UNIT-III.

Business Organizations and Markets

Syllabus:

Introduction – Forms of Business Organizations - Sole Proprietary - Partnership - Joint Stock

Companies - Public Sector Enterprises. Types of Markets - Perfect and Imperfect Competition -
Features of Perfect Competition Monopoly- Monopolistic Competition–Oligopoly-Price-Output
Determination - Pricing Methods and Strategies

Introduction:

Business:

It is an organization or economic system where buyers and sellers meet together and goods and
services are exchanged for one another or exchanged for money. It also refers to the efforts and
activities undertaken by individuals to produce and sell goods and services for profit.

Factors affecting the choice of business type:

Nature of the business activity:

This is an important factor that having direct impact on the choice of a form of business types. In
small trading businesses, professions and personal service trades, sole trader is suitable.Besides
partnership is suitable for finance, insurance, real estate, manufacturing activities on a modest
scale.

Amount of the capital:

Capital availability will affect the choice of business type. In case of small capital, sole trader is
suitable from. If the owners can manage large amount of capital, Joint Stock Company will be
the suitable form of the organization.

Scale of Operations:

Scale of operations can affect the choice of business type. If the scale of operations of business
activities are small, sole proprietorship is suitable, if the scale of operations are modest,
partnership is suitable, whereas, in case of large scale of operations, the company form is
suitable.

Degree of control and management:

The degree of control and management that an enterprise desire to have over business affects the
choice of ownership organization. In sole trader, owner has complete control over business. In
partnership management and control of business is jointly shared by partners.
Stability of business:

Stability of business is another factor of choice of organization. A stable business is preferred by

owners as it helps him in attracting suppliers, Workers and also suppliers of capital

Division of profit:

Profit is guiding the entrepreneur to select a particular form of business. If the owner desire to
get all profits will naturally prefer sole trader.

Cost, procedure and government regulations:

This is also an important factor that should be taken into amount while choosing a particular
form of organization. Different forms of organization involve different procedure for
establishment and governed by different laws. Sole trader is the easiest and cheapest to get
started. Partnership is also quite simple and oral agreement can be equally effective. Company
form is more complicated form.

Sole trader
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or
proprietorship, is a type of enterprise owned and run by only one person and in which there is no
legal distinction between the owner and the business entity.

Example: Gardener, Hairdresser, Private Chef, Photographer etc.

Features of Sole trader:

1. Single Ownership: A sole trader business is owned and run by a single individual who
has full control over all business decisions.
2. Unlimited Liability: The owner is personally liable for all the debts and obligations of
the business. This means that if the business faces financial difficulties, the owner’s
personal assets (like their home or savings) could be used to settle business debts.
3. Simple Setup: Establishing a sole trader business is relatively easy and inexpensive.
There are fewer regulatory requirements compared to other business structures, such as
limited companies.
4. Full Control: The sole trader has complete control over the decision-making and
direction of the business. There is no need for consultation or approval from partners or
shareholders.
5. Taxation: The income of the business is considered the personal income of the owner
and is taxed as such. This means the profits are taxed at the individual's personal income
tax rate.
6. Profits: All profits from the business belong to the sole trader, who can choose how to
reinvest or withdraw the profits.
7. Less Administrative Burden: Sole traders face less paperwork and fewer regulations
than businesses with more complex structures. There is typically no need to file annual
reports or conduct meetings.
8. Limited Capital Raising: Since a sole trader business relies on the personal resources of
the owner, raising capital can be more challenging compared to other business structures
that can issue shares or take on partners.
9. No Separate Legal Entity: Unlike limited companies, a sole trader does not have a
separate legal identity from the owner. The business is not considered a separate entity
from the person running it.
10. Flexibility: Sole traders have the ability to adapt quickly to changes and make decisions
without needing approval from others.
11. Succession: In the event of the sole trader's death or incapacity, the business typically
ceases to operate unless specific plans are in place.
Advantages of sole trader:
1. Full Control: As a sole trader, you have complete control over all aspects of the
business. You make all the decisions, from day-to-day operations to long-term strategy,
without needing approval from partners or shareholders.
2. Simple Setup and Low Costs: Starting a sole trader business is typically quick and easy.
There are minimal legal requirements and fewer formalities compared to other business
structures, which means lower startup costs.
3. Tax Benefits: As a sole trader, the business’s profits are treated as your personal income,
which can be simpler to manage from a tax perspective. In some cases, it may be easier to
offset business expenses against your income.
4. Flexibility: Sole traders enjoy a high degree of flexibility. You can easily change
direction, adapt to new opportunities, or make adjustments without needing to consult
with others.
5. Retain All Profits: All profits generated by the business belong to the owner. Since there
are no shareholders or partners to pay, you get to keep everything the business earns
(after tax).
6. Less Paperwork and Administration: Compared to other business structures like
limited companies, sole traders have less red tape. There's no need for complex financial
reporting, filing annual accounts, or holding shareholder meetings.
7. Confidentiality: As a sole trader, you don’t have to disclose financial information to the
public, unlike limited companies, which must file accounts and disclose their finances
publicly.
8. Direct Relationship with Customers: Because you're directly involved in the business,
you can build stronger relationships with customers. This personal touch can be a
competitive advantage.
9. Independence: There’s a sense of independence and self-sufficiency that comes with
being a sole trader. You make the decisions, set your hours, and have the flexibility to run
the business exactly as you see fit.
10. Easier to Dissolve: If you decide to stop the business or retire, the process of winding up
a sole trader business is straightforward and much simpler than that of a limited
company.
Disadvantages of sole trader:
1. Unlimited Liability: The biggest drawback of being a sole trader is that you are
personally liable for all the debts and obligations of the business. If the business faces
financial difficulties or lawsuits, your personal assets (like your house or savings) could
be at risk.
2. Limited Capital: As a sole trader, you're limited to the capital you can personally invest
or borrow. It can be difficult to raise significant funding since you're not able to sell
shares or bring in investors as you could in a limited company.
3. Lack of Continuity: A sole trader business often ends if the owner retires, becomes
incapacitated, or passes away. There is no separate legal entity, so the business doesn't
continue unless arrangements are made beforehand.
4. High Workload and Stress: As the sole person responsible for all aspects of the
business (from administration to customer service to management), you may face a high
workload. This can lead to stress, especially if the business grows quickly or encounters
challenges.
5. Limited Expertise: A sole trader may struggle to handle all aspects of the business
effectively, particularly areas like finance, marketing, or law, unless they hire experts or
develop skills in those areas.
6. Difficulty in Scaling: Sole trader businesses can have trouble growing beyond a certain
point because they lack the resources and structure of larger businesses. Hiring
employees or expanding operations may be more challenging without the infrastructure
that larger businesses have.
7. Less Credibility: Some customers, suppliers, or lenders may view sole traders as less
credible or stable compared to limited companies. This could make it harder to secure
business contracts or obtain loans.
8. Higher Tax Rates: In some jurisdictions, sole traders may face higher personal tax rates
compared to companies, especially when profits are significant. Additionally, they might
miss out on tax advantages available to incorporated businesses.
9. No Shared Responsibility: As a sole trader, you shoulder all the responsibility. This can
lead to burnout, and if something goes wrong, you are solely accountable. There's no one
to share the risk or burden with.
10. Limited Exit Strategy: Selling a sole trader business is generally more difficult than
selling a company. There’s no separate legal entity to sell; the business is directly tied to
the owner’s personal identity.
Partnership:
 A partnership is an agreement between two or more people or entities to share a business, its
profits, and its losses. Partners may contribute money, skills, or labor to the business. They
also share responsibility for managing the business.
The Indian Partnership Act, 1932 defines a partnership under Section 4 as follows:
"Partnership is the relationship between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all."
In simpler terms, a partnership is formed when two or more individuals agree to run a business
together, sharing both the profits and the losses that arise from the business. These partners may
carry out the business jointly, or one or more partners may act on behalf of the entire partnership.
Feature of Partnership:
Here's a more detailed breakdown of the key features of a partnership:

1. Mutual Agency:

 Every partner acts as both an agent (representing the firm) and a principal (acting on their own
behalf).
 This means that any action taken by one partner can bind the entire partnership.
2. Sharing of Profits and Losses:

 Partners agree to share both the profits and losses of the business.
 The profit-sharing ratio is usually determined in the partnership agreement.
 If there is no agreement, profits are typically shared equally.
3. Unlimited Liability:

 Partners are personally liable for the debts and obligations of the partnership.
 This means that if the partnership cannot pay its debts, creditors can pursue the personal assets of
the partners.
4. Contractual Relationship:

 A partnership is formed through an agreement, which can be written or verbal.

 While a verbal agreement is valid, a written partnership agreement is recommended to avoid
misunderstandings.
5. Business Purpose:

 A partnership must involve a business activity aimed at making a profit.

 The purpose of the partnership should be lawful.
6. At Least Two People:

 A partnership requires at least two people to form it.

 7. Decision-Making Authority:

 Partners have the right to make decisions that affect the business or its assets.
 The degree of involvement may vary depending on the type of partnership.

Advantages of Partnership:
Easy Formation – An agreement can be made oral or printed as an agreement to enter as
a partner and establish a firm.
Large Resources – Unlike sole proprietor where every contribution is made by one
person, in partnership, partners of the firm can contribute more capital and other
resources as required.
Flexibility – The partners can initiate any changes if they think it is required to meet the
desired result or change circumstances.
Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
Combination of different skills – The partnership firm has the advantage of knowledge,
skill, experience and talents of different partners.
Tax Benefits: Partnerships usually benefit from "pass-through taxation," meaning the
business itself is not taxed directly. Instead, profits are passed through to individual
partners who report them on their personal income tax returns. This can result in tax
savings, especially if the business's profits are low or the partners are in lower tax
brackets.
Motivation and Incentive: Since partners share in both the profits and the risks of the
business, they often have a strong incentive to work hard and ensure the success of the
business. Their personal stake in the business can lead to greater motivation and
commitment.
Business Continuity: Partnerships can continue even if one partner leaves or retires,
provided there are provisions in the partnership agreement for succession or replacement
of partners. This offers a degree of business continuity.
Disadvantages of partnership:
Unlimited Liability: In most types of partnerships (except limited partnerships), partners
have unlimited liability, meaning they are personally liable for the debts and obligations
of the business. This means that if the business cannot pay its debts, the personal assets of
the partners (like their homes or savings) can be used to settle those liabilities.
Potential for Disputes: Partnerships often involve individuals with different ideas, goals,
and working styles. This can lead to conflicts and disagreements over business decisions,
management, and profit distribution. If not properly managed, such disputes can harm the
business.
Shared Profits: While profits are shared in a partnership, partners may not always feel
that their share is proportional to their input. If one partner works harder or invests more,
 they might feel the profit-sharing arrangement is unfair, leading to dissatisfaction or
tension within the partnership.
Lack of Continuity: A partnership does not have perpetual existence. If one partner
leaves, dies, or becomes incapacitated, the partnership may need to be dissolved or
restructured, which could disrupt the business. This is different from a corporation, which
can continue despite changes in ownership.
Limited Access to Capital: Partnerships may have a harder time raising capital
compared to corporations. Partners can only contribute so much in terms of capital and
may struggle to secure financing from external sources like banks, especially if the
business is perceived as high risk.
Management Issues: While shared management can be an advantage, it can also be a
disadvantage. Differences in management styles, decision-making processes, or vision for
the business can lead to inefficiencies and poor decision-making. If the partners cannot
effectively communicate and collaborate, the business could suffer.
Risk of Partner’s Actions: In a partnership, the actions of one partner can bind the
others. For instance, if one partner makes a bad decision or enters into a contract without
consulting the other partners, the entire partnership could be held responsible. This shared
liability can be risky, particularly if one partner acts irresponsibly.
Limited Expertise: While partnerships allow for complementary skills, the partners may
still lack the expertise needed to manage all aspects of the business effectively. If the
partners do not have the necessary skills in areas like finance, law, or marketing, it could
hinder business growth or performance.
Types of Partners:
1. Active Partner/Managing Partner
An active partner is also known as Ostensible Partner. As the name suggests he takes active
participation in the firm and the running of the business. He carries on the daily business on behalf
of all the partners. This means he acts as an agent of all the other partners on a day to day basis and
with regards to all ordinary business of the firm.Hence when an active partner wishes to retire from
the firm he must give a public notice about the same. This will absolve him of the acts done by other
partners after his retirement. Unless he gives a public notice he will be liable for all acts even after
his retirement.

2. Dormant/Sleeping Partner
This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he does
not take an active part in the daily activities of the firm. He is however bound by the action of all the
other partners.He will continue to share the profits and losses of the firm and even bring in his share
of capital like any other partner. If such a dormant partner retires he need not give a public notice of
the same.

3. Nominal Partner
This is a partner that does not have any real or significant interest in the partnership. So, in essence,
he is only lending his name to the partnership. He will not make any capital contributions to the
firm, and so he will not have a share in the profits either. But the nominal partner will be liable to
outsiders and third parties for acts done by any other partners.

