Coco Cola and Pepsi usually there two sellers may agree to
co-operate each other and share the market equally between themselves, so that
they can avoid harmful competition.
5) Monopsony: Monopsony is a single buyer or a purchasing agency, which
buys the whole, or nearly whole of a commodity or service produced, it may be
created when all consumers of a commodity are organized together and/or when
only one consumer requires that commodity which no one else requires.
6) Duopsony : If there are two buyers, duopsony is said to exist.
7) Oligopsony: Oligopsony is a market situation in which there will be a few
buyers and many sellers. As the sellers are more and buyers are few the price of
product will be comparatively low but not so low as under monopoly.
8) Bilateral Monopoly: A bilateral monopoly is a market situation in which a
single seller (Monopoly) faces a single buyer (Monopsony). It is market called
bilateral monopoly.
Pricing Methods:
1) Cost based pricing: The cost of product of the commodity decides the price
of the product.
a) Full Cost Pricing: When the price equal to the average cost, that price is called
full cost pricing.
b) Cost Plus Pricing: Some mark-up added to average cost that is called cost
plus pricing
c) Marginal Cost Pricing: Which price is equal to marginal cost that pricing is
called marginal cost pricing
2) Competitive Based Pricing: Some commodities are priced according to the
competition in their market.
a) Going rate Pricing: This price could be below or above the average cost and it
could even be an economic price Ex: If the Maruthi Car was first manufacture in
India, it must have taken into amount the prices of existing cars.
b) Sealed Bid Pricing: If the buyer asked companies to quote their price in
sealed cover, all the offers are opened at a pre announced time in the presence
of all the competitors, and the who quoted the least is awarded the contract.
3) Demand Pricing : Based on the demand of the product in the market to be
consider to decided the price of the product.
a) Perceived Value Pricing : Perceived value pricing considers the buyers
perception of the value of the product as the basis of pricing. Here the pricing
rule is that the firm must develop procedure for measuring the relative value of
the product as perceived by consumers.
b) Differential Pricing : The selling price of the product is different prices in
different market segments. It is depends on geographical location of the
consumers, type of consumer, purchasing quantity, season, time of the service.
Ex: Telephone charges, APSRTC charges.
4) Strategy Based Pricing : Based on the strategy of the company to be
consider to decided the price of product called strategy based pricing.
a) Skimming Pricing : Under this strategy, the new product of the price is high in
the beginning and its price is reduced gradually as it faces a dearth of buyers.
Such a strategy may be beneficial for products, which are fancy, but of poor
quality and/or of insignificant use over a period of time.
b) Penetration Price : Under this strategy the price of the product initial low price
in the beginning in order to catch the attention of consumers, once the product
image and credibility is established, the seller slowly starts to increase the price
to earn good profits in future under this price the price of the product is below the
production cost, initial the firm runs into losses to start with but eventually it
recovers all its losses and even make good over all profits, Ex: Rin Soap
5) Two – Part Pricing: Under this strategy a firm charges a fixed fee for the right
to purchase its goods, plus a per unit charge for each unit purchased
Fixed fee generally equals the consumer surplus each consumer received
at this per unit price. The charge per visit or on monthly basis equals the
marginal cost. Ex: Country Clubs, Health Club
6) Block Pricing : Block pricing is another way a firm with market power can
enhance its profits we see block pricing in our day-to-day very frequently
Ex: Six Lux Soaps in a single pack.
7) Commodity Bundling: It is refers to the practice of bundling two or more
different products together and selling tem at a single bundle price.
Ex : The package deals offered by the tourist companies.
8) Peak Load Pricing: During seasonal period when demand is likely to be
higher, a firm may enhance profits by peak load pricing. The firm’s philosophy is
to charge a higher price during peak times, than is charged low during off-peak
time. Ex: Jet Air charge high price in festival seasons.
9) Cross Subsidization: In cases where demand for two product produced by a
firm is interrelated through demand or costs the firm may enhance the profitability
of its operations through. Cross subsidization using the profits generated by
established products, a firm may expand its activities by financing new product
developments into new product market.
Ex: Computer companies selling both software and hardware may find
economies, relating to volume and cost, in selling the two products jointly
10) Transfer Pricing: Transfer pricing is an internal pricing technique. It refers
to a price at which inputs of one department are transferred to another, in order
to maximize the overall profits of the company.
Ex: The engine department of kinetic Honda makes the Scooter engines and
forwards these to the assembly department.