Industrial-Economics-Module-3-

Important-Topics
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Industrial-Economics-Module-3-Important-Topics
1. Perfect competition
- Features of Perfect competition
2. Monopoly
- Features of Monopoly
3. Monopolistic Competition
What is Monopolistic Competition
Features of monopolistic competition
4. Oligopoly and kinked demand
Features of Oligopoly
Kinked demand Curve
5. Collusive Oligopoly
6. Pricing Strategies
Cost Plus or Markup Pricing
Target Return Pricing
Penetration Pricing
Predatory Pricing
Going Rate Pricing
Price Skimming
Administered Pricing

1. Perfect competition
 Perfect competition

Perfect competition is a market situation in which there are larger number of buyers and
sellers dealing in a homogeneous product with perfect knowledge of the market conditions
and perfect mobility of goods and factors of production.

Features of Perfect competition

Large number of buyers and sellers

Homogeneous Product
All sellers are selling identical product, same in appearance color, quality.
Freedom of entry and exit
Perfect knowledge
Perfect mobility of goods and factors of productions
Assumed that goods and factors of production are free to move from one place to
another
Absence of transport cost
Perfectly elastic demand curve

2. Monopoly
Monopoly means a single seller
Its a market situation in which a single seller controls the entire supply for a commodity
Example: Indian Railway is a monopoly of the government

Features of Monopoly

Single seller : under monopoly there is only a single seller who controls entire production
and distribution of a commodity.
Since there is only one seller there is no competition and the seller can charge any
price for his product.
No close substitutes : Monopolist is selling a product which has no close substitutes.
Close substitute means goods which satisfy the same want.
Barriers to entry
 Freedom of entry is restricted in monopoly
Form of
Legal restrictions
Exclusive ownership
Technical Knowhow

Price Maker
Can fix any price for the product, because there are no other competition

3. Monopolistic Competition
What is Monopolistic Competition

It is a market situation in which there are a large number of buyers and sellers dealing in a
differentiated product
The product produced by each seller is not identical, they are close substitutes. They may
differ in color, shape, taste etc.
Examples are Bath soap, softdrinks

Features of monopolistic competition

Large number of buyers and sellers

Similar to perfect competition there are large number of buyers and sellers in
monopolistic competition
Product differentiation
It can be in the form of changes in color, shape, quality, packing, etc
Selling cost
Each seller is selling a product which are close substitutes
They spend huge amounts on ads and other sales promotional activities. This is
called selling cost

Freedom of entry and exit

There are no restrictions on the entry or exit of firms
New firms can enter into the industry or loss making firms can leave the market at
any time
Imperfect knowledge
 The information about market condition like price, quality, cost etc is not uniformly
available to all buyers and sellers

4. Oligopoly and kinked demand

Oligopoly is a market situation in which there are a few sellers selling either a
homogenous or differentiated product.
Examples include Aviation and Telecommunication industry
Since there are only a few firms, they are interdependent to each other

Features of Oligopoly

Few Sellers
Few sellers dominate the entire industry
Homogenous or differentiated product
Homogeneous Example -> Petrol
Heterogenous Example -> Automobiles
Barriers to entry
Economic Barriers prevent the entry of new firms
Form of huge investment requirement
Strong Customer loyalty

Mutual Interdependence
Firms are influenced by each others decision

Existence of price rigidity

Firms do not prefer to change price of their product because it will not be beneficial
for them
If one firm decreases the price others will also reduce price
If the firm increases the price, others will not increase the price and hence it will
lose its customers
Firms resort to non price competition like ads
Indeterminate Demand Curve
Demand curve is unknown under oligopoly
Kinked demand Curve

Kinked demand curve explains price rigidity under oligopoly on the basic of the following
assumptions
If a firm increases its price others will follow
If a firm decreases its price others will also do the same
Usually in oligopoly, firms will not enter into a price war, price remains rigid
If one firm decreases price, others will decrease price
If the firm increases the price, others will not increase the price and hence it will lose its
customers
This behaviour is explained by kinked demand curve

The lower part in the demand curve is less elastic because the firm cannot gain from the
price cut
Upper part is more elastic because there will be substantial fall in demand if theres a price
hike
In the diagram we can see a kink K.
This creates a discontinuity in the MR curve
At the kink, MR remain unchanged between S and R
Marginal cost curve mc1 intersect MR curve at S and OQ is the equilibrium level of output
 Suppose cost increases and MC curve shift upwards as mc2
There will not be any change in equilibrium price and quantity till MC reached point R
in gap

5. Collusive Oligopoly
Under oligopoly firms are interdependent and face cut throat competition
To avoid price war and loss, firms enter into an agreement regarding uniform price
and output
This agreement is known as collusion
Collusion denotes a situation in which two or more firms jointly set their prices or output,
divide the market among them or make business decisions
Under collusion, sometimes the dominant firm in the industry sets the price and others
follow it.

6. Pricing Strategies
The pricing Strategies are

Cost Plus or Markup Pricing

Under this strategy price is th esum of cost and a profit margin

Average cost is used for this price
Price = AC + m
Where m is the percentage of markup
Markup is fixed arbitarily and Determined at 10 percent

Target Return Pricing

Similar to cost plus pricing

But in cost plus pricing, the profit margin is decided arbitarily
But in this method, producer rationally decides the minimum rate of return

Penetration Pricing
 When a firm wants to enter into a market which is already dominated by existing firms, the
only option is charging a price less than the existing price.
This price is called penetration price
Example: Reliance with using penetration price with Jio

Predatory Pricing

Under predatory pricing, the predator, already a dominant firm, sets its prices too low for a
sufficient period of time so that its competitors leave the market and others deterred from
entering.
This predation is done on the expectation that these present losses will be compensated
by future gains.

Going Rate Pricing

This is the strategy of following the prevailing market price instead of separate pricing
strategy of their own. In this case, the price is fixed by a dominant firm and others accept
it.
Going rate pricing strategy is adopted when the products sold by the sellers are very close
substitutes.
This strategy is adopted when the product is generic like mineral water

Price Skimming

Its a strategy in which high price is charged at the time of introduction of the product an a
lower price during maturity.
Once the product is established, and reached maturity, producers will reduce the profit
margin and charge a lower. This will attract the lower income group.

Administered Pricing

The term administered pricing is used to denote the price charged by the monopolists.
Administered prices are not fixed by the market mechanism
In the case of india, Administered price is fixed by the government
Example: Price of cooking gas