4. Partner by Estoppel
If a person holds out to another that he is a partner of the firm, either by his words, actions or
conduct then such a partner cannot deny that he is not a partner. This basically means that even
though such a person is not a partner he has represented himself as such, and so he becomes partner
by estoppel or partner by holding out.

5.Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even
when dealing with third parties he will be liable for all acts of profit only, he will share none of the
liabilities.

6. Minor Partner:

A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be
admitted to the benefits of a partnership if all partner gives their consent for the same. He will share
profits of the firm but his liability for the losses will be limited to his share in the firm.

Joint Stock Company:

Introduction and Meaning:

A Joint stock Company is an artificial person, created by a fixed capital, divisible into transferable
shares with common seal.

1. The company has a separate legal entity. It must be compulsorily registered.

2. Company owned by shareholders, who subscribe for its shares.

3. It managed by board of directors, elected representatives of share holders.

4. In this way, management and ownership is practically different.

 5. The company has permanent life, not at all affected by the death, insolvency of its
members.

6. The liability of the share holders is limited to the face value of shares held by a
particular shareholder.

Definition:

According to Haney “A Joint Stock Company is a voluntary association of persons for profit, whose
capital is divided into transferable shares and ownership is required for its membership”

Features of Joint Stock Company:

 Separate Legal Entity:

A joint-stock company is recognized as a distinct legal entity, separate from its owners
(shareholders), meaning it can own property, enter contracts, and be sued in its own name.
 Limited Liability:
Shareholders are only liable for the amount of their investment (the value of their shares) and
not for the company's debts or liabilities.
 Transferable Shares:
Ownership in a joint-stock company is represented by shares, which can be easily bought, sold,
or transferred without affecting the company's operations.
 Perpetual Existence:
The company's existence continues even if shareholders come and go, die, or sell their shares.
 Association of Persons:
A joint-stock company is formed by an association of individuals who pool their resources to
form a business.
 Common Seal:
A joint-stock company has a common seal, which is a legal signature used to authenticate
official documents.
 Separation of Ownership and Management:
Ownership (shareholders) and management (board of directors) are distinct, allowing for
professional management of the company.
 Registration:
A joint-stock company must be registered under the relevant laws to gain its status as an
independent entity.
 Capital Accumulation:
Joint stock companies can raise large amounts of capital by issuing shares and debentures,
enabling them to undertake large-scale operations.
 Professional Management:
The company's operations are managed by a professional team, rather than the owners, which
allows for expertise and efficiency.
Types of Joint Stock Company

Chartered company:

It is a business entity incorporated and granted rights (often exclusive) by a royal charter or
similar instrument of government, for trade, exploration, or colonization, or a combination of
these. Example: East India Company, Dutch India Company, Bank of England.

Registered Company:
A "registered company" in India, like a Private Limited Company or Public Limited Company,
is a business entity that has been formally established and recognized as a distinct legal entity by
the government, specifically the Ministry of Corporate Affairs (MCA). Example: Google India
pvt Ltd, Infosys Limited, Byju’s pvt ltd

Statutory Company:

A statutory company, also known as a statutory corporation, is a type of company created by a

specific act of parliament or a state legislature. These entities are established to perform public
functions and are owned or controlled by the government, although they often operate with a
degree of independence. Examples include the Reserve Bank of India (RBI) and Life Insurance
Corporation of India (LIC).

A limited company:

It is a business structure where the liability of its owners (shareholders) is limited to their
investment in the company, meaning their personal assets are protected from business debts.
These companies are classified as below:

Company limited by shares"

It is a type of company where the liability of its shareholders is limited to the amount unpaid on
their shares, meaning their financial risk is capped at their investment. These companies are
classified in to two types:

1. Public limited company (PLC):

It is a business entity that offers shares to the public and is listed on a stock exchange, allowing
anyone to buy and sell its shares, and is subject to more stringent regulations than private limited
companies. Example: Bharat Petroleum, Tata Motors, Infosys etc..

2. Private limited company (Pvt Ltd)

It is a business entity that's privately owned and limits shareholder liability. It's a popular choice
for small and medium-sized businesses. Example: IKEA, Dell Technologies

Limited by Promise:
Companies limited by guarantee, often used by non-profit organizations, charities, and clubs, are
structured where members guarantee a nominal amount, rather than owning shares, and liability
is limited to that guarantee. Example: Sports-Clubs, Charities, etc..

Public Enterprises:

Public enterprise is a business organization owned, managed, and controlled by the government,
either wholly or partially, aiming to maximize social welfare and uphold public interest. Public
enterprises can be corporations, statutory corporations or nationalized banks.

Public enterprises (also known as state-owned enterprises or government-owned corporations)

are organizations owned and operated by the government to provide goods or services to the
public. Here are the key features of public enterprises:
1. Ownership
 Public enterprises are owned, controlled, and financed by the government (either at the
central, state, or local level).
 The government is the sole or majority shareholder, and it has significant control over the
enterprise’s operations and policies.
2. Public Purpose
 The primary objective of public enterprises is to serve the public interest rather than to
maximize profits.
 They often provide essential services such as utilities (electricity, water), transportation
(railways, public transit), healthcare, education, and infrastructure development.
3. Government Control
 These enterprises are subject to government regulation, including oversight on pricing,
labor practices, and the provision of services.
 They may also be used as instruments of policy to achieve economic, social, and
developmental goals.
4. Revenue Generation
 Public enterprises generate revenue by selling goods or services to the public, but their
profits may not be the main driving force.
  Some public enterprises are financially self-sustaining, while others may require
government subsidies or funding.
5. Monopoly or Limited Competition
 Many public enterprises operate in industries where competition is limited or absent (e.g.,
postal services, public transportation), often because the services are seen as essential.
 In some cases, they may face limited competition from private entities or operate in
monopolistic conditions.
6. Accountability and Transparency
 Public enterprises are expected to maintain a high level of accountability and
transparency, as they are funded by taxpayers’ money.
 They are typically required to report on their performance to government bodies,
legislators, and the public.
7. Social Objectives
 They are often driven by social or welfare objectives, such as ensuring affordable access
to basic services or promoting regional economic development.
 For example, public enterprises may focus on providing services to underserved or
remote areas where private companies may not find it profitable to operate.
8. Government Intervention in Management
 The government may appoint boards of directors and top executives, which may
influence the management style and decision-making.
 Political considerations sometimes play a role in the operation and policy direction of
public enterprises.
9. Employment
 Public enterprises often employ a large number of people, sometimes offering more
stable jobs than those in the private sector.
 Labor policies in public enterprises are typically subject to government regulations and
can include unionized workforces.
10. Capital Investment
 Public enterprises can attract capital through government funding, loans, or bonds, and
sometimes through public-private partnerships.
 They may have easier access to credit due to their government backing.
Types of Public Enterprises
Public enterprises can be classified into different types based on their ownership structure,
function, and the degree of government involvement. Here are the main types of public
enterprises:
1. Departmental Undertakings
 Ownership and Control: These are fully owned and controlled by the government, and
they operate as a department within the government structure.
  Management: They are managed by government officials or civil servants and do not
have a separate board of directors.
 Examples:
o Indian Railways (in India)
o Post offices (in many countries)
Features of Departmental Undertakings:
Direct Government Control:
Departmental undertakings are directly managed and controlled by the government, typically
through a specific ministry or department.
No Separate Legal Entity:
They are not established as independent legal entities, meaning they are part of the government
and don't have the ability to sue or be sued in their own name.
Government Funding:
These undertakings are funded through the government budget, rather than relying on
independent revenue generation.
Public Service Focus:
The primary objective of departmental undertakings is to provide public services, rather than
generating profit.
Government Employees:
The employees of these undertakings are considered government servants, subject to the same
rules and regulations as other civil servants.
Accountability and Audit:
Departmental undertakings are subject to the same accounting, auditing, and budgeting
procedures as other government departments.

