Course Code and Name: 144E1C &Business Economics
Unit III
Assignment and Test 5.1
Part A (2 mark Questions)
State the meaning of Price
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Price: The amount of money charged for a product or service
Define Equilibrium price.
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Equilibrium Price: The price where quantity demanded equals quantity supplied.
What do you mean by Discrimination?
3 Discrimination (Price): Charging different prices for the same product to different
customers.
Give the meaning of Oligopoly
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Oligopoly: A market with few firms competing and influencing prices.
What is mean by Monopoly?
5
Monopoly: A market with a single firm supplying the entire market.
What are the objectives of pricing?
6. Objectives of Pricing:
- Revenue maximization
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- Profit maximization
- Market share expansion
- Customer retention
- Competition response
Define pure competition.
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Pure Competition: A market with many firms producing homogeneous products.
Write a short note on monopolistic competition.
Monopolistic Competition:
- Mix of monopoly and competition
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- Product differentiation
- Non-price competition
- Free entry/exit
- Some price control
Write a short note on Price discrimination.
Price Discrimination:
9 - Charging different prices for the same product
- Types: first-degree, second-degree, third-degree
- Benefits: increased revenue, efficiency
- Drawbacks: inequity, potential abuse
Define Bilateral Monopoly:
10 A market structure where a single buyer (monopsony) faces a single seller (monopoly),
resulting in a unique bargaining situation
Part B (5 mark Questions)
Explain the different methods of Pricing
1. Cost-plus Pricing: Adds markup to production costs.
2. Value-based Pricing: Sets prices based on product value to customers.
3. Competitive Pricing: Matches or beats competitors' prices.
4. Penetration Pricing: Low initial prices to capture market share.
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5. Skimming Pricing: High initial prices to maximize profits.
6. Dynamic Pricing: Adjusts prices based on demand fluctuations.
7. Psychological Pricing: Uses pricing strategies like anchoring, rounding, and
discounts.
8. Target Pricing: Sets prices based on target profit margins
What are the pricing objectives?
Pricing objectives are the specific goals a company aims to achieve through its pricing
strategy. Here are common pricing objectives, explained:
1. Revenue Maximization: Maximize total revenue, prioritizing sales volume.
2. Profit Maximization: Maximize profit margins, balancing revenue and costs.
3. Market Share Expansion: Increase market share, often through competitive pricing.
4. Customer Retention: Maintain customer loyalty through attractive pricing.
5. Competition Response: React to competitors' pricing strategies.
2 6. Survival: Ensure financial stability and survival.
7. Social Welfare Maximization: Balance profits with social responsibility.
8. Target Return on Investment (ROI): Achieve a specific ROI percentage.
9. Price Leadership: Establish a price standard for the industry.
10. Product Line Pricing: Optimize pricing across multiple products.
Pricing Objective Categories:
1. Financial Objectives: Revenue, profit, ROI.
2. Marketing Objectives: Market share, customer retention.
3. Competitive Objectives: Competition response, price leadership.
4. Social Objectives: Social welfare, sustainability.
Factors Influencing Pricing Objectives:
1. Market conditions
2. Competition
3. Customer needs
4. Product life cycle
5. Company resources
6. Regulatory environment
List out the Limitations of Break Even Analysis.
1. Ignores fixed costs' variability
2. Assumes constant sales price and variable costs
3. Doesn't account for changes in production volume
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4. Fails to consider multiple products or services
5. Simplifies complex business environments
6. Doesn't provide insight into profitability beyond break-even point
7. Assumes linear relationships between costs and revenu
When price discrimination possible?
Price discrimination is possible when:
Conditions:
1. Market power: Firm has significant control over prices.
2. Customer segmentation: Firm can identify and separate customers into distinct groups.
3. Different demand elasticities: Each group has varying sensitivity to price changes.
4. Barriers to arbitrage: Prevents customers from reselling products.
5. Firm's ability to restrict output: Limits supply to maintain price differences.
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Types of Price Discrimination:
1. First-degree (Perfect): Charge each customer their maximum willingness to pay.
2. Second-degree (Quantity-based): Offer discounts for bulk purchases.
3. Third-degree (Group-based): Charge different prices to different customer groups.
Situations:
1. Monopoly or oligopoly markets.
2. Different customer segments (e.g., students, seniors, businesses).
3. Geographic separation (e.g., international markets).
4. Time-sensitive products (e.g., airline tickets).
5. Digital products (e.g., software, e-books).
6. Services (e.g., healthcare, education).
Examples:
1. Airlines: Charge different fares based on passenger type (e.g., business, economy).
2. Movie theaters: Offer discounted tickets for students, seniors.
3. Software companies: Offer different pricing plans for individual, business users.
What are the features of kinked demand curve?
Features of Kinked Demand Curve:
1. Non-linear demand curve with a "kink" at prevailing price.
2. Two segments: elastic above kink, inelastic below.
3. Firms reluctant to raise prices (fear of losing market share).
4. Firms reluctant to lower prices (fear of price war).
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5. Price stability prevails.
Key Assumptions:
1. Oligopolistic market structure.
2. Interdependent firms.
3. Asymmetric demand responses.
Part C (10 mark Questions)
1 Discuss the short period price determination under perfect competition.
Bring out the characteristics of Oligopoly.
Main Characteristics:
1. Few firms competing: 2-10 firms dominate the market.
2. Interdependent decision-making: Firms consider rivals' actions.
3. Barriers to entry: Difficulty for new firms to join the market.
4. Non-price competition: Advertising, branding, and product differentiation.
5. Price leadership: One firm sets prices, others follow.
6. Mutual forbearance: Firms avoid direct competition.
7. Complex decision-making: Firms use game theory and strategic planning.
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Additional Features:
1. Homogeneous or differentiated products.
2. High fixed costs and economies of scale.
3. Limited product differentiation.
4. Significant advertising and marketing expenses.
5. Firms have significant market power.
6. Government regulations may influence market dynamics.
7. Potential for collusion or tacit agreements.
Examples:
1. Airlines
2. Automobile manufacturers
3. Telecommunications
4. Banking and finance
5. Energy and petroleum
6. Pharmaceuticals
7. Technology and software
