Objectives of setting market price

The market structure is determined by type of competition that prevails in the market.
Competition within and between the brands is known today than ever before partly because of
the increasing strength of foreign market.

It is majorly of two types :- Perfect(Pure) competition and Imperfect(Impure) competition.

Pricing objectives  give direction to the whole pricing process. Determining the objectives for
our market is the first step in pricing.

Points to be considered while deciding pricing objectives:

1) the overall financial, marketing, and strategic objectives of the company.

2) the objectives of product or brand.

3) consumer price elasticity and price points.

4) the resources available.

Some of the most common pricing objectives are: To maximise long-run and short-run, profit,
company growth which is essential for every company, desensitize customers to price
discourage new entrants into the industry, match competitors prices for a healthy competition in
market, investigation or intervention enhance the image of the firm, brand, or product.

How prices are set in the market under perfect

competition and under imperfect competition?
Perfect Competition
Basically, a Perfect Competition is a theoretical concept and can not be implemented in the real
world.

In a Perfect Competition, resources would be divided among companies equally and fairly in a
market, and no monopoly would exist. Each company would have the same industry knowledge
and they would all sell the same products. There would be plenty of buyers and sellers in this
market, and demand would help set prices evenly across the board .

In a market period, the time span is so short that no firm can increase its output. The total stock
of the commodity in the market is limited. The market period may be an hour, a day or a few days
or even a few weeks depending upon the nature of the product.

For example, in the case of perishable commodities like vegetables, fish, eggs, the period may
be a day. Since the supply of perishable commodities is limited by the quantity available or stock
in day that neither can be increased nor can be withdrawn for the next period, the whole of it
must be sold away on the same day, whatever may be the price.
Fig 4.1 shows that the supply curve of perishable commodities like fish is perfectly inelastic and
assumes the form of a vertical straight line SS. Let us suppose that the demand curve for fish is
given by dd. Demand curve and supply curve intersect each other at point R, determining the
price OP. If the demand for fish increases suddenly, shifting the demand curve upwards to d’d’.

The equilibrium point shift from R to R” and the price rises to OP’. In this situation, price is
determined solely by the demand condition that is an active agent.

Similarly, if the demand for a product is given, as shown in demand curve SS in figure 4.2. If the
supply of the product decreases suddenly from SS to S’S’, the price increases from P to P’. In
this case price is determined by supply, the supply being an active agent.

In this case supply curve shifts leftward causing increase in price of the reduced supply goods.
Given the demand curve dd and supply curve SS, the price is determined at OP. Demand curve
remaining the same, the decrease in supply shifts the supply curve to its left to S’S’.
Consequently, the price rises from OP to OP’.

The supply curve of non-perishable but reproducible goods will not be a vertical straight line
throughout its length. This is for certain goods can be withdrawn from the market if the price is
too low as the seller would not sell any amount of the commodity in the present market period
and would like to hold back the whole stock.

The price below which the seller declines to offer for any amount of his product is known as
‘reserve price’. Thus, the seller faces two extreme price-levels; at one he is ready to sell the
whole stock and the other he refuses to sell any. The amount he offers for sale will vary with
price.

The seller will be ready to supply more at a higher price rather than at a lower one will depend
upon his anticipations of future price and intensity of his need for cash. The supply curve of a
seller will, therefore, slope upwards to the right up to the price at which he is ready to sell the
whole stock. Beyond this point, the supply curve will become a vertical straight line whatever the
price.

Imperfect competition

Imperfect competition occurs in a market when one of the conditions in a perfectly competitive

market are left unmet. This type of market is very common. In fact, every industry has some type
of imperfect competition. This includes a marketplace with different products and services, prices
that are not set by supply and demand, competition for market share, buyers who may not have
complete information about products and prices, and high barriers to entry and exit.

Imperfect competition can be found in the following types of market structures: monopolies,
oligopolies, monopolistic competition, monopsonies, and oligopsonies.

Under monopoly conditions, too, there is bound to be interaction between the forces of demand
and supply. But there is this difference that the-supply is not free to adjust itself to demand. It is
under the control of the monopolist. A monopolist is the sole producer of his product which has
no closely competing substitutes.

In other words, the cross-elasticity of demand between the product of the monopolist and the
product of the closest rival must be very low, i.e., the product of a rival cannot take the place of
the monopolized product. Monopolist is a sole producer of the commodity and he can easily
influence the price by changing his supply.

Under perfect competition, because there is a large number of producers, the supply of each
producer constitutes only a small proportion of the total supply Hence, under perfect competition,
no one seller can influence the price by changing his own supply. On the other hand, the
monopolist can influence the price.

In fact, he sets the price. There is another difference between monopoly and competition. When
there is perfect competition, the demand for the product of an individual producer is perfectly
elastic at the ruling price. He can sell any amount at the prevailing price. Such demand is
represented by a horizontal straight line parallel to the X-axis. Also, marginal revenue (MR) =
Price, i.e., average revenue (AR).

These two curves MR and AR coincide. This is not so in monopoly; the demand for the
monopolized product is not perfectly elastic (there being practically no substitutes); hence
demand price or curve AR falls to the right and MR curve is always below it.

Being in control of the supply, the monopolist can (a) either fix the price and offer to supply the
quantity demanded at that price; or (b) he can fix the supply, and then let price be determined by
demand in relation to the supply fixed by him. But he cannot fix both the price and also force the
people to buy a pre-determined quantity at that price. He can only do one of these two things,
i.e., either fix the price or fix the supply.

Equalising Marginal Revenue and Marginal Cost:

The aim of the monopolist, like every other producer, is to maximize his total money profits.
Therefore, he will produce to a point and charge a price which gives him the maximum money
profits. In other words, he will be in equilibrium at the price-output level at which his profits are
maximum. He will go on producing so long as additional units add more to revenue than to cost.
He will stop at that point beyond which additional units of production add more to cost than to
revenue.

In other words, the monopolist will be in equilibrium position at that level of output at which
marginal revenue equals marginal cost. He will continue expanding output so long as marginal
revenue exceeds marginal cost. He does so because profits will go on increasing as long as
marginal revenue exceeds marginal cost. At the point where marginal revenue is equal to
marginal cost, the profits will be maximized. If the production is carried beyond this point, the
profits will start decreasing.

The price-output equilibrium of the monopolist can be easily understood with the help of Fig. 29.1
on the next page. AR is the demand curve or average revenue curve facing the monopolist. MR
is the marginal revenue curve, which lies below the average revenue curve AR. AC is the
average cost curve and MC is the marginal cost curve.

It can be seen from the diagram that until OM output, the marginal revenue is greater than
marginal cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the
monopolist will be in equilibrium at output OM, where marginal revenue is equal to marginal cost
and profits are the maximum.
The price at which output OM is sold in the market can be known from looking at demand curve
or average revenue curve AR. It can be seen from Fig. 29.1 that corresponding to equilibrium
output OM, the price or the demand or average revenue is MP’ (= OP). Thus, it is clear that given
the cost-revenue situation as presented in the diagram, a monopolistic firm will be in equilibrium
at output OM and will be charging price equal to MP’ (= OP).

Now the question is: what amount of actual total profits—although maximum they would be in the
given cost-revenue situation—will be earned by the monopolist in this equilibrium position? This
can be found in the following way. At output OM, while MP’ is the average revenue, ML is the
average cost. So P’L is the profit per unit.

Now the total profits = Profits per unit x total output sold

= P’L X OM

= P’ L X TL

= P’LTP

Thus, the total profits earned by the monopolist in the equilibrium position will be equal to the
rectangle P’LTP. i.e., the shaded area in Fig. 29.1.