Advantages of Departmental Undertaking:

Direct Government Control and Accountability:
Departmental undertakings are directly managed by government departments, ensuring policies
align with national interests and are accountable to the public.
Public Service Focus:
These undertakings prioritize public welfare and service provision rather than profit
maximization, making essential services accessible to all.
 Reliable and Stable Services:
As government-owned, these undertakings are less susceptible to market fluctuations and can
provide consistent, reliable services.
Policy Implementation:
They are effective tools for implementing government policies and programs, particularly in
areas like infrastructure development and social welfare.
Financial Stability:
Departmental undertakings are funded through the government budget, ensuring financial
stability and reducing the risk of financial instability.
Transparency and Accountability:
Financial records are subject to government audit, reducing the risk of misuse of funds and
promoting transparency.
Social Welfare:
They can be used to address social welfare concerns, such as providing affordable housing,
healthcare, education, and other essential services.
Ease of Formation:
Forming departmental undertakings is relatively easy, as they are created by administrative
decisions rather than requiring complex legal procedures.
Secrecy and National Security:
In areas where secrecy is crucial, such as defense and atomic power, departmental
undertakings are well-suited due to direct government oversight.

Disadvantages of Departmental Undertakings:

Bureaucratic Inefficiency:
Departmental undertakings are often characterized by slow decision-making processes and
rigid procedures due to the need to adhere to government regulations and bureaucratic
processes.
Lack of Autonomy and Flexibility:
They lack the autonomy to make independent decisions, leading to delays and inability to
respond quickly to market changes or emerging opportunities.
Financial Dependence:
Funding is typically dependent on government allocations and the revenue generated cannot be
used for reinvestment or expansion, limiting their ability to adapt to changing market
conditions.
Political Interference:
Political interference can disrupt operations, influence decision-making, and hinder the pursuit
of efficiency.
Lack of Motivation:
The absence of profit motives and competition can lead to a lack of motivation and reduced
efficiency among employees.
Insensitivity to Customer Needs:
Rigid procedures and a focus on government directives can lead to a lack of responsiveness to
customer needs and dissatisfaction.
Limited Innovation:
The lack of competition and emphasis on following procedures can stifle innovation and the
development of new products or services.

Public Corporations
Ownership and Control: Public corporations are owned by the government but are set
up as separate legal entities, distinct from government departments.
Management: They have their own boards of directors and are given a greater degree of
operational independence.
Examples:
o BBC (British Broadcasting Corporation)
o State Bank of India (SBI)
Features of Public Corporations:
Created by Law:
Public corporations are established by an act of parliament or a state legislature.
Separate Legal Entity:
They are treated as separate legal entities, distinct from the government, allowing them to own
property, enter contracts, and sue or be sued in their own name.
Perpetual Succession:
They have perpetual existence, meaning they continue to exist even if their members or
directors change.
State Ownership: The government is the sole owner of public corporations.
Capital provided by the Government: The government provides the capital for these
corporations.
Parliamentary Control: They are accountable to the parliament or state legislature for their
activities.
Management by Board of Directors: The administration is typically undertaken by a board of
directors nominated by the government.
Service-Oriented:
Public corporations are primarily established to provide essential services to the public, rather
than to generate profits.
Public Accountability:
They are accountable to the public and are subject to parliamentary scrutiny.
Auditing:
Their accounts are audited by the Comptroller & Auditor General of India (CAG).

Advantages of Public Corporations :

Access to Capital:
Public corporations can raise significant amounts of capital by selling shares to the public,
allowing for expansion and investment in growth initiatives.
Easier Financing:
Public companies often have an easier time obtaining loans and other forms of financing due to
their established reputation and financial transparency.
Liquidity for Investors:
The public nature of a corporation makes it easier for investors to buy and sell shares,
providing them with liquidity and a way to realize their investments.
Economies of Scale:
Large-scale operations enable public corporations to benefit from economies of scale,
potentially leading to lower production costs and competitive pricing, which can be passed on
to consumers.
Enhanced Visibility and Credibility:
Public companies have greater visibility and can project a more credible image, attracting
investors, customers, and talent.
Strategic Control:
The government can use public corporations to control and influence key sectors, such as
energy and infrastructure, to serve public interests.

Public Accountability:
Public corporations are subject to regulations and public scrutiny, fostering transparency and
accountability.
Employee Incentives:
Public companies can offer stock options and other incentives to employees, aligning their
interests with the company's success.
Flexibility and Independence:
While subject to regulations, public corporations often retain a degree of autonomy, allowing
them to adapt to changing market conditions.
Addressing Public Needs:
Public corporations can be used to provide essential services, even in unprofitable areas, where
private companies may be less willing to operate

Disadvantages of public corporations:

1. Increased Compliance Costs and Regulations:

Public companies must adhere to complex regulatory requirements, including financial reporting
standards (GAAP or IFRS), and are subject to scrutiny from government agencies like the SEC.

2. Loss of Control and Ownership:

When a company goes public, original owners or founders may lose control over the company as
shareholders gain voting rights.

