INTRODUCTION TO MARKETS AND PRICING STRATEGIES MARKETS - JNTU MEFA Notes

UNIT-IV

INTRODUCTION TO MARKETS AND PRICING STRATEGIES MARKETS

INTRODUCTION :-

• All the goods and services that are produced need to be sold to the consumer for a price.
• Without market there is no society.
• Sellers sell the goods to the buyers and then transfer the ownership of the goods.

Definition of the market :-

A place or point at which buyers and sellers negotiate their exchange of well defined products or services.

• Based on the location markets are classified as

1. Rural ,
2. urban ,
3. national or world markets.

• Market refers to a meeting point of the buyers and sellers.
• Todays it is not necessary to meet persons(buyers or sellers).
• Because the technology is increased or developed.
• VPP (Value payable by post.
• e-commerce through internet.
• online selling.

SIZE OF THE MARKET :-

• The size of the market depends on many factors such as

1. Nature of product,
2. Nature of their demand,
3. Tastes & preferences of the customers,
4. Income levels,
5. State of technology,
6. Extent of infrastructure it includes telecommunications & IT,
7. Time factor (Short & long term).

Market Structure :-

The structure of market is based on its following features:

1. The degree of sellers concentration, no of buyers
2. The degree buyers concentration, no. of buyers.
3. The degree of product differentiation.

Ex: different products

4. Varieties(styles).
5. Brand names.

(Ex: cars)

6. The conditons of entry into the market.

Competition :-

Types of competition :-

1. Perfect markets: -perfect competition.
2. Imperfect markets: -imperfect competition.

Perfect competition & perfect market:-

A market structure in which all the firms in an industry are price takeers & in which there is freedom of entry into and exit from the industry is called perfect market.

The features of perfect competition :-

1. Large no. of buyers & sellers.
2. Homogenous products or services.
3. Freedom to enter or exit the market.
4. Perfect information available to the buyers and sellers.
5. Perfect mobility of factors of production.
6. Each firm is a price taker.

Imperfect competition:-

• When it is not perfect
• Based on buyers & sellers imperfect markets are classified into

1. Monopoly: single seller,
2. Duopoly: two sellers,
3. Oligopoly: few sellers,
4. Monopolistic competition: large no. of sellers,
5. Monopsony: one buyer ,
6. Duopsony: two buyers,
7. Oligopsony: few buyers.

Monopoly:

• If there is only one seller.
• Single seller controls the entire industry.
• Only one firm produces the required products.

Ex: 1. maruthi suziki (monopoly),

2. APSEB

MONOPOLISTIC COMPETITION:-

• When large no. of sellers produce differentiated products, monopolistic competition is said to exist.

Ex: cameras, zoom lens, focal length, memory, size of the camera, flash, safety, digital etc.

Duopoly:-

There are two sellers in the market to sell the products.

Ex: Pepsi & coke

Oligopoly:-

There are few sellers to sell their products in the market is called Oligopoly.

Ex: car manufacturing companies.(Maruthi suziki, Hindustan motors, Toyota etc.) ,

newspapers (Hindu, Indian Express, Times of India, Economic Times, Eenadu etc.)

Monopsony:-

• There is only one buyer in the market to buy the products.

Ex: FCI- Govt. purchases agricultural products.

Duopsony:-

• There are two buyers.

*Poly=seller ; psony=buyer

Rate of Time Factor in determination of price:-

• The price level depends upon the demand & supply.
• Delay in supply push the prices up & vice versa.

Marshall distinguished the following three periods:

1.Very short period equilibrium:-

• Here supply is limited to the stock on hand.
• The available stock can only be sold is called market price.
• There is no time to arrange additional products.

2.Short run equilibrium:-

• Here firm can expand its outputs
• It can make adjustments to its product in a limited way.
• In short-run, the price will not be as high as the market price.

