MARKET STRUCTURES

What are markets?

-A place where commodities are bought and sold at retail or wholesale prices.
-It refers to an arrangement whereby buyers and sellers come in close contact with each other
directly or indirectly to sell and buy goods.

What is ‘market structure’....

-Market structure is the characteristics of a market.
-We focus on those characteristics which affect the nature of competition and pricing.

Types of Market Structures

1. PERFECT COMPETITION
2. MONOPOLY
3. MONOPOLISTIC COMPETITION
4. OLIGOPOLY

IMPERFECT COMPETITION

Monopoly
-Literally monopoly means one seller.
-‘Mono’ means one and ‘poly’ means seller.
-One firm is the sole producer or seller of a product which has no close substitutes.
-Thus monopoly is negation of competition.

Features of Monopoly
-Single producer or seller
-There is no close substitute for the product
-There is no freedom of entry
-The monopolist is a price maker
-The monopolist aims at maximization of his profit
PRICE DISCRIMINATION
-Sometimes, a monopoly firm might charge different prices to different groups of buyers. This
pricing technique is called price discrimination.

Degrees of Price Discrimination

FIRST DEGREE PRICE DISCRIMINATION
(different price to each of its customers)
-The monopolist discriminates price not only between different consumers but also between the
different units of purchase by a given consumer.
-He extracts the maximum possible price for each unit of his output.
-The monopolist has complete knowledge about the market demand curve.
-He can charge the maximum price which a consumer is ready to pay for purchasing a given
quantity.

SECOND DEGREE PRICE DISCRIMINATION

(discriminate according to quantities consumed)
-Price does not differ for each unit of purchase.
-The consumer is made to pay one price up to a certain amount of purchase and another price
for purchases exceeding this amount.
-This is known as the principle of block pricing.

THIRD DEGREE PRICE DISCRIMINATION

(different prices to each sub market)
-A particular consumer pays a particular price, irrespective of the amount of his purchase.
-But the price differs between different consumers (or different group of consumers)
Monopolistic Competition
-It is that form of market in which there are large numbers of sellers selling differentiated
products which are similar in nature but not homogenous.
-It is a combination of perfect competition and monopoly
EXAMPLE:
The different brands of soap - these are closely related goods with a little difference in odor, size
and shape
OLIGOPOLY
-Oligopoly is a market situation in which there are few firms producing either differential goods
or closely differential goods.
-The number of firms is so small that every seller is affected by the activities of the others.

FEATURES OF OLIGOPOLY
-Few Sellers
-Interdependence
-Homogeneous/ Differential products
-Barriers to entry

COLLUSIVE OLIGOPOLY
-There usually exists some form of understanding among the oligopolists in a particular industry.
-This understanding or agreement among the oligopolists may be either tacit or formal.

2 TYPES OF COLLUSIONS:
1. Cartels
2. Price Leadership
CARTELS- A collection of independent businesses or organizations that collude in order to
manipulate the price of a product or service. Cartels are competitors in the same industry and
seek to reduce that competition by controlling the price in agreement with one another.
-The organization of petroleum exporting countries (OPEC) is perhaps the best known example
of an international cartel; OPEC members meet regularly to decide how much oil each member
of the cartel will be allowed to produce.

PRICE LEADERSHIP- Price leadership refers to a situation where prices and price changes
established by a dominant firm, or a firm is accepted by others as the leader, and which other
firms in the industry adopt and follow.
-Price leadership is common in airline industry, whereby a price leader sets the price and all the
other competitors feel compelled to lower their prices to match.

DUOPOLY
- It is a specific type of oligopoly where only two producers exist in one market. In reality,
this definition is generally used where only two firms have dominant control over a
market.
Visa and Mastercard – two companies which process credit card payments take around
80-90% of market share, gaining highly profitable commission on the processing of payments.

MONOPSONY
- Monopsony denotes a market condition when there is a solitary consumer of a product
or service.
EXAMPLE: A supermarket which is a sole buyer of fruits from a regions
Though Uber likes to position itself as the free market in action, in reality, Uber acts as a
monopsony (a single purchaser for all goods and services) and “purchases” all trips from
drivers, before supplying them to riders.

Bilateral Monopoly - denotes a market condition in which a solitary manufacturer of

merchandise faces a solitary purchaser of that commodity

Example: A situation where there is a single large employer in a factory town, where its demand
for labor is the only significant one in the city, and the labor supply is managed by a
well-organized and strong trade union.

DUOPSONY
-An economic condition, similar to a duopoly, in which there are only two large buyers for a
specific product or service. Members of a duopsony have great influence over sellers and can
effectively lower market prices for their supplies.

EXAMPLE: In a local market where there are only two leading milk companies collecting milk
from farmers

OLIGOPSONY
-A market form in which the number of buyers is small while the number of sellers is small while
the number of sellers in theory could be large.
-This typically happens in a market for inputs where numerous suppliers are competing to sell
their product to a small number of (often large and powerful) buyers.
-It contracts with an oligopoly, where there are many buyers but few sellers.

