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Market Structure and Pricing Strategies

MBA International business paper -Economics

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12 views

Market Structure and Pricing Strategies

MBA International business paper -Economics

Uploaded by

sujeeshcssujee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Market Structure and Pricing Strategies

Price Determination under Perfect Competition


Characteristics: Large number of buyers and sellers, homogeneous products, free entry and exit,

perfect information.

Price Determination: Firms are price-takers. Market forces of demand and supply determine the

equilibrium price.

Example: Agricultural markets like wheat and rice.

Monopoly Market
Characteristics: Single seller, no close substitutes, high entry barriers.

Price Determination: A monopolist is a price maker and sets prices by equating MR (marginal

revenue) = MC (marginal cost).

Example: Utility companies (like electricity providers).

Duopoly
Characteristics: Only two dominant firms control the market.

Price Determination: Firms often follow interdependent pricing strategies, either through collusion or

competition.

Example: Airbus and Boeing in the aircraft industry.

Monopolistic Competition
Characteristics: Many sellers with differentiated products, free entry and exit.

Price Determination: Firms have some control over prices due to product differentiation, and the

price is determined where MR = MC.

Example: Fast food restaurants.

Price Discrimination
Definition: Charging different prices to different customers for the same product, based on their
willingness to pay.

Types:

- First-degree: Charging the maximum each customer is willing to pay.

- Second-degree: Prices vary based on quantity purchased (e.g., bulk discounts).

- Third-degree: Different prices for different consumer groups (e.g., student discounts).

Example: Airline ticket pricing.

Oligopoly
Characteristics: A few large firms dominate the market, high entry barriers, interdependent

decision-making.

Price Determination: Firms often use price leadership or form cartels to control prices.

Example: Automobile industry.

Nash Equilibrium and Its Implications


Definition: A situation in which no player has anything to gain by changing their strategy, given that

other players' strategies remain unchanged.

Application: Helps predict the outcome of competitive situations where parties must make decisions

simultaneously.

Example: Pricing strategies in a duopoly (e.g., Cournot or Bertrand models).

Game Theory
Definition: A framework for analyzing strategic interactions where outcomes depend on the actions

of all players.

Types of Games:

- Zero-sum games: One player's gain is another's loss.

- Non-zero-sum games: All players may benefit.

Example: Prisoner's Dilemma.

Risk and Uncertainty


Risk: Outcomes are unknown, but probabilities are known (e.g., investing in stocks).

Uncertainty: Neither outcomes nor probabilities are known (e.g., launch of a new product).

Approaches:

- Expected value and expected utility theory help in decision-making under risk.

- Scenario analysis and decision trees assist in situations with uncertainty.

Real-world Applications of Decision-Making under Uncertainty


Investment Decisions: Portfolio diversification to minimize risks.

Business Strategy: Launching new products with uncertain demand.

Insurance: Hedging against potential future losses.

Pricing Strategies: Firms set dynamic prices based on future market conditions (e.g., surge pricing

by ride-hailing services).

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