PricingandRevenueManagementUnit-II

Perfect Competition:
The Perfect Competition is a market structure where a large number of buyers and sellers
are present, and all are engaged in the buying and selling of the homogeneous products at asingle
price prevailing in the market.
In other words, perfect competition also referred to as a pure competition, exists when
there is no direct competition between the rivals and all sell identically the same products at a
single price.
Features of Perfect Competition:

Large number of buyers and sellers: In perfect competition, the buyers and sellers are large
enough, that no individual can influence the price and the output of the industry. An individual
customer cannot influence the price of the product, as he is too small in relation to the whole
market. Similarly, a single seller cannot influence the levels of output, which is too small in
relation to the gamut of sellers operating in the market.
Homogeneous Product:Each competing firm offers the homogeneous product, such that no
individual has a preference for a particular seller over the others. Salt, wheat, coal, etc. are some
of the homogeneous products for which customers are indifferent and buy these from the one
who charges a less price. Thus, an increase in the price would let the customer go to some other
supplier.

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Free Entry and Exit:Under the perfect competition, the firms are free to enter or exit the
industry. This implies, If a firm suffers from a huge loss due to the intense competition in the
industry, then it is free to leave that industry and begin its business operations in any of the
industry, it wants. Thus, there is no restriction on the mobility of sellers.
Perfect knowledge of prices and technology: This implies that boththebuyers and sellers have
complete knowledge of the market conditions such as the prices of products and the latest
technology being used to produce it. Hence, they can buy or sell the products anywhere and
anytime they want.
No transportation cost:There is an absence of transportation cost, i.e. incurred in carrying the
goods from one market to another. This is an essential condition of the perfect competition since
the homogeneous product should have the same price across the market and if the transportation
cost is added to it, then the prices may differ.
Absence of Government and Artificial Restrictions: Under the perfect competition, both the
buyers and sellers are free to buy and sell the goods and services. This means any customer can
buy from any seller, and any seller can sell to any buyer. Thus, no restriction is imposed oneither
party. Also, the prices are liable to change freely as per the demand-supply conditions. In such a
situation, no big producer and the government can intervene and control the demand, supply or
price of the goods and services.
PerfectCompetitionShortRunEquilibrium:Supernormal Profits:

• Supernormalprofitisalltheexcessprofitafirmmakesabovetheminimumreturn necessary to
keep a firm in business.
 • Supernormal profit is calculated by Total Revenue – Total Costs(where total cost
includes all fixed and variablecosts, plus minimum incomenecessary fortheownerto be
happy in that business.)
• Normal profit is defined as the minimum level of profit necessary to keep a firm in that
line of business. This level of normal profit enables the firm to pay a reasonable salary to
its workers and managers. The definition of normal profit occurs when AR=ATC
(average revenue = average total cost)
• Supernormalprofitisdefinedasextraprofitabove thatlevelofnormal profit.
• Supernormal profit is also known asabnormal profit. Abnormal profit means there is an
incentive for other firms to enter the industry.
The theory of perfect competition suggests that supernormal profit can only be earned in the
short term. In the long-term firms will make normal profit. Perfect competition is a market
structure which involves:
• Perfectinformation
• FreedomofEntryandexit
Suppose there is a rise in demand, price rises and a firm can make supernormal profit in the
short-term.
PerfectCompetitionShortRunEquilibriumLoss Making:

Loss:
Lossisrelativelyself-explanatory:ifJack'sbusinesstakesinlessrevenuethanitspends
inagivenperiod,ithasexperiencedloss.Lossescanoccurforanynumberofreasonsinany
marketcondition.Itmightbetheresultofcustomerdissatisfactionwiththecompany,evenina
strong economy. Thebusiness might haverising expenses overtime while simultaneously taking
in less revenue.
PerfectCompetitionShortRunZeroEconomic Profits:

Normalprofit
In markets which areperfectly competitive, the profit available to a single firm in the long run
is called normal profit.This exists when total revenue, TR, equals total cost, TC. Normal profit is
defined as the minimum reward that is just sufficient to keep the entrepreneur supplying their
enterprise. In other words, the reward is just covering opportunity cost - that is, just better than
the next best alternative.
The accounting definition of profits is rather different because the calculation of profits is
basedonastraightforwardnumericalcalculationofpastmonetarycostsandrevenues,andmakes no
reference to the concept of opportunity cost. Accounting profit occurs when revenues are greater
than costs, and not equal, as in the case of normal profit.
Totheeconomist,normal profitis acost and isincluded inthe totalcosts of production.
ImperfectCompetition:
In real life, perfect competition or even pure competition are seldom met with. On the
other hand, it is imperfect competition which is the rule, and perfect competition is
theexception.There are different degrees of imperfect competition, ranging from what is called-
‘monopolistic competition’ to ‘simple monopoly’. In between these two forms of imperfect
competition are ‘oligopoly’ and ‘duopoly”.
MonopolyMarket
TheMonopolyis a market structure characterized by a single seller, selling the unique
product with the restriction for a new firm to enter the market. Simply, monopoly is a form of
market where there is a single seller selling a particular commodity for which there are no close
substitutes.

• Under monopoly, the firm has full control over the supply of a product. The elasticity of
demand is zero for the products.
• Thereisasingleselleroraproducerofaparticularproduct,andthereisnodifference between the
firm and the industry. The firm is itself an industry.
• The firms can influence the price of a product and hence, these are price makers, not the
price takers.
• Therearebarriersforthenewentrants.
• The demand curve under monopoly market is downward sloping, which means the firm
can earn more profits only by increasing the sales which are possible by decreasing the
price of a product.
• Thereareno closesubstitutesforamonopolist’s product.
• Under a monopoly market, new firms cannot enter the market freely due to any of the
reasons such as Government license and regulations, huge capital requirement, complex
technology and economies of scale. These economic barriers restrict the entry of new
firms.
MonopolisticCompetition:
The monopolistic competition is also called as imperfect competition because this market
structure lies between the pure monopoly and the pure competition. Under, theMonopolistic
Competition, there are a large number of firms that produce differentiated products which are
close substitutes for each other. Here large sellers selling the products that are similar but not
identical and compete with each other on other factors besides price.
FeaturesofMonopolisticCompetition:
Product Differentiation:This is one of the major features of the firms operating under the
monopolisticcompetitionthatproducestheproductwhichisnotidentical butisslightlydifferent
fromeachother.Theproductsbeingslightlydifferentfromeachotherremainclosesubstitutesof each
other and hence cannot be priced very differently from each other.
Large number of firms: A large number of firms operate under the monopolistic competition,
and there is a stiff competition between the existing firms. Unlike the perfect competition, the
firms produce the differentiated products which are substitutes for each other, thus make the
competition among the firms a real and a tough one.
Heavy expenditure on Advertisement and other Selling Costs: Under the monopolistic
competition, the firms incur a huge cost on advertisements and other selling costs to promote the
saleoftheirproducts.Sincetheproducts aredifferentandareclosesubstitutesforeach other;the firms
need to undertake the promotional activities to capture a larger market share.
Product Variation:Under the monopolistic competition, there is a variation in the products
offered by several firms. To meet the needs of the customers, each firm tries to adjust its product
accordingly. The changes could be in the form of new design, better quality, new packages or
container, better materials, etc. Thus, the amount of product a firm is selling in the market
depends on the uniqueness of its product and the extent to which it differs from the other
products.
DemandcurveofMonopolistic market:
The demand curve for the output produced by a monopolistically competitive firm is
relatively elastic. The firm can sell a wide range of output within a relatively narrow range of
prices. As a price maker, the firm has some ability (not much, but some) to control price. The
demand curve is negatively sloped, but relatively elastic, because each firm produces a slightly
differentiated product, but faces competition from a large number of very, very close substitutes.
RelativelyElasticDemand
The four characteristics of monopolistic competition mean that a monopolistically
competitive firm faces a relatively, but not perfectly, elastic demand curve, such as the one
labeled D=AR and displayed in the exhibit to the right. Each firm in a monopolistically
competitive market can sell a wide range of output within a relatively narrow range of prices.
Demand is relatively elastic in monopolistic competition because each firm faces competition
from a large number of very, very close substitutes. However, demand is not perfectly elastic (as
in perfect competition) because the output of each firm is slightly different from that of other
firms. Monopolistically competitive goods are close substitutes, but not perfect substitutes.
OligopolyMarket
TheOligopoly Marketcharacterized by few sellers, selling the homogeneous or
differentiated products. In other words, the Oligopoly market structure lies between the pure
monopoly and monopolistic competition, where few sellers dominate the market and havecontrol
over the price of the product.
UndertheOligopolymarket,afirmeitherproduces:
 Homogeneous product:The firms producing the homogeneous products are called as Pureor
Perfect Oligopoly. It is found in the producers of industrial products such as aluminum,
copper, steel, zinc, iron, etc.
 Heterogeneous Product:The firms producing the heterogeneous products are called as
Imperfect or Differentiated Oligopoly. Such type of Oligopoly is found in the producers of
consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc.
Thereare fivetypes ofoligopoly market, fordetailed description,click onthelink below:
FeaturesofOligopolyMarket
1. Few Sellers:Under the Oligopoly market, the sellers are few, and the customers are many. Few
firms dominating the market enjoys a considerable control over the price of the product.
2. Interdependence:it is one of the most important features of an Oligopoly market, wherein, the
seller has to be cautious with respect to any action taken by the competing firms. Since there are
few sellers in the market, if any firm makes the change in the price or promotional scheme, all
other firms in the industry have to comply with it, to remain in the competition.
Thus,everyfirmremains alerttotheactionsofothersandplantheircounterattackbeforehand,to escape
the turmoil. Hence, there is a complete interdependence among the sellers with respect to their
price-output policies.
3. Advertising:Under Oligopoly market, every firm advertises their products on a frequent basis,
with the intention to reach more and more customers and increase their customer base. This is
due to the advertising that makes the competition intense.
If any firm does a lot of advertisement while the other remained silent, then he will observe that
his customers are going to that firm who is continuously promoting its product. Thus, in order to
be in the race, each firm spends lots of money on advertisement activities.
4. Competition:It is genuine that with a few players in the market, there will be an intense
competition among the sellers. Any move taken by the firm will have a considerable impact on
its rivals. Thus, every seller keeps an eye over its rival and be ready with the counterattack.
5. Entry and Exit Barriers: The firms can easily exit the industry whenever it wants, but has to
face certain barriers to entering into it. These barriers could be Government license, Patent, large
firm’s economies of scale, high capital requirement, complex technology, etc. Also, sometimes
the government regulations favor the existing large firms, thereby acting as a barrier for the new
entrants.
6. Lack of Uniformity:There is a lack of uniformity among the firms in terms of their size, some
are big, and some are small.
 TypesofOligopolyMarket

