market analysis in modern business

8/9/2019 Market Analysis in Modern Business

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MARKETMARKET

ANALYSISANALYSIS

MARKETMARKET

ANALYSISANALYSIS



WHAT IS MARKET ?

³ Market is a set of conditions through which buyers

and sellers come in contact with each other for the

purpose of exchange of goods and services for

value.´



MARKET CLASSIFICATION

On the basis of area

- Local Market

- Regional Market

- National Market

- International Market

On the basis of Nature of transactions

- Spot Market

- Future Market

On the basis of Volume of business

- Wholesale Market

- Retail Market



On the basis of Time

- Very short period Market- Short period Market

- Long period Market

On the basis of Status of sellers

- Primary Market

- Secondary Market

- Terminal Market

On the basis of Regulations

- Regulated Markets

- Unregulated Markets



Significance of time element

- According to Marshallian theory of value, the forces of

demand and supply determine the price. The position of

supply is greatly influenced by the element of time.

Supply is to be adjusted in relation to changing demand in

the view of the time span given for such adjustments.

Market period price ± Market period is a very short

period during which it is practically impossible to alter

output or increase the stock. Thus the supply of the

commodity tends to be perfectly inelastic.



Short period price ± Short period is that period during

which supply of the commodity can be changed to

some extent though scale of production remainsunchanged. Here supply curve is elastic to some

extent.

Long period price ± Long period is sufficient time

period during which the firms can change the scale of

production to match the changing demands. Thus

supply curve becomes perfectly elastic in the long run

The degree of elasticity of supply tends to vary in

relation to time. In the short period the utility of thecommodity has greater significance in the

determination of its value (price). In the long run the

supply exerts greater influence on equilibrium price

determination.



On the basis of Competition- Pure and perfect competition

- Monopoly

- Duopoly- Oligopoly

- Monopolistic

Pur e & P erf ect competition

Characteristic features of perfect competition- Large number of sellers

- Large number of buyers

- Product homogeneity

- Free entry and exit of firms

- Perfect knowledge of market conditions

- Perfect mobility of factors of production

- Government non-intervention

- Absence of transport cost element



The distinction between pure and perfect competition

It is more a matter of degree than of kind. For a market to be purely competitive four fundamental conditions must

prevail (first four conditions in the list). For perfect

competition four additional conditions must be fulfilled

(next four in the list).

P rice determination under perfect competition

- U nder perfect competition there is a ruling market price

determined by the interaction of forces of total demand and

total supply in the market.- BBoth buyers and sellers are price takers and not the prices

makers.



E quilibrium of the firm

Assuming that firms always attempt to maximise

profits, basic economic theory provides a framework for determination of price. The rationale to this theory is

± I f the pr od uction and sale o f anan additional unit o f

pr od uct adds mor e to r evenue than to cost, pr o f it isincr eased and thus that unit should be pr od uced and sold.

In other words the firm continues to increase outputuntil marginal revenue (MR) is larger than marginalcost (MC). Thus the firm is in equilibrium only whenMR = MC



Short run equilibrium of the firm under perfect

competition

Normal profit - It is the minimum profit just sufficient

to keep the entrepreneur in that business. It is the

opportunity cost of entrepreneurship. As it is the factor

cost of entrepreneurship, it is included in the cost

curve itself. So when the firm¶s revenue is equal to

cost, it is earning the normal profit.

Super-Normal P rofit ± Revenue over and above thecost indicates the super-normal profit.



At the given price the firm may or may not be able to

attain the super- normal profit, depending on its short

run cost function.- When the AR>AC, there is super-normal profit

- When AR=AC, normal profit is yielded

- When AR<AC, Losses occur.

Long run equilibrium of the firm under perfect

competition

In the long run the firms under perfect competition will

be able to earn normal profits only, given the free entryand exit of firms.



M onopoly

Monopoly is a well defined market structure where thereis only one seller who controls the entire market supply, as

there are no close substitutes for that product.

F eatures of monopoly

- Monopolist is the single producer of the product in themarket

- under monopoly firm and industry are identical

- No close competitive substitutes

- It¶s a complete negation of competition- A monopolist is a price maker and not a price taker.



