Price determination

Each firm thinks that its own demand curve is more elastic than the market demand curve because its product is a perfect substitute for the product of its rivals.The moment the firms cease to follow the price leader, the model breaks down.The barometric price leader may not be the dominant firm with the lowest cost or even the largest firm in the industry.INTRODUCTION: University purchasing agents or buyers are the primary personnel who make decisions on behalf of the.The oligopolistic firms know that if they try to increase their market share through price cut, competition among them will lead to an unabated fall in the price and all of them would be losers in the process.Price determination mechanisms range from an advanced spot and forward contracts traded online as well as in London at.However, during long run, a firm reduces price per unit to capture bigger share of the market and hence earn high profits through increased sales. (b) Obtaining Market Share Leadership: ADVERTISEMENTS.Following are the pricing objectives of any business: (a) Profit Maximisation: Usually the objective of any business is to maximise the profit.The notions of supply and demand are fundamental to economics.

A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock.This is based on the implicit assumption that there is direct marketing of the product to buyers.The former is known as the joint profit maximisation cartel and the latter as the market-sharing cartel.Determination of price and quantity supplied in perfectly competitive market in the short run treating demand as exogenous.Rather they will stick to the prevailing price and cater to the customers, leaving the price-raising seller. (9) The marginal cost curve passes through the dotted portion of the marginal revenue curve so that changes in marginal cost do not affect output and price.When other firms come to know of this, they will leave the cartel.So when such problems arise in joint profit distribution in contravention of the cartel agreement, they lead to the breakdown of the cartel. 7. I he price of the product fixed by the cartel cannot be changed even if the market conditions require it to be changed.

The other firms may invent and produce cheaper substitutes which may be accepted by consumers.This type of cartel is inherently unstable because if one low-cost firm cheats the other firms by charging a lower price than the common price, it will attract the customers of other member firms and earn larger profits.The supply and demand model states that the price of a good will be the level.National Income and Price Determination: Aggregate Supply and Aggregate Demand By: Darshana Balasubramaniam, Kristina Bogardy, Spencer Cappelli, Ryan Lawler.

A Dynamic Analysis of Price Determination Under Joint Profit Maximization in Bilateral Monopoly Abstract This study provides a dynamic mathematical treatment of.Suppose the cost of production falls so that the new MC curve is MC 1, to the right, as in Figure 2.But this is only a theoretical possibility in the short run because in practice the joint profit maximisation objective cannot be achieved by a cartel.Joint profits are generally more than the total profits earned by them if they were to act independently.

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But this does not mean that A will be getting more profit than B.Before publishing your articles on this site, please read the following pages: 1.The price you charge for your product or service is one of the most important business decisions you make.Demand Customers will generally demand more of a product at a lower cost.In case of a differentiated product also prices can be uniform.

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In these two situations, the demand curve of the oligopolistic firm has a kink at the prevailing market price which explains price rigidity.

Some states set mandatory minimum prices for controlled products like alcohol.With Threat of Entry: So far our analysis has been confined to collusive oligopoly without any threat of entry of new firms in the industry.References (3) NetMBA: Supply and Demand bNet: Determining the Right Price for a Product or Service Investopedia: Economics Basics: Demand and Supply Resources (1) Wolfram Demonstrations Project: Supply and Demand About the Author Jason Gillikin is a copy editor and writer who specializes in health care, finance and consumer technology.

Though he will increase his sales, his profit would be less than before.

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The resultant price and output will depend upon the reaction of the collusive oligopolists towards the profit maximisation price and their attitude towards the existing and potential rivals. (B) Price Leadership: Price leadership is imperfect collusion among the oligopolistic firms in an industry when all firms follow the lead of one big firm.The total profit earned by each firm is RP x Oq and by both is RP x 2Oq or RP x OQ.They may try to increase their share of the market by means of secret price concessions.Unlike most products, oil prices are not determined entirely by supply,. which are traded heavily by speculators, play a dominant role in price determination.In such a situation, the demand curve of the oligopolist will have inverted kink.

We know that the behaviour of an entrepreneur or a firm under perfect competition assuming that a single firm or a producer cannot influence the price of his product.The mathematical process...

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Empirical evidences about the working of modern oligopolistic firms reveal that there are a variety of marketing channels that help in increasing the sales of a product as against its rivals.In this way, it can be said that the demand for a product falls as the price increases.However, chances of the existence of price rigidity are greater where there is a reduction in costs than there is a rise in costs.

Thus the firm lowering the price will not be able to increase its demand much.Some of the major steps involved in price determination process are as follows: (i) Market Segmentation (ii) Estimate Demand (iii) The Market Share (iv) The Marketing.These are two related but different concepts which need to be understood when discussing.Objectives Visit a Retail Store Determine how prices Of cosmetic range is fixed Determine factors affecting pricing policies Use of different pricing strategies.If the existing oligopolists are wiser, they may forestall entry by charging a price lower than the profit maximisation price OP.In perfect competition, sellers and buyers are fully aware about the current market price of a product.So sometimes, while entering a new market or launching a new product, business firm has to keep its price below the cost level but in the long rim, it is necessary for a firm to cover more than its total cost if it wants to survive amidst cut-throat competition. 2. The Utility and Demand: Usually, consumers demand more units of a product when its price is low and vice versa.

The dominant firm fixes the price for the entire industry and the small firms sell as much product as they like and the remaining market is filled by the dominant firm itself.Advertising differentiates one product from another and makes the product better known than others.If the transaction line is not price protected, find a price list for the product on the transaction line.