Unit Iii Introduction To Market And Pricing Strategies


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UNIT – III
INTRODUCTION TO MARKET AND PRICING STRATEGIES
MARKET Market is a place where buyer and seller meet, goods and services are offered for the sale
and transfer of ownership occurs. Economists describe a market as a collection of buyers and sellers who transact over a particular product or product class (the housing market, the clothing market, the grain market etc.). For business purpose we define a market as people or organizations with wants (needs) to satisfy, money to spend, and the willingness to spend it.
Definition:
According to Philip Kotler “Market is a societal process by which individuals and groups obtain what they need and want through creating, offering and freely exchanging products and services of value with others”.
Market Structure Market structure describes the competitive environment in the market for any good or
service. A market consists of all firms and individuals who are willing and able to buy or sell a particular product. This includes firms and individuals currently engaged in buying and selling a particular product, as well as potential entrants. These are the main areas in the market, they are
• Seller contribution • Buyer contribution • Product differentiation • Conditions of entry into the market.(competition)
Types of Competition
The market can be divided into two types.,

Perfect Competition
Perfect competition refers to a market structure where competition among the sellers and buyers prevails in its most perfect form. In a perfectly competitive market, a single market price prevails for the commodity, which is determined by the forces of total demand and total supply in the market
Characteristics/Features of Perfect Competition The following features characterize a perfectly competitive market:
1. A large number of buyers and sellers: The number of buyers and sellers is large and the share of each one of them in the market is so small that none has any influence on the market price.
2. Homogeneous product: The product of each seller is totally undifferentiated from those of the others.
3. Free entry and exit: Any buyer and seller is free to enter or leave the market of the commodity.
4. Perfect knowledge: All buyers and sellers have perfect knowledge about the market for the commodity.
5. Indifference: No buyer has a preference to buy from a particular seller and no seller to sell to a particular buyer.
6. Non-existence of transport costs: Perfectly competitive market also assumes the nonexistence of transport costs.
7. Perfect mobility of factors of production: Factors of production must be in a position to move freely into or out of industry and from one firm to the other.
Under such a market no single buyer or seller plays a significant role in price determination.
Imperfect competition
A competition is said to be imperfect when it is not perfect. Based on the number of buyers and sellers, the structure of market varies as outlined below: “poly” refers to seller and “psony” refers to buyer. Imperfect competition has three types, they are,
1. Monopoly 2. Monopolistic competition 3. Oligopoly 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. Pure monopoly is a market situation in which a single firm sells a product for which there is no good substitute.
Features of monopoly The following are the features of monopoly.
1. Single person or a firm: A single person or a firm controls the total supply of the commodity. There will be no competition for monopoly firm. The monopolist firm is the only firm in the whole industry.
2. No close substitute: The goods sold by the monopolist shall not have closely competition substitutes. Even if price of monopoly product increase people will not go in far substitute. For example: If the price of electric bulb increase slightly, consumer will not go in for kerosene lamp.
3. Large number of Buyers: Under monopoly, there may be a large number of buyers in the market who compete among themselves.
4. Price Maker: Since the monopolist controls the whole supply of a commodity, he is a pricemaker, and then he can alter the price.
5. 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.
6. Downward Sloping Demand Curve: The demand curve (average revenue curve) of monopolist slopes downward from left to right. It means that he can sell more only by lowering price.
Monopolistic competition When large number of sellers produce differentiated products , monopolistic competition is said to exist. A product is said to be differentiated when its important features vary.
Characteristics of Monopolistic Competition The important characteristics of monopolistic competition are:
1. Existence of Many firms: Industry consists of a large number of sellers, each one of whom does not feel dependent upon others. Every firm acts independently without bothering about the reactions of its rivals. The size is so large that an individual firm has only a relatively small part in the total market, so that each firm has very limited control over the price of the product.
2. Product Differentiation: Product differentiation means that products are different in some ways, but not altogether so. These products are relatively close substitute for each other but not perfect substitutes. Consumers have definite preferences for the particular verities or brands of products offered for sale by various sellers. Advertisement, packing,

trademarks, brand names etc. help differentiation of products even if they are physically identical. 3. Large Number of Buyers: There are 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. Each seller has to plan various incentive schemes to retain the customers who patronize his products. 4. Free Entry and Exist 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. 5. Selling costs: Since the products are close substitute much effort is needed to retain the existing consumers and to create new demand. So each firm has to spend a lot on selling cost, which includes cost on advertising and other sale promotion activities. 6. Imperfect Knowledge: Imperfect knowledge about the product leads to monopolistic competition. If the buyers are fully aware of the quality of the product they cannot be influenced much by advertisement or other sales promotion techniques. But in the business world we can see that thought the quality of certain products is the same, effective advertisement and sales promotion techniques make certain brands monopolistic.
PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETITION
Price Determination in the 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.
The price in short period may be explained with the help of a diagram.