Managerial Economics: Pricing Strategies

-The process of determining what a company will receive in exchange for its product or service.
-A business can use a variety of pricing strategies when selling a product or service.
-The price can be set to maximize profitability for each unit sold or from the market overall.
-It can be used to defend an existing market from new entrants, to increase market share within
a market or to enter a new market.

Pricing a New Product

-The marketing of a new product poses a problem because new products have no past
information.
-The marketing of a new product poses a problem because new products have no past
information.
-Fixing the first price of the product is a major decision.
-The future of the company depends on the soundness of the initial pricing decision of the
product.
-In large multidivisional companies, top management needs to establish specific criteria for
acceptance of new product ideas.
-The price fixed for the new product must have completed the advanced research and
development, satisfy public criteria such as consumer safety and earn good profits.
-In pricing a new product, two types of pricing can be selected…….

SKIMMING PRICE
-Known as short period device for pricing.
-Here, companies tend to charge higher price in initial stages.
-Initial high helps to “Skim the Cream” of the market as the demand for new product is likely to
be less price elastic in the early stages.

PENETRATION PRICE
-Also referred as stay out price policy since it prevents competition to a great extent.
-In penetration pricing lowest price for the new product is charged.
-This helps in prompt sales and keeping the competitors away from the market.
-It is a long term pricing strategy and should be adopted with great caution.

Multiple Products
-As the name indicates multiple products signifies production of more than one product.
-The traditional theory of price determination assumes that a firm produces a single
homogenous product.
-But firms in reality usually produce more than one product and then there exists
interrelationships between those products.
-Such products are joint products or multi–products.
-In joint products the inputs are common in the production process and in multi-products the
inputs are independent but have common overhead expenses.

The pricing methods followed in Multiple Products are…..

Full Cost Pricing Method
-A price-setting method under which you add together the direct material cost, direct labor cost,
selling and administrative cost, and overhead costs for a product and add to it a markup
percentage in order to derive the price of the product.
-This method is most commonly used in situations where products and services are provided
based on the specific requirements of the customer.
-Thus, there is reduced competitive pressure and no standardized product being provided.
-The method may also be used to set long-term prices that are sufficiently high to ensure a profit
after all costs have been incurred.

Marginal Cost Pricing Method

-The practice of setting the price of a product to equal the extra cost of producing an extra unit
of output is called marginal pricing in economics.
-By this policy, a producer charges for each product unit sold, only the addition to total cost
resulting from materials and direct labor.
-Businesses often set prices close to marginal cost during periods of poor sales.
-For example, an item has a marginal cost of P2.00 and a normal selling price is P3.00, the a
firm selling the item might wish to lower the price to P2.10 if demand has waned.
-The business would choose this approach because the incremental profit of 10 cents from the
transaction is better than no sale at all.

Transfer Pricing
-Relates to international transactions performed between related parties and covers all sorts of
transactions.
-The most common being distributorship, R&D, marketing, manufacturing, loans, management
fees, and IP licensing.
-All intercompany transactions must be regulated in accordance with applicable law and comply
with the "arm's length" principle which requires holding an updated transfer pricing study and an
intercompany agreement based upon the study.

Dual Pricing
-In simple words, different prices offered for the same product in different markets is dual
pricing.
-Different prices for the same product are basically known as dual pricing.
-The objective of dual pricing is to enter different markets or a new market with one product
offering lower prices in foreign countries.
-There are industry specific laws or norms which are needed to be followed for dual pricing.
-Dual pricing strategy does not involve arbitrage. It is quite commonly followed in developing
countries where local citizens are offered the same products at a lower price for which
Foreigners are paid more.
-Airline Industry could be considered as a prime example of Dual Pricing. Companies offer lower
prices if tickets are booked well in advance. The demand of this category of customers is elastic
and varies inversely with price.
-As the time passes the flight fares start increasing to get high prices from the customers whose
demands are inelastic. This is how companies charge different fare for the same flight tickets.
The differentiating factor here is the time of booking and not nationality.

EVALUATING THE ECONOMIC BENEFITS

ECONOMIC EVALUATION
-The process of systematic identification, measurement and valuation of the inputs and
outcomes of two alternative activities, and the subsequent comparative analysis of these.
-The purpose of economic evaluation is to identify the best course of action, based on the
evidence available.

1. COST–BENEFIT ANALYSIS (CBA) sometimes also called Benefit–Cost Analysis

-A systematic approach to estimating the strengths and weaknesses of alternatives used to
determine options which provide the best approach to achieving benefits (in
transactions,activities, and functional business requirements).
-A CBA may be used to compare completed or potential courses of actions, or to estimate (or
evaluate) the value against the cost of a decision, project, or policy.
-It is commonly used in commercial transactions, business or policy decisions (particularly public
policy), and project investments.
-CBA consists of estimating all the costs of a particular decision, then comparing them to the
estimated benefits of that decision.
-CBA is not exclusive to business, as governments use it to evaluate different policy choices.
-CBA can be performed using very sophisticated financial models that take into account not only
tangible costs and benefits, but also factors hard to quantify intangibles such as employee
morale and customer satisfaction.
-Another cost included in a CBA is the opportunity cost of not pursuing other alternatives.

