Test: Product Pricing - 2 - B Com MCQ

Price discrimination by a monopolist is possible under certain conditions. The preconditions for successful price discrimination are: No Possibility of Resale of Product: Price discrimination is successful when the product or service cannot be easily resold from low-priced to high-priced markets. This prevents arbitrage and is common in services like medical care, legal advice, and personal services. Separation of Markets: Markets should be separated geographically or politically, making it difficult for buyers and sellers to interact between markets. Dumping, where products are sold at different prices in different markets, is an example of this. These conditions, along with other factors like consumer peculiarities and different demand elasticities, enable a monopolist to engage in successful price discrimination.

The key feature of monopolistic competition is product differentiation among firms. In monopolistic competition, there are many sellers, but each produces a product that is slightly different from those of its competitors. These differences can be in terms of quality, branding, packaging, or other attributes. This product differentiation allows firms to have some degree of monopoly power over their own product, as consumers may have preferences for one brand or variation over another.

The market structure characterized by a few dominant firms that control the supply of a commodity is known as "oligopoly." In an oligopoly, a small number of large firms dominate the industry, and their actions have a significant impact on prices and competition. Oligopolistic industries are often marked by intense competition among the few major players.

Sweezy's Kinked Demand Curve Model explains why prices tend to remain stable in oligopolistic markets. According to this model, oligopolistic firms face a kinked demand curve, meaning that they believe price increases will not be matched by competitors, while price cuts will be matched. This leads to price stability as firms are reluctant to change their prices. It provides an explanation for the observed rigidity of prices in many oligopoly markets.

When a firm reduces its price in an oligopolistic market, assuming competitors match the price cut, its demand curve becomes less elastic. This means that the quantity demanded is not very responsive to price changes, and the firm may not experience a significant increase in sales. This is one of the reasons why oligopolistic firms are often reluctant to change their prices.

In the context of oligopoly, the term used to describe the situation where a price cut by one firm leads to competitors matching the price cut is "competitive retaliation." Oligopolistic firms are often cautious about price changes because they anticipate that competitors will respond by matching the price cut, leading to a price war.

The primary reason for the stability of prices in oligopoly markets, according to Sweezy's Kinked Demand Curve Model, is the kinked nature of the demand curve. When an oligopolistic firm reduces its price, it expects competitors to match the price cut, leading to a relatively inelastic demand for price decreases. Conversely, if the firm raises its price, competitors are unlikely to follow suit, leading to a more elastic demand for price increases. This kinked demand curve results in price stability.

When a firm in an oligopolistic market raises its price, assuming competitors do not follow suit, its demand curve becomes more elastic. This means that the quantity demanded becomes more responsive to price changes, and the firm may experience a significant decrease in sales. Oligopolistic firms are often cautious about raising prices for this reason.

The term for the situation in which firms in an oligopolistic industry tacitly agree to set the same price for their products is "price leadership." In price leadership, one firm, often the largest or dominant one, sets the price, and other firms in the industry follow suit without a formal agreement. This form of imperfect collusion helps maintain price stability in the oligopoly market.

Oligopolistic firms often avoid changing their prices, according to Sweezy's Kinked Demand Curve Model, because price cuts lead to competitive retaliation from rivals, and price increases lead to a more elastic demand, resulting in reduced sales. This makes price changes unattractive and contributes to price stability in oligopoly markets.