1. PRICING AND OUTPUT DECISIONS MONOPOLISTIC COMPETITION
CHAPTER 8
PRICING AND OUTPUT DECISIONS
UNDER
MONOPOLISTIC COMPETITION
&
OLIGOPOLY
Dr. Vasudev P. Iyer

2. Understand the conceptual issues
OBJECTIVES
Understand the conceptual issues
Understand how price related decisions are taken under monopolistic competition and oligopoly

3. The Agenda The Imperfect Competition
Meaning and features of monopolistic competition
Meaning and features of oligopoly
The Kinked Demand model of oligopoly
CASELET (17): STRATEGY- The fundamental challenge for firms in imperfect competition

4. Imperfect Competition
Imperfect Competition: Less Competition, but not the absence of the same
Features
Some market power but not absolute market power.
Have the ability to set prices within certain constraints
Mutual Interdependence

5. Perfect Monopolistic
Competition Monopoly Competition Oligopoly
Market Power? No Yes, subject to Yes Yes
government
regulation
Mutual interdependence No No No Yes among competing firms?
Non-price competition? No Optional Yes Yes
Easy market entry or exit ? Yes No Yes No, relatively relatively easy difficult

6. MONOPOLISTIC COMPETITION

7. DEFINITION
Monopolistic competition refers to a market structure in which a large number of sellers sell differentiated products, which are close substitutes of one another.
Element of competition and monopoly.

8. Examples of this very common market structure include:
Toothpaste
Soap
Cold remedies

9. PRODUCT DIFFERENTIATION
By product differentiation we mean the modification of a product usually in minor ways, to make it more attractive to the target market and to differentiate it from competitors' products.

10. WHAT THE GURU HAS TO SAY ON DIFFERENTIATION ?
PHYSICAL DIFFERENTIATION
BRAND DIFFERENTIATION
RELATIONSHIP DIFFERENTIATION

11. “” BE DISTINCT OR EXTINCT”
THUS SPOKE THE GURU
PHYSICAL DIFFERENTIATION
BRAND DIFFERENTIATION
RELATIONSHIP DIFFERENTIATION
Sizes, shapes, colours, tastes etc.
Different brand names
Customer satisfaction
“” BE DISTINCT OR EXTINCT”
TOM PETERS
Source: Marketing insights from A to Z by P. Kotler, John Wiley & Sons

12. FEATURES Product differentiation Large number of sellers
Free entry and free exit
Selling costs

13. OLIGOPOLY

14. MEANING An oligopoly is a market dominated by a few large suppliers.
The degree of market concentration is very high (i.e. a large per centage of the market is taken up by the leading firms)
In case of only two firms: Duopoly

15. FEATURES A few firms selling similar product
Each firm produces branded products 
High barriers to entry.
Interdependence of decision making
Importance of non-price competition

16. THE KINKED DEMAND CURVE
Pricing under rivalry
THE KINKED DEMAND CURVE
Developed by Prof. Paul Sweezy
The demand curve has a bend.
When a firm increases the price above the market price, other firms maintain status-quo.
When a firm decreases the price below the market price, others do the same.

18. Oligopoly Price Leadership Model
One firm in the industry (typically the largest firm) is the price leader and, as such, takes the lead in changing prices.
The price leader assumes that firms will follow a price increase. It assumes that firms may follow a reduction in price, but will not go lower in order not to trigger a price war.

19. Oligopoly: Non-price Competition
Definition
Any effort made by firms other than a change in the price of the product in question in order to change the demand for their product.
Efforts intended to affect the non-price determinants of demand

20. Non-price Determinants of Demand
Any factor that causes the demand curve to shift
Tastes and preferences
Income
Prices of substitutes and complements
Number of buyers
Future expectations of buyers about the product price

21. Non-price variables Advertising Promotion
Any factor that managers can control, influence, or explicitly consider in making decisions affecting the demand for their goods and services
Advertising
Promotion
Location and distribution channels
Market segmentation
Loyalty programs
Product extensions and new product development
Special customer services product “lock-in” or “tie-in”
Pre-emptive new product announcements

22. STRATEGY The fundamental challenge for firms in imperfect competition
CASELET (17):
STRATEGY
The fundamental challenge for firms in imperfect competition
MANAGERIAL ECONOMICS
KEAT AND YOUNG
PG. 477

23. Introduction to strategy
Strategy is important when firms are price makers and are faced with price and non-price competition as well as threats from new entrants into the market.
More important for firms in imperfectly competitive markets than those in perfectly competitive markets or monopoly markets.

24. Meaning
Strategy is defined as “the means by which an organization uses its scarce resources to relate to the competitive environment in a manner that is expected to achieve superior business performance over the long run.”
Managerial Economics is “the use of economic analysis to make business decisions involving the best use of an organization’s scarce resources.” (see Chapter 1)
Important linkages between managerial economics and strategy.

25. Linkages are divided into two sections:
Division of Linkages
Linkages are divided into two sections:
Industrial Organization
Ideas of Michael Porter

26. Strategy Industrial Organization
Industrial organization studies the way that firms and markets are organized and how this organization affects the economy from the viewpoint of social welfare.
How does industry concentration affect the behaviour of firms competing in the industry?

27. Strategy Industrial Organization
Structure-Conduct-Performance (S-C-P) Paradigm
Structure affects conduct which affects performance
Structure
Demand and supply conditions in the industry.
Conduct
Pricing and non-price strategies
Performance
Welfare and efficiency results

28. Strategy Ideas of Michael Porter
Economics professor from the Harvard Business School.
“Five Forces” model illustrates the factors that affect the profitability of a firm.

29. Strategy Ideas of Michael Porter