Market Structure and Pricing

Decisions

GROUP 4
Blancaflor,Buendia,Brugada,Burabo,Cestina,
Cimarra,Jadie, Malinao, Parcia
Perfect Competition

Market structure that is composed of

many small firms with identical products
and can be a perfect substitute to each
product
There are no consumer preferences.
None of the firm can control the market
place
 Advantages of Perfect Competition

Encourages efficiency
Operate at maximum efficiency
Consumer benefits, consumers charged at lower price
Consumers are not exploited
Same quality of products are supplied from all
manufacturer.
Disadvantages of Perfect Competition

Lack of product variety

Insufficient profits for investment
Lack of competition over product design and
specification
Unequal distribution of income and goods
No choice — goods are almost identical
Example: market, fishball/street food vendor
PRICING DECISION

Cost-Oriented Method
 Since cost provide the base for a possible proce range, some firms may consider cost-
oriented methods to fix the price.
Cost Plus Pricing
 Involves adding a certain percentage to cost in order to fix the price.
FORMULA:
Cost of production per unit + Percentage on costs
 Mark-Up Pricing

• Difference between average cost and price of all

merchandise in stock, for a department, or for an
individual item. Firms that use cost –oriented methods
use mark-up pricing
Mark-Up Pricing

FORMULA:
Cost + Mark – up = Selling Price

Break Even Pricing

• The firm, determines the level of sales needed to cover all
the relevant variable and fixed costs.
Example:

Cost of production is 200 per unit +

10 percent profit on costs = Selling
price will be 220
Break-Even Price
Sales revenue = cost of goods sold. There is no loss
or profit

FORMULA:
Contribution = Selling price – Variable cost per
unit

Example: Solution:
Fixed cost – Php 200, 000 Contribution = selling price –variable cost
Variable cost per unit – Php 10 per unit
Selling price – Php 15
= Php 15 – Php 10
=5
Break-even = Fixed cost / contribution
= Php 200, 000 / 5
= 40, 000 units
So the seller will plan to sell more than 40, 000 units
to earn profit, but if not, it has to increase the selling
price.
Target Return Pricing – the firm sets prices in order to achieve
a particular level of return on investment (ROI)

 FORMULA:
 Target return price = Total cost + (desired % of ROI)/total sales in
units

 Example:
Total investment – Php 10, 000
Desired ROI - 20%
Total cost - Php 5,000
Total Sales - 1000 units
 Solution:
TRP = Total Cost + (desired %™of ROI)/ total sales in units
= 5,000 + (10,000 x 20%)/1,000
= 5,000 + 2,000 / 1,000
= 7,000/1,000
=7

* The limitation of this method is that prices derived from costs without considering the market factors
such as competition, demand and consumer’s percieved value. However, this method helps to
ensure the prices exceed the costs and contribute to profit.
MONOPOLY

 A market structure characterized by a single seller, selling a unique product in the market
 The seller faces no competition, as he is the sole seller of the goods with no close
substitute.
 Factors like government license, ownership of resources, Copyright and patent, and high
starting cost make an entity a single seller of goods.
Sources of Monopoly Power

 Economies of scale
 Capital requirements
 Techonological sususuperiority
 No substitute goods
 Control of natural resources
 Legal barriers, and
 Deliberate actions
Similarities between Differences Between
Monopoly and the Two Market
Competitive Market Structure

1. Marginal revenue and price

1. The cost functions are the same 2. Product differentiation
2. Both minimize cost and maximize profit
3. Number of competitors
4. Barriers to entry
3. The shutdown decisions are the same, and
5. Elasticity of demand
4. Both have competitive market factors
6. Excess profits
7. Profit maximization, and
8. The supply curve
Monopoly Market

 Characterized by :
1. Profit Maximizer
2. Price maker
3. High barriers to entry
4. Single seller
5. Price discrimination
Monopoly vs. Competitive Market

 Similarities
1. Cost funtions
2. Minimize cost and maximize profit
3. Shutdown decisions
4. Assumed to have perfectly competitive market factors
Differences
1. Marginal revenue and price
2. Product differentiation
3. Number of competitors
4. Barriers to entry
5. Elasticity of demand.
6. Excess profits
7. Profit maximization
8. Supply curve
MONOPOLY

Features
1. Lack of substitutes
2. Barriers to entry
3. Competition
4. Price maker
5. Profits
Advantages Disadvantages
of Monopoly of Monopoly

1. Stability of prices 1. Higher prices

2. Price didiscrimination
2. Economies of scale
3. Inferior goods and services
3. Research and
development
Monopolistic Competition

 Type of impe4fect competition such that many producers sell products that are different
from one another

 ADVANTAGES
1. No significant barriers to entry
2. Differentiation creates diversity , choice, and utility
3. More efficient than monopoly
4. May be dynamically efficient, innovative, in terms of new production processes of new
products
 DISADVANTAGES
1. Some differentiation does not create utility
2. Generates unnecessary wastes
3. Inefficient

 Examples
-Restaurant business
-hotels and pubs
-consumer services such as hair dressing
Monopolistic Competition
END