1. Open Vs Closed Oligopoly:This classification is made on the basis of freedom to enter into the
new industry. An open Oligopoly is the market situation wherein firm can enter into the industry
any time it wants, whereas, in the case of a closed Oligopoly, there are certain restrictions thatact
as a barrier for a new firm to enter into the industry.
2. Partial Vs Full Oligopoly:This classification is done on the basis of price leadership. The partial
Oligopoly refers to the market situation, wherein one large firm dominates the market and is
looked upon as a price leader. Whereas in full Oligopoly, the price leadership is conspicuous by
its absence.
3. Perfect (Pure) Vs Imperfect (Differential) Oligopoly: This classification is made on the basis
of product differentiation. The Oligopoly is perfect or pure when the firms deal in the
homogeneous products. Whereas the Oligopoly is said to be imperfect, when the firms deal in
heterogeneous products, i.e. products that are close but are not perfect substitutes.
4. Syndicated Vs Organized Oligopoly: This classification is done on the basis of a degree of
coordination found among the firms. When the firms come together and sell their products with
the common interest is called as a Syndicate Oligopoly. Whereas, in the case of an Organized
Oligopoly, the firms have a central association for fixing the prices, outputs, and quotas.
5. Collusive Vs Non-Collusive Oligopoly:Thisclassification is made on thebasis of agreement or
understanding between the firms. In Collusive Oligopoly, instead of competing with each other,
the firms come together and with the consensus of all fixes the price and the outputs. Whereas in the
case of a non-collusive Oligopoly, there is a lack of understanding among the firms and they
compete against each other to achieve their respective targets.
DemandUncertainty:
Demand uncertainty occurs during times when a business or an industry is unable to
accurately predict consumer demand for its products or services. This can cause a number of
problems for the business, especially in managing orders and stocking levels, with effects
magnifying through the supply chain.
Causes
The causes of demand uncertainty may result from inherent qualities of the business and
its customer base, or from external factors. Seasonal fluctuations, for example, are a type of
inherent uncertainty, although industries that experience seasonal fluctuations can often use
records from past years to anticipate and estimate the current seasonal shift. Businesses with a
very innovative product or service will face a great deal of demand uncertainty, simply because
their uniqueness means that there is no track record from which to draw conclusions about
demand.
Problems
When demand is uncertain, it’s difficult to determine the right quantityof supplies
andgoodstoorderforthenextsalescycle.Abusiness thatanticipates anormal orhigh levelofsales, only to
see the demand drop, will have leftover goods that must be stored, returned or discarded.
Eachofthesescenariosleadstoextracosts.Ifdemandincreases,however,andthecompany
doesnothaveasufficientsupplyofgoodstosell,theresultisdissatisfiedcustomers,someof
whommaypurchasefromacompetitorthatdoeshaveasupplyofthedesiredgoods.Some customers may
never return to the original seller, resulting in loss of business for that company. Bullwhip effect
Demand uncertainty at the retail customer level has a way of becoming magnified down
the supply chain. When wholesalers notice that the retail outlets they serve have cut back or
increased their orders, the wholesalers are likely to cut back or increase purchases from
manufacturers by a greater percentage, in order to hedge their bets. Manufacturers, in turn, may
hedge their bets even further on their orders from suppliers of raw materials. As result, raw
materialssuppliersmay endupwithasixmonthorgreaterbacklog,onasupplychainthatbegan
with retailers ordering an extra supply of only one month. This is known as the bullwhip effect,
because it charts in a way that resembles the action of a bullwhip when the “handle” is moved
slightly while the “tail” swings in wider and wider fluctuations.