Price Determination in the short period: “Long-run” period is a period of many years. Long period is the time during which the supply conditions are fully able to meet the new demand conditions. In the long-run both fixed as well as variable factors are variable. In this period, new plants can be installed and new firms can enter into the market and the old firms can leave the market. Long period price is called by Adam Smith as “natural price” and Marshall called it as ‘normal price’. According to Marshall, “The normal value or price of a commodity is that which economic forces would tend to bring about in the long-run.”
Price – Output Determination under Pricing under Monopoly Monopoly refers to a market situation where there is only one seller. He has complete
control over the supply of a commodity. He is therefore in a position to fix any price. Under monopoly there is no distinction between a firm and an industry. This is because the entire industry consists of a single firm.

Being the sole producer, the monopolist has complete control over the supply of the commodity. He has also the power to influence the market price. He can raise the price by reducing his output and lower the price by increasing his output. Thus he is a price-maker. He can fix the price to his maximum advantages. But he cannot fix both the supply and the price, simultaneously. He can do one thing at a time. If the fixes the price, his output will be determined by the market demand for his commodity. On the other hand, if he fixes the output to be sold, its market will determine the price for the commodity. Thus his decision to fix either the price or the output is determined by the market demand.
PRICING METHODS Pricing is an exercise, under pricing will results in losses and over pricing will make the customers run away. To determine pricing in a scientific manner. It is necessary to understand the pricing objectives,pricing methods,procedures and policies.
1.COST- BASED PRICING METHODS : Cost-plus pricing Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.

This appears in two forms, Full cost pricing which takes into consideration both variable and fixed costs and adds a % markup. The other is direct cost pricing which are variable costs plus a % markup, the latter is only used in periods of high competition as this method usually leads to a loss in the long run.
Marginal cost pricing Selling price is fixed in such a way that it covers fully the variable or marginal cost and contributes towards recovery of fixed costs fully or partly, depending upon the market situations. This is also called Break-even pricing or target profit pricing.
2.COMPETITION – ORIENTED PRICING
Sealed bid pricing Price quotes solicited by governmental and other public agencies to ensure objective
consideration of competitive bids. Interested vendors are formally notified in advance of the request for a bid and must meet a bidding deadline as well as stringent bid format requirements. Sealed bids are sometimes opened publicly in the presence of all bidders. The lowest bid is awarded the order. Going Rate Pricing:
Here the price charged by the firm is in tune with the price charged in the industry as a whole. Eg. When one wans to buy or sell gold, the prevailing market rate at a given point of time is taken as the basis to determine the price.normally the prevailing market rate at a given point of time is taken as the basis to determine the price.
3.DEMAND ORIENTED PRICING Demand oriented pricing rules imply establishment of prices in accordance with consumer preference and perceptions and the intensity of demand. Thus if seller wishes to sell more he must reduce the price of his product, and if he wants a good price for his product, he could sell only a limited quantity of his good.
Perceived value pricing : Perceived value pricing considers the buyer’s perception of the value of the product ad the basis of pricing. Here the pricing rule is that the firm must develop procedures for measuring the relative value of the product as perceived by consumers

