Unit 3: Market structure and pricing

• General equilibrium condition for profit maximisation in every market: MR = MC and MC cuts MR from below.

• Features: many buyers and sellers, homogeneous product, free entry and exit, perfect knowledge, perfect mobility, no transport costs.
• Price is fixed by industry demand and supply; the firm is a price taker with AR = MR = P.

• Supply curve of the firm: the portion of the MC curve above minimum AVC — because at each price the firm produces where P = MC.
• Industry supply curve: horizontal sum of firms' supply curves.

Monopoly is a market with a single seller of a product with no close substitutes and strong barriers to entry.

• Sources of monopoly power: control of raw materials, patents and copyrights, government licences, economies of scale (natural monopoly), legal restrictions.
• Equilibrium: output where MR = MC; price read from the AR curve — price > MC.
• Can earn supernormal profits in the long run because entry is blocked.

Price discrimination

Charging different prices to different buyers for the same product.

• Degrees (Pigou): first degree (each buyer pays maximum), second degree (by quantity slabs), third degree (by markets/groups).
• Conditions: markets can be separated, no resale, different elasticities in markets.
• Rule: charge a higher price where demand is less elastic; MR1 = MR2 = MC.

Chamberlin's model: many sellers of differentiated products (brands) with free entry.

• Features: product differentiation, selling costs (advertising), freedom of entry, downward-sloping demand.
• Short run: may earn supernormal profit (MR = MC).
• Long run: entry of new firms eliminates supernormal profit — demand curve becomes tangent to AC, earning normal profit.
• Excess capacity: firms operate at less than minimum AC — a cost of variety.

A market with few sellers whose decisions are interdependent.

• Features: interdependence, advertising, group behaviour, indeterminate demand curve, price rigidity, barriers to entry.

• Kinked demand curve (Sweezy, 1939): rivals follow a price cut but not a price rise, so the demand curve has a kink at the prevailing price; the MR curve has a gap, explaining price rigidity — MC can change within the gap without changing price.
• Cartel: formal agreement among firms to fix price/output; behaves like a monopoly; illegal under the Competition Act, 2002 in India.

Price leadership model

• Dominant firm price leadership: a large firm sets the price; small firms act as price takers and sell what they want at that price; the dominant firm supplies the rest (residual demand).
• Low-cost firm leadership: the lowest-cost firm sets a price others must follow.
• Barometric price leadership: a firm with good market knowledge signals price changes that others follow (no dominance).

• Cost-plus pricing: Price = Average cost + mark-up %. Simple and fair but ignores demand.
• Skimming: high price at launch for innovators (new iPhones); penetration: low price to capture market (Jio's launch).
• Transfer pricing: price at which divisions of the same company exchange goods.
• Dual pricing: two prices for the same product — controlled and open market (sugar under the levy system earlier).

Factors of production earn factor incomes: land → rent, labour → wages, capital → interest, entrepreneurship → profit. The marginal productivity theory says a factor is paid its marginal revenue product (MRP) under perfect competition. The demand for a factor is derived demand — it depends on demand for the goods it produces. Collective bargaining is negotiation between employers and trade unions on wages and working conditions; it can raise wages above the competitive level and improve conditions.

Real vs nominal interest: the nominal rate is the stated rate; the real rate adjusts for inflation: real rate ≈ nominal rate − inflation rate (Fisher equation).

Basic capital theory: capital is produced means of production; its value is the present value of the future income it generates, so investment depends on comparing expected returns with the interest rate.