Chapter 4 pricing on multiple products

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Pricing Based on other Economic Conditions:

Pricing Based on other Economic Conditions Administered Pricing Dual Pricing Price Discrimination

ADMINISTERED PRICE:

ADMINISTERED PRICE Introduced by J.M.KEYNES Administered price of commodity is decided and regulated by government. Implies government intervention in free functioning of market mechanism. Its prescribed by government rather than determined by the market mechanism. Ex: Petrol, Diesel, Kerosene, Liquid gas

General Characteristics:

General Characteristics They are fixed by government Legally enforced by the government Regulatory in nature Meant as corrective measures Outcome of pricing policies of government

NEED FOR ADMINISTERED PRICE :

NEED FOR ADMINISTERED PRICE Need for administrated prices of the price regulation by govt. may be stressed on following counts : Correct imperfection of market mechanism. Check undesirable price rate. Check undue price rise of less available goods. Provide relatively stable and assured income to farmer. To check high prices charged by the producers under the profit maximization motive. Provide wages goods and other essential items of mass consumption at low subsidized price for poor section of society.

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To protect the interest of the weaker sections of society To discourage or encourage the consumption or certain commodities To mitigate inflation or prevent stagflation(a combination of inflation and rising unemployment) To raise public revenue To ensure the efficient allocation of resources To promote equalitarian goal To ensure equitable distribution of scarce goods Objective of Administered Price

Major Issues Of Policy Of Price Control/Administered Prices:

Major Issues Of Policy Of Price Control/Administered Prices 1. Nature of price control : Price control may be : Informal : The industries/producers agree to voluntarily regulate the prices consistent within the limits suggested by the government. or Formal : Prices are statutorily fixed by the government which is to be accepted by the all concerned Total : the price for the entire stock of output is prescribed, administered and enforced by the government through a public distribution system and several control orders/directives. A single price policy or mono pricing is implied under total price control of commodity. Or Partial : The govt. directly fixes the price for a part of the production of a commodity and arranges for its distribution. Rest of the stock is allowed to be sold in the open market at any price which is determined by the free play of the market mechanism. Partial control, thus implies a system of dual Pricing.

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2. The problem of price fixation: Cost Plus The administered prices are fixed on the cost plus basis. For this computation of the cost of production and determination of reasonable return on capital is necessary. But it is difficult in India as cost vary Paucity of data Question of MC or AC base Highly fixed raw materials prices may cause higher prices for the finished products which may generate inflationary pressures and the socialist goal of the price policy is vitiated. 3. Problem of Dual Pricing

DUAL PRICING:

DUAL PRICING Meaning: A market, where a commodity is covered simultaneously under the administrated price as well as market price , is said to have Dual prices . In dual pricing fixed price concept applies only to a part of the output and the remaining output is allowed to be sold at prices determined by market forces. Points to be considered: Proportion of commodity to be procured at a govt. fixed rate called levy rate Fixing levy price Arranging beneficiaries Issue price Free sale quantity

The volume of demand & supply under dual market system will not be the same as under a system of a single free market system with respect to fixed price:

The volume of demand & supply under dual market system will not be the same as under a system of a single free market system with respect to fixed price Where, s= supply d= demand qt= quantity pr= price When taken together, the demand & supply curve would show a “KINK”. (D) (S) Qt Pr

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Drawback :- Misuse of the system. Leads to black marketing. Intensifies corruption. Deterioration of quality of the op released for procurement Increases financial burden for the government in organizing distribution system. Problem when surplus in the economy causes the levy price to be higher than the free maker price. Problems Commodity identification. Determination of levy rate of procurement rate. Levy price or issue price. organization of efficient distribution system.

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Advantages Legitimizes the existence of two prices for the product as well as price discrimination among two group of buyers. Permits restricting the benefits of price control to the deserving sections of buyers only on priority consideration. Reduces pressure on govt budget to provide for subsidies and incentives for the production of a particular commodity. obviates the need for higher taxation.