Bases of monopoly

- Natural factors

- Control of raw material

- Legal restrictions

- Economies of large scale production

- Business Reputation

- Business combines

Types of monopoly

- P ure & Imperfect Monopoly

- Legal monopoly

- Natural monopoly

- Technological monopoly

- Joint monopoly

-- Simple Simple & discriminating monopoly

-- Public Public & private monopoly



Monopoly E quilibrium

The monopolist can control both price and supply of the

product. But at any point of time she can fix only one of them. Either she can fix the quantity of output and let the

market demand determine the price of the product; or she

can fix the price of the product and let the market demand

determine the quantity which she can sell at the given

price.

Having profit maximising objective, she adopts the

rationale of equating MC with MR and fixes the level of

output which gives her the maximum profits or where the

losses are minimum. Thus when equilibrium output isdecided, the price is automatically determined in relation

to the demand for the product.

A monopolist may be earning profits or incur losses in

the short run.



F eatures of Monopoly price

- It is not the highest possible price.

- This price does not bring the highest average profit to theseller

- Monopoly price is often associated with the output, theAC of which is still falling.

- Under perfect competition, the price charged is equal to

MC but in monopoly the price is above MC.

Long run equilibrium of monopoly firm

P rice discriminationPrice discrimination implies the act of selling the outputof the same product at different prices in different marketsor or toto different buyers.



Types of price discrimination

- Personal discrimination

- Age discrimination- Sex discrimination

- Locational or territorial discrimination

- Size discrimination

- Use discrimination- Time discrimination

Objectives of price discrimination

- To maximise the profits.

- To convert the consumers¶ surplus into producer¶s profit.- To capture new markets.



- To keep hold on export markets.

- To exploit the unutilised capacity by widening the size of

market through price discrimination.

- To clear off surplus stock.

- To augment future sales by quoting lower rates at present

to the potential buyers who may develop the taste for the

product in future.

- To weed out the potential competition from the market or

destroy a rival firm.



Conditions necessary for price discrimination- Separate markets

- Apparent product differentiation

- Prevention of re-exchange of goods- Non-transferability nature of product

- Let go attitude of buyers

- Legal sanctions

- Buyer¶s illusion

When price discrimination is profitable?

Even though circumstances are favourable to practice pricediscrimination, it may not always be profitable. It is profitable onlywhen the following two conditions are prevailing.

- Elasticity of demand differs in each market

- The cost-differential of supplying output to different markets shouldnot be large in relation to the price differential based on elasticity

differential.



If the seller faces iso-elastic curves in two markets, the price

discrimination will not be profitable, as the AR and MR of those two

markets will also be equal in that case. Hence if any amount of output

transferred from one market to the other and different prices are

charged, the gains realised in one market is lost in the other.

MR = P [e-1/ e ]

When the monopolist considers separate markets, he takes the combined

marginal revenue ( MR) by aggregating the MR of different markets

and distributes equilibrium total output in different markets so that

marginal revenues in each market are the same.

Dumping

³Dumping is the act of selling a good abroad at a price lower than theselling price of the same good at the same time and in the same

circumstances at home, taking account of differences in the transport

cost´



M onopolistic Competition³ Monopolistic competition is defined as a market setting in which a large

number of sellers sell differentiated products´³ Monopolistic competition is a market situation in which there is keen

competition, but neither perfect nor pure, among a group of large number

of small producers or suppliers having some degree of monopoly power

because of their differential products´ ± Prof. E.H. Chamberlin

F eatures of monopolistic competition- Large number of sellers

- Large number of buyers

- Free entry & exit

- Product differentiation- Two dimensional Competition

- Selling cost

- The group



P rice and output determination under monopolistic competition

- Monopolistic demand curve (AR) is more elastic than monopoly.

- If the group consists less number of firms and great

product differentiation, then the elasticity is comparatively less.

- If the group consists of large number of firms and the productdifferentiation is weak, then the elasticity is comparatively more.