3. Market Volatility and Pressure to Perform:

Public companies are subject to market fluctuations, which can impact their stock price and
overall valuation.
Shareholders often expect consistent quarterly profits and dividend payouts, which can lead to a
focus on short-term gains over long-term growth.
This pressure can sometimes lead to unfavorable business decisions.
4. Increased Scrutiny and Public Attention:

Public companies are constantly under the spotlight from analysts, the media, and the public.
This can create additional pressure to maintain a positive image and meet investor expectations.
 5. Vulnerability to Takeovers:

 The publicly traded nature of a company's shares makes it more vulnerable to takeovers by other
entities.
 This can lead to changes in ownership and management, which may not always be in the best
interests of the original owners.
3. Government Companies
Ownership and Control: These are companies where the government holds at least 51%
of the shares, and it has a major say in their operations.
Management: They are managed like any other company, with a board of directors and
shareholders, but the government is the major stakeholder.
Examples:
o Bharat Heavy Electricals Limited (BHEL)
o Oil and Natural Gas Corporation (ONGC)
Features of Government Companies:
Separate Legal Entity:
Government companies are independent legal entities, separate from the government, with
their own legal standing.
Registration:
They are registered under the Companies Act and are subject to the regulations outlined in the
Act.
Government Ownership:
The government, either central or state, owns at least 51% of the paid-up share capital.
Public Accountability:
They are accountable to the government and the public, with reporting and auditing
requirements.
Financial Independence:
While funded by the government, they can also raise capital from the public and the capital
market.
Operational Flexibility:
They have autonomy in their internal operations, including staffing and management.
Board of Directors:
The government appoints a board of directors, which may include government officials.
 Objectives:
They pursue both commercial and social objectives, often serving public needs and
contributing to economic development.
Auditing:
They are audited by the Comptroller and Auditor General of India (C&AG) or an agency
appointed by the central government.
Employees:
They hire their own employees, who are not part of the government's civil service.
Public Service:
They are often established to provide essential services or fulfill strategic objectives deemed in
the public interest.

Advantages of Government Company

Public Welfare and Social Responsibility:

 Government companies often focus on delivering essential services like healthcare,

transportation, and electricity, even if it means sacrificing some profit margins.
 This approach ensures that critical needs are met for the public, even if they're not commercially
viable.
2. Financial Stability and Security:

 Government companies are backed by the government, which can provide a level of stability and
security that private companies may lack.
 This makes them less vulnerable to market downturns and fluctuations.
3. Easy Access to Funding and Capital:

 The government's support allows these companies to raise capital more readily through various
means, including public share offerings and government loans.
 This access to capital enables them to invest in infrastructure, research, and development,
contributing to economic growth.
4. Employment Generation and Economic Development:

 Government companies often create a significant number of jobs, contributing to employment

rates and regional economic growth.
 They also stimulate economic activity by investing in various sectors and creating demand for
goods and services.
 5. Autonomy and Flexibility:

 Government companies, while operating within a public sector framework, can often exercise
greater autonomy in their decision-making and operations compared to other government
agencies.
 This flexibility allows them to adapt to changing market conditions and make informed decisions
based on their specific needs.
6. Efficient Management and Professional Expertise:

 Government companies can attract and retain qualified professionals by offering competitive
salaries and benefits, as well as a more flexible work environment.
 This enables them to implement effective management practices and make sound business
decisions.

Disadvantages of Government Company :

Bureaucratic Delays:
Government companies often face slow decision-making due to intricate bureaucratic
processes, which can hinder agility and responsiveness.
Inefficiency:
They may struggle with inefficiencies and a lack of competition, potentially leading to lower
productivity and reduced profitability.
Political Interference:
Government policies and political agendas can interfere with operational decisions, potentially
prioritizing political considerations over business objectives.
Limited Profit Motive:
The focus on social objectives or public interest can sometimes overshadow profit-making
goals, potentially limiting investment and growth.
Funding Constraints:
Government companies may face funding limitations and rely heavily on government funding,
which can restrict their ability to invest in innovation and expansion.
Accountability Issues:
They might not be held to the same accountability standards as private companies, potentially
leading to inefficiencies and a lack of responsiveness to customer needs.
Regulatory Burden:
Government companies can be subject to stricter regulations and scrutiny compared to private
companies, increasing compliance costs and potentially hindering flexibility.
Inflexibility:
Their structure and operations may be less flexible than private companies, making it difficult
to adapt to changing market conditions.

MARKET:

Market is a place where buyer and seller meet, goods and services are offered for the sale and
transfer of ownership occurs. A market may be also defined as the demand made by a certain
group of potential buyers for a good or service. The former one is a narrow concept and later
one, a broader concept. Economists describe a market as a collection of buyers and sellers who
transact over a particular product or product class (the housing market, the clothing market, the
grain market etc.). For business purpose we define a market as people or organizations with
wants (needs) to satisfy, money to spend, and the willingness to spend it. Broadly, market
represents the structure and nature of buyers and sellers for a commodity/service and the process
by which the price of the commodity or service is established. In this sense, we are referring to
the structure of competition and the process of price determination for a commodity or service.
The determination of price for a commodity or service depends upon the structure of the market
for that commodity or service (i.e., competitive structure of the market). Hence the
understanding on the market structure and the nature of competition are a pre-requisite in price
determination.
Different Market Structures
Market structure describes the competitive environment in the market for any good or service. A
market consists of all firms and individuals who are willing and able to buy or sell a particular
product. This includes firms and individuals currently engaged in buying and selling a particular
product, as well as potential entrants.
The determination of price is affected by the competitive structure of the market. This is because

the firm operates in a market and not in isolation. In marking decisions concerning economic
variables it is affected, as are all institutions in society by its environment.

Perfect Competition

Perfect competition refers to a market structure where competition among the sellers and buyers
prevails in its most perfect form. In a perfectly competitive market, a single market price prevails
for the commodity, which is determined by the forces of total demand and total supply in the
market.
Characteristics of Perfect Competition
The following features characterize a perfectly competitive market:

1. A large number of buyers and sellers: The number of buyers and sellers is large and
the share of each one of them in the market is so small that none has any influence on the
market price.
2. Homogeneous product: The product of each seller is totally undifferentiated from those
of the others.
3. Free entry and exit: Any buyer and seller is free to enter or leave the market of the
commodity.
4. Perfect knowledge: All buyers and sellers have perfect knowledge about the market for
the commodity.
5. Indifference: No buyer has a preference to buy from a particular seller and no seller to
sell to a particular buyer.
6. Non-existence of transport costs: Perfectly competitive market also assumes the non-
existence of transport costs.
7. Perfect mobility of factors of production: Factors of production must be in a position to
move freely into or out of industry and from one firm to the other.
Under such a market no single buyer or seller plays a significant role in price determination. On
the other hand all of them jointly determine the price. The price is determined in the industry,
which is composed of all the buyers and seller for the commodity. The demand curve facing the
industry is the sum of all consumers’ demands at various prices. The industry supply curve is the
sum of all sellers’ supplies at various prices.
Pure competition and perfect competition
The term perfect competition is used in a wider sense. Pure competition has only limited
assumptions. When the assumptions, that large number of buyers and sellers, homogeneous
products, free entry and exit are satisfied, there exists pure competition. Competition becomes
perfect only when all the assumptions (features) are satisfied. Generally pure competition can be
seen in agricultural products.