CBA has two main applications:

-To determine if an investment (or decision) is sound, ascertaining if – and by how much
– its benefits outweigh its costs.
-To provide a basis for comparing investments (or decisions), comparing the total expected cost
of each option with its total expected benefits.
Examples: ABC, Inc. plans to build a new production facility. A CBA will consider the cost to
build the new project against the benefits of added productivity from a modern plant. The CBA
might also include other benefits such as an increase in employee morale.

Examples:The decision to remodel a kitchen is a CBA. The homeowner calculates the additional
value to his home, along with the intangible value of using an improved kitchen, and compares it
to the remodel cost.
Another cost the homeowner may consider is the opportunity cost of not using the remodeling
funds for other purposes, such as his children’s college fund. If the benefits exceed the costs,
the kitchen will get a much-needed remodel.
 2. COST-EFFECTIVENESS ANALYSIS (CEA)
-A form of economic analysis that compares the relative costs and outcomes (effects) of
different courses of action.
-Cost-effectiveness analysis is distinct from cost–benefit analysis, which assigns a monetary
value to the measure of effect.
-Typically the CEA is expressed in terms of a ratio where the denominator is a gain in health
from a measure (years of life, premature births averted, sight-years gained) and the numerator
is the cost associated with the health gain.
-CEA is most useful when analysts face constraints which prevent them from conducting
cost-benefit analysis.

Examples: In 2005 the UK Government undertook a value for money analysis of Government
investment in different types of childcare. The choice was between higher cost "integrated"
childcare centers, providing a range of services to both children and parents, or lower cost
"non-integrated" centers that provided basic childcare facilities.
-The analysis used a variant of cost-effectiveness analysis to allow the comparison of the
cost-effectiveness of childcare to other policy areas such as employment, education and crime,
where the evidence allowed the analysts to quantify intermediate outputs from the policy (e.g.
improved educational attainment aged 18) but not the final outcomes of the policy (e.g. better
overall life chances, higher skilled workforce and higher economy wide productivity
growth).

3. COST–UTILITY ANALYSIS (CUA)

-A form of financial analysis used to guide procurement decisions.
-The most common and well-known application of this analysis is in pharmaco-economics,
especially health technology assessment (HTA).
-(CUA) is an economic analysis in which the incremental cost of a program from a particular
point of view is compared to the incremental health improvement expressed in the unit of quality
adjusted life years (QALYs)
-Differing from cost-benefit analysis, cost-utility analysis is used to compare two different drugs
or procedures whose benefits may be different.
-The cost-utility analysis also considers healthcare costs and health effects, but the
effectiveness measure attempts to value the consequences of the health outcomes.

4. RISK–BENEFIT ANALYSIS
-An analysis that seeks to quantify the risk and benefits and hence their ratio.
-Analyzing a risk can be heavily dependent on the human factor. A certain level of risk in our
lives is accepted as necessary to achieve certain benefits.

Evaluations of future risk can be:

Real future risk, as disclosed by the fully matured future circumstances when they develop.
Statistical risk, as determined by currently available data, as measured actuarially for
insurance premiums.
Projected risk, as analytically based on system models structured from historical studies.
Perceived risk, as intuitively seen by individuals.

Examples: For research that involves more than minimal risk of harm to the subjects, the
investigator must assure that the amount of benefit clearly outweighs the amount of risk. Only if
there is a favorable risk–benefit ratio may a study be considered ethical.
-COVID 19 VACCINES

5. ECONOMIC IMPACT ANALYSIS (EIA)

-It examines the effect of an event on the economy in a specified area, ranging from a single
neighborhood to the entire globe.
-It usually measures changes in business revenue, business profits, personal wages, and/or
jobs. The economic event analyzed can include implementation of a new policy or project, or
may simply be the presence of a business or organization.
-An economic impact analysis is commonly conducted when there is public concern about the
potential impacts of a proposed project or policy.
-An economic impact analysis attempts to measure or estimate the change in economic activity
in a specified region, caused by a specific business, organization, policy, program, project,
activity, or other economic event.
-The study region can be a neighborhood, town, city, county, statistical area, state, country,
continent, or the entire globe.

Examples: Economic impact analyses are often used to examine the consequences of
economic development projects and efforts, such as real estate development, business
openings and closures, and site selection projects.
-The analyses can also help increase community support for these projects, as well as help
obtain grants and tax incentives.

6. SOCIAL RETURN ON INVESTMENT

-A principles-based method for measuring extra-financial value (such as environmental or social
value not currently reflected or involved in conventional financial accounts).
-It can be used by any entity to evaluate impact on stakeholders, identify ways to improve
performance, and enhance the performance of investments.