- The extent of monopoly power of the firms on the basis of differentiation and the resultant elasticity of demand decides the super normal profits of the firms in short run.

- The firms under monopolistic competition normally earn only normal profits in the long run.

- Some firms may earn super normal profits even in the long run withhigh product differentiation / good will etc.



P roduct differentiation is the major feature of

monopolistic competition- Product differentiation may broadly be defined as anything that causes

buyer to prefer one product to another. Therefore, in the real sense,

product differentiation exists in the mind of consumer. That is it is not

necessary for the difference to be real-it is only necessary for the

consumer to think it is real.( The role of advertising and brand name )

- The real differentiation among products may arise due to :

Patents, trademarks and copy rights

Differences in colour and packaging

Conditions relating to sale of the product

Method, time and cost of delivery

Availability of service

Guarantees and warranties



Non price competition - selling cost µ Expenditure incurred by a firm on advertising and sale promotion of

its products is known as selling cost¶. It includes, Advertising and publicity expenditure of all sorts

Expenses of sales department viz, commission and salaries of sales

staff

Margin granted to dealers

Expenditure for window display, demonstration of goods, freedistribution of samples etc.

Oligopoly Competition³ Oligopoly is defined as a market structure in which there are few

sellers selling a homogeneous product or differentiated products´.

Types of oligopoly- Pure or homogeneous oligopoly

- Differentiated or heterogeneous oligopoly



Sources of oligopoly- Huge capital investment

- Economies of scale- Patent rights

- Control over certain raw materials

- Mergers and takeovers

F eatures of oligopoly- Small number of sellers

- Interdependence of decision making

- Barriers to entry

- Huge cost

- Economies of scale

- Loyalty

- Price rigidity

- Indeterminate price



Sweezy¶s kinked demand curve model ( Model of price stability)

- Why price stays stable?

- Three possible ways of rival firms reaction to the price changes Rival firms follow the price changes both cut and hike

Rival firms do not follow the price changes

Rival firms follow the price cuts but not the price hikes

P rice leadership modelsA firm may become price leader formally or informally

- Formal price leadership- Out of tacit or explicit agreement

- Informal price leadership

Price leadership by a low cost firm

Price leadership by a dominant firm - Assumption ± There exists a

large firm in the industry which supplies a large proportion of the totalmarket supply



Barometric P rice leadership

- Barometric price leadership ± A firm ( not necessarily the dominantfirm ) taking lead in price change ( which is due but not effected due

to uncertainty in the market ).- Ability to forecast the market conditions more accurately

- A firm initiates a well publicized changes in the price which aregenerally followed by rival firms. Such firm need not be the largest or low cost firmfirm in the industry but should have the better knowledge of the prevailing market conditions and ability to predict them more

precisely. Reasons for the evolution of barometric leaders

- Rivalry between large firm leading to cut-throat competition to thedisadvantage of all the firms make them unacceptable.

- Lack of capacity and desire to make continuous calculations of cost,demand and supply conditions on the part of many firms.

- As a reaction to the long term economic welfare.



Conditions necessary for price leadership

- Number of firms is small.

- Entry of new firms restricted.- Products are by-n-large homogeneous.

- Demand for the industry is less elastic.

- Firms have almost similar cost curves.

Non-

P rice competition

- Product differentiation - Advertisements

- Collusion model : The cartel

Duopoly mark et

Duopoly is a limiting case of oligopoly. It is a market structure

assuming only two sellers selling identical products in the market



PRICING STRATEGIES & PRACTICES

Cost based pricing methods (Cost plus pricing )

- Full-cost / Mark up pricing /Average cost pricing

- Marginal cost pricing

P ricing based on stage of product life cycle

- Pricing of a new product

> Skimming price

> Penetration price

- Pricing in maturity stage

- Pricing in decline stage



Other pricing methods

- Rate of return pricing

- Going rate pricing> Pricing below market price

> Pricing above market price

> Pricing at market price

- Peak load pricing & Double pricing

- Value pricing

- Prestige pricing & Psychological pricing

- Multiple product pricing

- Loss leader pricing

- Administered prices



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ISBR-MBA

market analysis in modern business

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