3.Long run equilibrium:-

• Firm can replace the machine & plant.
• Firm can do anything to attain maximum profits.
• Price in the long-term depends upon many factors.

Ex:- competitors,

New technology,

New firms may enter the industry while some of the existing firms may leave the market.

• Price in the long-term depends upon many factors such as,

No. of competitors,

New technology&

Other cost situations.

Equilibrium point:-

It refers to a position where the firm enjoys maximum profits and it has no incentive either to reduce or increase its output level.

Perfect competition:-The individual firm

• In this competition no control over the price
• All have to accept the price as fixed by market.

Ex: Agricultural products such as,

Rice,,

wheat &

vegetable.

• The individual former has no control over the market prices.
• Thus the individual firm has no alternative other than accepting the given market price.

Perfect competition: - The firm & the industry

• In perfect competition: charge the same price as other firms charge.

Imperfect competition: For the same product the firms will charge different prices

in the long-term & short-term.

Monopoly:-

• Where a single firm is in a position to control either supply or price of a particular product or service.
• It cannot control both price & supply as it can’t control demand.
• If the firm sets the price higher, it may have to loose sales.
• It can either fix the output or price, but not both.
• It depends on demand of the products to decide.

Example for monopoly: RBI

Features of monopoly:-

1. There is a single from dealing in a particular product or service.
2. There is no competition.
3. The monopolist can decide either price or quantity, but not both.
4. It gives discounts Ex: 10 note books for 90/-

Actual-100/-, 10/- is discount

Price discrimination: (good judgement or taste)

A firm may be able to charge different prices for the same good only under the following conditions:

1. The firm can set the price for the entire market.
2. The nature of product or the seller offers different for the different types of people(poor, rich, middle class)

• Income levels.
• Geographical location.
• Alternative available.
• Tastes & preferences of the customers.

• If the products are shortage or low in the market the higher price will be charged for the same product.
• Those who buy for lower prices, can’t sell the same product for higher prices to others.

Seperation of markets:-

The customers can be seperated into different markets based on the no. of factors, such as,

• Time factor,
• Geographical boundaries(location),
• Income level(wealth),
• Sex,
• Age,
• Education etc.

1. Hero honda introduced scooty that was sold only to the college students under a limited age group.(15-19).
2. Most of the air lines such as Air India, Gulf Air, British Airways & so on charge cheaper rates for journey during off-season periods.
3. Electricity charges are different for domestic householders as compared to commercial and industrial uses.
4. Patients with higher income and wealth can pay higher fee to the doctors.
5. Those who buy large products are offered large quantity discounts.
6. Customer profile is the major determinant.

Ex: 1. students, senior citizens are charged lower fare on Indian Railways, buses.

2.Govt. provides rice & other essential commodities under public distribution system at lower prices to those who are below certain income level.

Pricing methods:-

• Pricing is not an exact science.
• Most often we see discounts & concessions offered at the time of purchase.
• Sometimes certain schemes are introduced.

Ex: If you buy a packet of Tea powder a tea spoon is given free.

• These are all for increase for sales.
• One of the other objectives is also to correct the pricing strategy
• Pricing is an important exercise:

1.Under-pricing will result in losses&

2.Over-pricing will make the customers run away.

• To determine pricing, the following terms must be learned.

1. Pricing objectives,
2. Pricing methods ,
3. Pricing policies&
4. Pricing procedures.

Pricing objectives:-

1. To maximise the profits.
2. To increase the sales.
3. To increase the market shares.
4. To satisfy customers&
5. To meet the competition.

Pricing policy:-

The firm has to formulate its pricing policies.

• Particularly when it deals in multiple products
• To maintain price differentiates between the deluxe model & basic models.
• Pricing policy defines how to handle complex issues such as price discrimination.

Pricing methods:

1. Cost-based pricing methods
2. Competition-oriented pricing
3. Demand-oriented pricing
4. Strategy-based pricing.

Cost based pricing methods:- This is also called ‘full cost or mark up’ pricing.