Equilibrium of a firm and industry under perfect competition

Equilibrium is a position where the firm has no incentive either to expand or contrast its output.
The firm is said to be in equilibrium when it earn maximum profit. There are two conditions for
attaining equilibrium by a firm. They are:

Marginal cost is an additional cost incurred by a firm for producing and additional unit of output.
Marginal revenue is the additional revenue accrued to a firm when it sells one additional unit of
output. A firm increases its output so long as its marginal cost becomes equal to marginal
revenue. When marginal cost is more than marginal revenue, the firm reduces output as its costs
exceed the revenue. It is only at the point where marginal cost is equal to marginal revenue, and
then the firm attains equilibrium. Secondly, the marginal cost curve must cut the marginal
revenue curve from below. If marginal cost curve cuts the marginal revenue curve from above,
the firm is having the scope to increase its output as the marginal cost curve slopes downwards.
It is only with the upward sloping marginal cost curve, there the firm attains equilibrium. The
reason is that the marginal cost curve when rising cuts the marginal revenue curve from below.
The equilibrium of a perfectly competitive firm may be explained with the help of the fig. 6.2.

In the given fig. PL and MC represent the Price line and Marginal cost curve. PL also represents
Marginal revenue, Average revenue and demand. As Marginal revenue, Average revenue and
demand are the same in perfect competition, all are equal to the price line. Marginal cost curve is
U- shaped curve cutting MR curve at R and T. At point R marginal cost becomes equal to
marginal revenue. But MC curve cuts the MR curve fro above. So this is not the equilibrium
position. The downward sloping marginal cost curve indicates that the firm can reduce its cost of
production by increasing output. As the firm expands its output, it will reach equilibrium at point
T. At this point, on price line PL; the two conditions of equilibrium are satisfied. Here the
marginal cost and marginal revenue of the firm remain equal. The firm is producing maximum
output and is in equilibrium at this stage. If the firm continues its output beyond this stage, its
marginal cost exceeds marginal revenue resulting in losses. As the firm has no idea of expanding
or contracting its size of out, the firm is said to be in equilibrium at point T.

Monopoly
The word monopoly is made up of two syllables, Mono and poly. Mono means single while poly
implies selling. Thus monopoly is a form of market organization in which there is only one seller
of the commodity. There are no close substitutes for the commodity sold by the seller. Pure
monopoly is a market situation in which a single firm sells a product for which there is no good
substitute.
Features of monopoly
The following are the features of monopoly.

1. Single person or a firm: A single person or a firm controls the total supply of the
commodity. There will be no competition for monopoly firm. The monopolist firm is the
only firm in the whole industry.
2. No close substitute: The goods sold by the monopolist shall not have closely competition
substitutes. Even if price of monopoly product increase people will not go in far
substitute. For example: If the price of electric bulb increase slightly, consumer will not
go in for kerosene lamp.
3. Large number of Buyers: Under monopoly, there may be a large number of buyers in the
market who compete among themselves.
4. Price Maker: Since the monopolist controls the whole supply of a commodity, he is a
price-maker, and then he can alter the price.
 5. Supply and Price: The monopolist can fix either the supply or the price. He cannot fix
both. If he charges a very high price, he can sell a small amount. If he wants to sell more,
he has to charge a low price. He cannot sell as much as he wishes for any price he
pleases.
6. Downward Sloping Demand Curve: The demand curve (average revenue curve) of
monopolist slopes downward from left to right. It means that he can sell more only by
lowering price.

Pricing under Monopoly

Monopoly refers to a market situation where there is only one seller. He has complete control
over the supply of a commodity. He is therefore in a position to fix any price. Under monopoly
there is no distinction between a firm and an industry. This is because the entire industry consists
of a single firm.

Being the sole producer, the monopolist has complete control over the supply of the commodity.
He has also the power to influence the market price. He can raise the price by reducing his output
and lower the price by increasing his output. Thus he is a price-maker. He can fix the price to his
maximum advantages. But he cannot fix both the supply and the price, simultaneously. He can
do one thing at a time. If he fixes the price, his output will be determined by the market demand
for his commodity. On the other hand, if he fixes the output to be sold, its market will determine
the price for the commodity. Thus his decision to fix either the price or the output is determined
by the market demand.

The market demand curve of the monopolist (the average revenue curve) is downward sloping.
Its corresponding marginal revenue curve is also downward sloping. But the marginal revenue
curve lies below the average revenue curve as shown in the figure. The monopolist faces the
down-sloping demand curve because to sell more output, he must reduce the price of his product.
The firm’s demand curve and industry’s demand curve are one and the same. The average cost
and marginal cost curve are U shaped curve. Marginal cost falls and rises steeply when compared
to average cost.

Price output determination (Equilibrium Point)

The monopolistic firm attains equilibrium when its marginal cost becomes equal to the marginal
revenue. The monopolist always desires to make maximum profits. He makes maximum profits
when MC=MR. He does not increasing his output if his revenue exceeds his costs. But when the
costs exceed the revenue, the monopolist firm incur loses. Hence the monopolist curtails his
production. He produces up to that point where additional cost is equal to the additional revenue
(MR=MC). Thus point is called equilibrium point. The price output determination under
monopoly may be explained with the help of a diagram.

In the diagram 6.12 the quantity supplied or demanded is shown along X-axis. The cost or
revenue is shown along Y-axis. AC and MC are the average cost and marginal cost curves
respectively. AR and MR curve slope downwards from left to right. AC and MC and U shaped
curves. The monopolistic firm attains equilibrium when its marginal cost is equal to marginal
revenue (MC=MR). Under monopoly, the MC curve may cut the MR curve from below or from
a side. In the diagram, the above condition is satisfied at point E. At point E, MC=MR. The firm
is in equilibrium. The equilibrium output is OM.