Factorssaidtocauseorcontributetothebullwhipeffectinsupplychains:
 Disorganizationbetweeneachsupplychainlink; withorderinglargerorsmalleramountsofa
product than is needed due to an over or under reaction to the supply chain beforehand.
 Lack of communication between each link in the supply chain makes it difficult forprocesses
to run smoothly.Managers can perceive a product demand quite differently within different
links of the supply chain and therefore order different quantities.
 Free return policies; customers may intentionally overstate demands due to shortages and
then cancel when the supply becomes adequate again, without return forfeit retailers will
continue to exaggerate their needs and cancel orders; resulting in excess material.
 Order batching; companies may not immediately place an order with their supplier; often
accumulating the demand first.Companies may order weekly or even monthly.This creates
variability in the demand as there may for instance be a surge in demand at some stage
followed by no demand after.
 Pricevariations–specialdiscountsandother costchangescanupsetregularbuyingpatterns; buyers
want to take advantage on discounts offered during a short time period, this can cause uneven
production and distorted demand information.
 Demand information – relying on past demand information to estimate current demand
informationofaproductdoesnottakeintoaccountanyfluctuationsthatmayoccurindemand over a
period of time.
Industries Affected
Certain industries aremorevulnerable to demand uncertainty than others. Ranked high in
demand uncertainty, while low in technological uncertainty, were consumer-level industries,such
as restaurants and hotels, healthcare services, and retail. However, materials suppliers such as
coal, mining and steelworks ranked even higher in demand uncertainty. Furthermore, some
industries face high demand uncertainty, along with high technological uncertainty. These
industries include transportation, computers, software, medical equipment and pharmaceuticals.