It is classified as cost plus pricing and marginal cost pricing.

This method is suitable where the costs keep fluctuating from time to time.

• It is commonly followed in retail shops.
• The competitor may produce the same product at lower cost and thus offer it at a lower price.

Marginal cost pricing:-

• In this selling price is fixed.
• In times of competition the selling price will be lowered.
• This is also called BEP. P=pricing

2.Competition-oriented pricing:-

• Here the pricing is a very complex task.
• Sometimes the price will be reduced basing on the competitors.
• But the marginal cost must be maintained.
• If it is less than this better stop selling.
• Every unit sold at less than the marginal cost results in loss.

a.Sealed bid pricing

It is most popular in tenders and contracts.

• Each contracting firm quotes its price in a sealed cover called “tender’.
• All the tenders are opened on a scheduled date and the person who quotes the lowest price other things remaining the same is awarded the contract.
• Any price quoted less than the marginal price results in loss. Any price quoted ambitiously, no doubt, results in profits but suffers from the danger of losing the contract.

Going rate pricing:-

Here the price charged by the firm is in tune with the price charged in the industry as a whole.

• When one wants 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 market leaders keep announcing the prevailing prices at a given at a given point of time based on demand & supply positions.

Demand-oriented pricing:-

• The higher the demand, the higher can be the price.

a.Price discrimination.

b.Price discrimination refers to the practice of charging different prices to customers for the same good.

The objectives of price discrimination are to

1. Develop a new market including for export.
2. Utilise the maximum capacity.
3. Maintain surplus.
4. Meet the competitors.
5. Increase the market shares.

Perceived value pricing :- It refers to where the price is fixed on the basis of the perception of the buyer of the value of this product.

Strategy-based pricing:-

1. Market skimming,
2. Market penetration,
3. Two part pricing,
4. Block pricing,
5. Commodity bundling,
6. Peak load pricing,
7. Cross subsidization,
8. Transfer pricing.

Market skimming:-

• When the product is introduced for the first time in the market, the company follows this method.
• Under this method, the company fixes a very high price for the product.
• The main idea is to charge the customer maximum possible
• This strategy is mostly found in case of technology products.

Ex: sony T.V . It fixed very high prices.

• All can’t offer, only few customers offer this .
• As this time passes by, the price comes down & more people can offer to buy.

Market penetration:- This is exactly opposite to the market skimming method.

• Here the price of the product is fixed so low that the economy can increase its market share.
• The company attains profits with increasing volumes & increase in the market share.

More often, the companies believe that it is necessary to dominate the market in the long-run than making profits in the short-run.

• A low price stimulates more rapid growth.

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.

Ex: Entertainment houses such as,

• Country Clubs,
• Athletic Clubs,
• Golf Clubs,
• Health Clubs,
• Resorts,
• Ramoji Film City.
• They charge a fixed initiation fee plus & charge per month or per unit to use the facilities.
• Membership fee.

Block pricing:-

• Block pricing is another way a firm with market power can enhance its profits.
• We see block pricing in our day-to-day life very frequently.

Ex: 6 lux soaps in a single pack or 5 maggi noodles in a single pack.

• They sell certain no. of units of a product as one package.
• The firm earns more than by selling unit wise.
• The block pricing is a profit maximization price on each package.

Ex: 6 international lux soaps+soap case=100/-

• Here customer buy all or none.

Each soap is say 18/-

Soap case=25/-

(6*18+25=133) but they offered it for only 100/-

Commodity bundling:-

• Commodity bundling refers to the practise of bundling two or more different products together & selling them at a single “bundle price”.
• This package offered by the tourist companies.

Ex:- air lines, tourist buses.

• This package includes

• Air fares,
• Hotel,
• Meals,
• sight seeing & so on.