The above diagram (Average revenue) = MQ or OP

Average cost = MR

Profit per unit = Average Revenue-Average cost=MQ-MR=QR

Total Profit = QRXSR=PQRS

The area PQRS resents the maximum profit earned by the monopoly firm.

But it is not always possible for a monopolist to earn super-normal profits. If the demand
and cost situations are not favorable, the monopolist may realize short run losses.

Through the monopolist is a price marker, due to weak demand and high costs; he suffers a
loss equal to PABC.
If AR > AC -> Abnormal or super normal profits.
If AR = AC -> Normal Profit
If AR < AC -> Loss
In the long run the firm has time to adjust his plant size or to use existing plant so as to
maximize profits.
Monopolistic competition

Perfect competition and pure monopoly are rate phenomena in the real world. Instead, almost
every market seems to exhibit characteristics of both perfect competition and monopoly. Hence
in the real world it is the state of imperfect competition lying between these two extreme limits
that work. Edward. H. Chamberlain developed the theory of monopolistic competition, which
presents a more realistic picture of the actual market structure and the nature of competition.

Characteristics of Monopolistic Competition

The important characteristics of monopolistic competition are:

1. Existence of Many firms: Industry consists of a large number of sellers, each one of
whom does not feel dependent upon others. Every firm acts independently without
bothering about the reactions of its rivals. The size is so large that an individual firm has
only a relatively small part in the total market, so that each firm has very limited control
over the price of the product. As the number is relatively large it is difficult for these
firms to determine its price- output policies without considering the possible reactions of
the rival forms. A monopolistically competitive firm follows an independent price policy.
2. Product Differentiation: Product differentiation means that products are different in
some ways, but not altogether so. The products are not identical but the same time they
will not be entirely different from each other. IT really means that there are various
monopolist firms competing with each other. An example of monopolistic competition
and product differentiation is the toothpaste produced by various firms. The product of
each firm is different from that of its rivals in one or more respects. Different toothpastes
like Colgate, Close-up, Forehans, Cibaca, etc., provide an example of monopolistic
competition. These products are relatively close substitute for each other but not perfect
substitutes. Consumers have definite preferences for the particular verities or brands of
products offered for sale by various sellers. Advertisement, packing, trademarks, brand
names etc. help differentiation of products even if they are physically identical.
3. Large Number of Buyers: There are large number buyers in the market. But the buyers
have their own brand preferences. So the sellers are able to exercise a certain degree of
monopoly over them. Each seller has to plan various incentive schemes to retain the
customers who patronize his products.
4. Free Entry and Exist of Firms: As in the perfect competition, in the monopolistic
competition too, there is freedom of entry and exit. That is, there is no barrier as found
under monopoly.
 5. Selling costs: Since the products are close substitute much effort is needed to retain the
existing consumers and to create new demand. So each firm has to spend a lot on selling
cost, which includes cost on advertising and other sale promotion activities.
6. Imperfect Knowledge: Imperfect knowledge about the product leads to monopolistic
competition. If the buyers are fully aware of the quality of the product they cannot be
influenced much by advertisement or other sales promotion techniques. But in the
business world we can see that thought the quality of certain products is the same,
effective advertisement and sales promotion techniques make certain brands
monopolistic. For examples, effective dealer service backed by advertisement-helped
popularization of some brands through the quality of almost all the cement available in
the market remains the same.
7. The Group: Under perfect competition the term industry refers to all collection of firms
producing a homogenous product. But under monopolistic competition the products of
various firms are not identical through they are close substitutes. Prof. Chamberlin called
the collection of firms producing close substitute products as a group.
Price – Output Determination under Monopolistic Competition
Since under monopolistic competition different firms produce different varieties of products,
different prices for them will be determined in the market depending upon the demand and cost
conditions. Each firm will set the price and output of its own product. Here also the profit will be
maximized when marginal revenue is equal to marginal cost.

Short-run equilibrium of the firm:

In the short-run the firm is in equilibrium when marginal Revenue = Marginal Cost. In Fig 6.15
AR is the average revenue curve. NMR marginal revenue curve, SMC short-run marginal cost
curve, SAC short-run average cost curve, MR and SMC interest at point E where output in OM
and price MQ (i.e. OP). Thus the equilibrium output or the maximum profit output is OM and the
price MQ or OP. When the price (average revenue) is above average cost a firm will be making
supernormal profit. From the figure it can be seen that AR is above AC in the equilibrium point.
As AR is above AC, this firm is making abnormal profits in the short-run. The abnormal profit
per unit is QR, i.e., the difference between AR and AC at equilibrium point and the total
supernormal profit is OR X OM. This total
abnormal profits is represented by the
rectangle PQRS. As the demand curve here is
highly elastic, the excess price over marginal
cost is rather low. But in monopoly the demand
curve is inelastic. So the gap between price and
marginal cost will be rather large.
If the demand and cost conditions are less favorable the monopolistically competitive firm may
incur loss in the short-run fig 6.16 Illustrates this. A firm incurs loss when the price is less than
the average cost of production. MQ is the average cost and OS (i.e. MR) is the price per unit at
equilibrium output OM. QR is the loss per unit. The total loss at an output OM is OR X OM. The
rectangle PQRS represents the total loses in the short run.

Long – Run Equilibrium of the

Firm:

A monopolistically competitive firm will

be long – run equilibrium at the
output level where marginal cost
equal to marginal revenue.
Monopolistically
competitive firm in the long run
attains equilibrium where
MC=MR and AC=AR Fig 6.17 shows this
trend.
Oligopoly
The term oligopoly is derived from two Greek words, oligos meaning a few, and pollen meaning
to sell. Oligopoly is the form of imperfect competition where there are a few firms in the market,
producing either a homogeneous product or producing products, which are close but not perfect
substitute of each other.
Characteristics of Oligopoly
The main features of oligopoly are:

1. Few Firms: There are only a few firms in the industry. Each firm contributes a sizeable
share of the total market. Any decision taken by one firm influence the actions of other
firms in the industry. The various firms in the industry compete with each other.
2. c As there are only very few firms, any steps taken by one firm to increase sales, by
reducing price or by changing product design or by increasing advertisement expenditure
will naturally affect the sales of other firms in the industry. An immediate retaliatory
action can be anticipated from the other firms in the industry every time when one firm
takes such a decision. He has to take this into account when he takes decisions. So the
decisions of all the firms in the industry are interdependent.
3. Indeterminate Demand Curve: The interdependence of the firms makes their demand
curve indeterminate. When one firm reduces price other firms also will make a cut in
their prices. So he firm cannot be certain about the demand for its product. Thus the
demand curve facing an oligopolistic firm loses its definiteness and thus is indeterminate
as it constantly changes due to the reactions of the rival firms.
4. Advertising and selling costs: Advertising plays a greater role in the oligopoly market
when compared to other market systems. According to Prof. William J. Banumol “it is
only oligopoly that advertising comes fully into its own”. A huge expenditure on
advertising and sales promotion techniques is needed both to retain the present market
share and to increase it. So Banumol concludes “under oligopoly, advertising can become
 a life-and-death matter where a firm which fails to keep up with the advertising budget of
its competitors may find its customers drifting off to rival products.”
5. Price Rigidity: In the oligopoly market price remain rigid. If one firm reduced price it is
with the intention of attracting the customers of other firms in the industry. In order to
retain their consumers they will also reduce price. Thus the pricing decision of one firm
results in a loss to all the firms in the industry. If one firm increases price. Other firms
will remain silent there by allowing that firm to lost its customers. Hence, no firm will be
ready to change the prevailing price. It causes price rigidity in the oligopoly market.

PRICING METHODS

The micro – economic principle of profit maximization suggests pricing by the marginal
analysis. That is by equating MR to MC. However the pricing methods followed by the firms in
practice around the world rarely follow this procedure. This is for two reasons; uncertainty with
regard to demand and cost function and the deviation from the objective of short run profit
maximization.

It was seen that there is no unique theory of firm behavior. While profit certainly on important
variable for which every firm cares. Maximization of short – run profit is not a popular objective
of a firm today. At the most firms seek maximum profit in the long run. If so the problem is
dynamic and its solution requires accurate knowledge of demand and cost conditions over time.
Which is impossible to come by?

In view of these problems economic prices are a rare phenomenon. Instead, firms set prices for
their products through several alternative means. The important pricing methods followed in
practice are shown in the chart.
Cost-based pricing: It is a pricing strategy where the selling price of a product or service is
determined by adding a markup to the total cost of producing or acquiring it. This method
ensures that the business covers its costs and achieves a desired profit margin. It can be classified
into different types:

Full cost pricing: It is a pricing strategy where the price of a product or service is determined by
adding a markup to the total cost of production, including both direct and indirect costs. This
approach ensures that all expenses, such as materials, labor, overhead, and marketing, are
covered, and a profit is generated.

Cost-Plus Pricing: It is also known as markup pricing, a strategy where a fixed percentage (the
markup) is added to the total cost of producing a product or service to determine its selling price.

For example, if a sweater costs $20 to produce and a 50% markup is desired, the selling price
would be $30.

Marginal-cost Pricing:

In economics, the practice of setting the price of a product to equal the extra cost of producing an
extra unit of output. By this policy, a producer charges, for each product unit sold, only the
addition to total cost resulting from materials and direct labor. Businesses often set prices close
to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of
$1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price
to $1.10 if demand has waned. The business would choose this approach because the incremental
profit of 10 cents from the transaction is better than no sale at all.

Competition based Pricing:

Competition-based pricing is a strategy where a company sets its prices by closely watching and
adjusting to the prices of its competitors. This means a business may set prices at the same level,
slightly higher, or lower than their competitors. The primary focus is on the external market and
competitor behavior rather than internal costs or consumer demand. One example of this is when
one major soda brand matches the price of its closest competitor. It classified into different types.

Going rate pricing:

Going rate pricing is a strategy where a company sets its product or service price based on the
average or prevailing price of similar items in the market. It's a competitive pricing approach
often used when products or services are relatively standardized or homogeneous, meaning
there's little variation in design and function. Essentially, companies using this strategy aim to
match or stay close to the prices of their competitors. Example: Imagine a babysitting service in
a neighborhood where most other babysitters charge $16 per hour. If a new babysitter wants to
enter the market, they might use going-rate pricing and also charge $16 per hour. This ensures
they are competitive and don't lose business to other sitters who are already established.

Sealed bid pricing:

Sealed bid pricing, also known as sealed-bid auction,is a method where potential buyers or
sellers submit their bids in a closed, confidential manner, and the bids are evaluated
simultaneously. Example: Real Estate, In a real estate sale, potential buyers might submit sealed
bids for a property, with the highest bid typically winning.

Demand based Pricing: It is a strategy where the price of a product or service is adjusted based
on the level of demand for that product or service. It's a dynamic pricing approach that aims to
maximize revenue by charging higher prices during periods of high demand and lower prices
when demand is low. Example: Airline carriers typically use a demand-based pricing approach to
adjust their fares according to market demands. It can be classified into different types:

Perceived value pricing: It is a pricing strategy that sets prices based on how customers
perceive the value of a product or service, rather than the actual cost of production. It focuses on
the value customers believe they are receiving, whether it's through perceived quality, brand
image, or overall benefits. This approach can lead to higher profit margins if customers are
willing to pay more for a product they perceive as valuable. For example, a designer handbag
might be priced much higher than a similar bag from a non-designer brand, because the
designer's name and reputation contribute to a higher perceived value.
Differential Pricing:
Differential pricing is a strategy where a business sets different prices for the same product or
service based on various factors such as customer characteristics, location, time of purchase, or
purchase behavior. It's also known as discriminatory pricing, variable pricing, or flexible pricing.
Example: Amazon. Amazon relies on several differential pricing tactics to maximize their
revenue, which includes dynamic pricing. ...
Uber. This company uses dynamic pricing by adjusting fare rates in real-time based on the
demand and supply in a specific area. ..
Strategy based pricing:
A pricing strategy is an approach businesses use to determine what prices they should charge for
their products and services. It involves analyzing the market and customer demand,
understanding customer needs, evaluating production costs, and setting competitive prices that
maximize profits. There are different types of strategy based pricing.
Penetration pricing: It is a strategy where a business initially sets low prices for a product or
service to quickly gain market share and attract customers, often used to establish a new product
or service in a competitive market. Example: Streaming Services: Netflix and Disney+ initially
offered lower subscription rates to attract new viewers and build a subscriber base. Once they
had established a large user base, they gradually increased their prices.
Skimming Pricing:
Price skimming is a pricing strategy where a company initially sets a high price for a product or
service, then gradually lowers it over time to capture different market segments and maximize
profits. Examples: Electronic products – take the Apple iPhone, for example – often utilize a
price skimming strategy during the initial launch period. Then, after competitors launch rival
products, i.e., the Samsung Galaxy, the price of the product drops so that the product retains a
competitive advantage