Differential pricing: Differential pricing is nothing but price discrimination. In involves selling a product or service for different prices in different market segments. Price differentiation depends on geographical location of the consumers, type of consumer, purchasing quantity, season, time of the service etc. E.g. Telephone charges, APSRTC charges.
4. STRATEGY BASED PRICING
Market skimming:
In most skimming, goods are sold at higher prices, . Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players,smart phones are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service.
Market Penetration: This is exactly opposite to he market skimming method.here the price of the product is fixed so low that the company can increase its market share, the company attins profits with increasing volumes and increase in the market share.
Two-Part Pricing:
The firms with market power can enhane profits by the strategy of 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. Entertainment houses such as country clubs, athletic clubs, golf courses and health clubs usually adopt this strategy. They charge a fixed initiation fee plus a charge, per month or per visit.
Block Pricing:
Block pricing is another way a firm with ,market power can enhance its profits.Six Lux soaps in a single pack or five.by selling a certain no. of units of products as one package.
Commodity bundling:
Commodity Bundling refers to the practice of bundling two or more different products together and selling them as a single bundle price.The package deals offered by the the tourit companies, Airlines hold testimony to this practice.Computer firm offers offer PC’s ,assembling as per the customer specifications and offer them at a bundled Price.
Peak Load Pricing: This has particular applications in public goods such as public urban transportation, where day demand (peak period) is usually much higher than night demand (off-peak period). By subtracting the marginal costs of operation from the original demands we find the marginal benefits of capacity, which must then be vertically aggregated and equated to the marginal cost of increasing capacity.

Business Organisation
Business Definition:
According to Dicksee, "Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted."
Factors affecting the choice of form of business organization
The following are the factors affecting the choice of a business organization:
1. Easy to start and easy to close: The form of business organization should be such that it should be easy to close. There should not be hassles or long procedures in the process of setting up business or closing the same.
2. Division of labour: There should be possibility to divide the work among the available owners. 3. Large amount of resources: Large volume of business requires large volume of resources. Some
forms of business organization do not permit to raise larger resources. Select the one which permits to mobilize the large resources. 4. Liability: The liability of the owners should be limited to the extent of money invested in business. It is better if their personal properties are not brought into business to make up the losses of the business. 5. Secrecy: The form of business organization you select should be such that it should permit to take care of the business secrets. We know that century old business units are still surviving only because they could successfully guard their business secrets. 6. Transfer of ownership: There should be simple procedures to transfer the ownership to the next legal heir. 7. Ownership, Management and control: If ownership, management and control are in the hands of one or a small group of persons, communication will be effective and coordination will be easier. Where ownership, management and control are widely distributed, it calls for a high degree of professional’s skills to monitor the performance of the business. 8. Continuity: The business should continue forever and ever irrespective of the uncertainties in future. 9. Quick decision-making: Select such a form of business organization, which permits you to take decisions quickly and promptly. Delay in decisions may invalidate the relevance of the decisions. 10. Personal contact with customer: Most of the times, customers give us clues to improve business. So choose such a form, which keeps you close to the customers. 11. Flexibility: In times of rough weather, there should be enough flexibility to shift from one business to the other. The lesser the funds committed in a particular business, the better it is. 12. Taxation: More profit means more tax. Choose such a form, which permits to pay low tax.

Forms of business Organisation
1. Sole proprietorship 2. Partnership 3. Joints tock company 4. Public enterprises
Sole proprietorship: The sole trader is the simplest, oldest and natural form of business organization. It is also called sole proprietorship. ‘Sole’ means one. ‘Sole trader’ implies that there is only one trader who is the owner of the business.
It is a one-man form of organization wherein the trader assumes all the risk of ownership carrying out the business with his own capital, skill and intelligence. He is the boss for himself. He has total operational freedom. He is the owner, Manager and controller. He has total freedom and flexibility. Full control lies with him. He can take his own decisions. He can choose or drop a particular product or business based on its merits. He need not discuss this with anybody. He is responsible for himself. This form of organization is popular all over the world. Restaurants, Supermarkets, pan shops, medical shops, hosiery shops etc.
Features • It is easy to start a business under this form and also easy to close. • He introduces his own capital. Sometimes, he may borrow, if necessary • He enjoys all the profits and in case of loss, he lone suffers. • He has unlimited liability which implies that his liability extends to his personal properties
in case of loss. • He has a high degree of flexibility to shift from one business to the other. • Business secretes can be guarded well • There is no continuity. The business comes to a close with the death, illness or insanity of
the sole trader. Unless, the legal heirs show interest to continue the business, the business cannot be restored. • He has total operational freedom. He is the owner, manager and controller. • He can be directly in touch with the customers. • He can take decisions very fast and implement them promptly. • Rates of tax, for example, income tax and so on are comparatively very low.
Advantages The following are the advantages of the sole trader from of business organization:
1. Easy to start and easy to close: Formation of a sole trader from of organization is relatively easy even closing the business is easy.

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Unit Iii Introduction To Market And Pricing Strategies