Ex 2:- Car companies provide cars with:

• Air conditioning ,
• Power steering,
• Automatic transmission,
• Autogear system etc.

Peak load pricing:-

• During seasonal period when demand is likely to be higher, a firm may enhance profits by peak load pricing.
• The firm’s philosophy is to charge a higher price during peak times than is charged during off-peak times.
• Where the demand during the peak times is so high that all customers can’t be accommodated at the same.
• Price due to capacity constraints, the profitable alternatives for the firm is to follow peak load pricing.

Ex: Air lines, Air India, Jet Air, King fisher & so on keep revising their fares every three months to charge higher (prices) fares during festival/ holiday seasons.

Cross subsidisation:-

In cases where demand for two products produced by a firm is interrelated through demand or costs.

Ex: Computer company, selling both hardware & software.

• The demand for two products is likely to be interdependant.
• Here the company can sell hardware at below cost & charge a relatively high prices for the software.

Transfer pricing:- It is an internal pricing technique. It refers to a price at which inputs of one department are transferred to another, in order to maximise the overall profits of the company.

Pricing strategies in times of stiff price competition:

• In market we find firm setting similar products computing neck-to-neck in price.
• In this situation firm does not get profits, but exists in the market.
• In such a situation, there are five strategies that are valuable for firms.

1. Price matching
2. Promoting Brand loyalty
3. Time-to-Time pricing
4. Promotional pricing
5. Target pricing

1.Price matching:-

• It is a strategy in which a firm promises to match a lower price offered by any competitor while giving less than the actual prices.
• In the market, the price is different.
• The firms with similar products will sell for lower prices.

Promoting Brand loyalty:-

• This is an advertising strategy, when the customers are frequently reminded by the brand value of a given product.
• The conviction here is that the customers, once they are (loyal) accepted the price for a given branded products, will never slip away when the competitors come out with products at lower prices.
• Pepsi & coke spend huge amount on advertising to draw the attention of consumers.
• Brand loyal customers continue to be with the firm despite its higher prices, because no change in the quality.

3.Time-to-time pricing:-

• Customers are ready to purchase with lower prices.
• The price changes time-to-time, day-to-day & hour-to-hour.
• By this the customers are confused to purchase the products.
• There is no guarentee that one firm continues to offer the best price.
• The prices will be updated from time-to-time.

Ex:-This method is frequently applied in the markets of

• Bullion,

• Currency &
• Bank deposits (interests) changes,
• Gold prices,
• US dollar.

4.Promotional pricing:-

• To promote a particular product, the firm may offer the produt intentionally at lower prices to attract the attention of customers, than other products.
• The main objective is to increase the sales.

5.Target pricing:-

• Here the company operates with a particular targeted profit in mind.
• Normally the cost of capital will be one of the yardsticks to guide the targeted rate of return.

*How much the other companies earning.

• The higher the risk & investment, the higher is the targeted profits.

Departmental undertaking:-

• The overall control must be one of departments of the Govt.
• Govt. appoints M.D (civil servant)
• He will be given an executive authority to take necessary decisions.
• It does not have its own budget.
• When it requires it can draw from the accounts of the Govt.
• When it has surplus money can be deposited in Govt. a/c.

Ex:- For departmental undertaking:

• Railways Postal department,
• All India Radio Doordarshan,
• Defence DRDL DLRL ordinance factories.

Public Corporation= a large company or group of companies recognized by law as a single unit.

• A public corporation has a total freedom in Planning of its operation.
• Mgt. of its operation.
• Control of its operation.

• It can formulate its own budget.
• It can recruit staff members at different levels.
• It is also called statutory corporation.

Ex:- LIC, UTI, Industrial Finance Corporation of India (IFCI)

Achievements of P.E:-

1. Generate large no. of employment opportunities.
2. Creating internal resources.
3. Developing backward regions/areas in the country.
4. Rapid growth of industrialization.
5. Benefiting rural areas & small scale industries or business.