Business Goals:

Business Goals Maximize revenue…… How do they maximize revenue?

Price Discrimination:

MEANING Price discrimination is selling the same good to different customers/markets at different prices. It occurs in two ways: By charging different prices for the same product and By not setting prices of different varieties of products or different products in relation to their cost differences. Examples: Movie tickets, Airline tickets, and Discount coupons. Price Discrimination

Forms of Price Discrimination:

Forms of Price Discrimination Personal Discrimination : Fees charged by surgeons, lawyers and teachers. Age Discrimination : Grouped as adults and children. Ex: Railways and bus transport Gender Discrimination : Seats at concessional rates for ladies during a tour. Zenana shows Locational or Territorial discrimination : When a monopolist charges different prices in different markets located at different places. Distribution rights for cinema. Domestic and export markets Size Discrimination : Economy size cheaper than a small size tube. Product in retail market costlier than in wholesale.

Forms of Price Discrimination:

Forms of Price Discrimination Quality variation Discrimination: Deluxe edition and paperback edition Tailor charges for a suit and a shirt Designer and normal saris Special Service or comforts: First class, second class in railways cinemas and hospitals Use Discrimination: Electricity slab rates for consumer and commercial Time Discrimination: Cinema morning or afternoon shows than evening (prime) shows Nature of commodity Discrimination: Freight charges different for coal and iron for the same distance.

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Sometimes known as optimal pricing. With perfect price discrimination, the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay. If successful, the firm can extract all consumer surplus that lies beneath the demand curve and turn it into extra producer revenue (or producer surplus). This is impossible to achieve unless the firm knows every consumer’s preferences and, as a result, is unlikely to occur in the real world. The transactions costs involved in finding out through market research what each buyer is prepared to pay is the main block or barrier to a businesses engaging in this form of price discrimination. Degrees of Price Discrimination First degree (perfect) PD - charging whatever the market will bear

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Monopolist sells blocks of output at different prices. The possible maximum price is charged for some given minimum block output purchased by the buyer and then the additional blocks are sold at successively lower prices. Te units in a particular block will be uniformly priced. It is a case of block wise different prices Monopolist captures a part of the consumer’s surplus and not the whole of it. Ex: case of public utilities like electricity, telephone and gas services rail and bus transport service, the services are given in block units. Second degree (perfect) PD – Selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price .

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The firm divides its total output into many sub-markets and sets different prices for its product in each market in relation to the demand elasticities. Price depends upon the allocation of OP and the related demand elasticities in each market. For allocation of OP, the monopolist follows the principle of Equi-marginal Revenue ( total OP would be distributed for sale in each market such that from each market, the resulting marginal revenue should be equal so that the revenue is maximum. Different prices charged in different market but in each market the buyers are treated equally. This is the most frequently found form of price discrimination. The key is that third degree discrimination is linked directly to consumers’ willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production. The market is usually separated in two ways: by time or by geography. For example, exporters may charge a higher price in overseas markets if demand is estimated to be more inelastic than it is in home markets. Third degree PD - when different observable characteristics

CONDITIONS ESSENTIAL FOR PRICE DISCRIMINATION:

CONDITIONS ESSENTIAL FOR PRICE DISCRIMINATION Monopoly Difference in price elasticity. Market segmentation . Effective separation of sub-markets. Apparent product differentiation Buyers’ Illusion Ability to “sort out” different consumers and charge them different prices No arbitrage opportunities (Prevention of resale or re-exchange of goods) Non-transferability characteristics of goods: Private tuitions, haircuts, health checkups Let-go attitude of buyers: Vanaspati , Bambino Legal sanction: Electricity

When is Price Discrimination Profitable:

When is Price Discrimination Profitable Elasticity of demand differs in each market The cost differential of supplying. Op in different markets should not be large in relation to the price differential based on elasticity-differential.

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