Price is importantPricing in idealized economic markets and then shifts to the gragmatics of pricing in real marketsPrices in idealized economic marketsPrices in perfect competitionThe price of a product in perfect competition depends on supply, demand, attributes, and timing associated with the productSpot transactions and homogenous products are in perfect competition – this reduces to price dependent only on supply and demandEvery seller should ask the same price and every buyer would be expected to accept that price – equilibrium priceWho determines equilibrium price? Buyers and sellers jointly determine the equilibrium price by their choice of actionsIn perfect competition – shopping on price is equivalent to shopping on value or on statusPrices on oligopolyIn oligopolies, sellers have some control over pricesHomogeneous products in oligopolies although we allowed for the existence of brands – typically sellers prices are similar – not identical2 reasonsSellers with stronger brands may get higher prices than those sellers with weaker brandsOften prices are relative to the market share of the seller, with the largest supplier setting a slightly higher price than the second largest, and so on through to the smallest playerBrand and share may be related in the sense that it may give the largest player in an oligopoly some serious competitive advantagesThe same seller in an oligopoly can often price differently in different market segments (price discrimination)Different prices for regular customers and for senior citizensPrices in oligopoly are collusiveExplicit collusion – in oligopoly, it makes sense for sellers to share info and/or strike agreements among themselves to “fix” prices at artificially high levels = Illegal under US and EU lawImplicit collusion – even in the absence of overt exchange of info or agreement to collude, sellers can often exchange info by “signaling”No price changes in a market until the largest sellers increases price followed quickly by price increases among all of the smaller players adjust their prices upwardClearly the price move by the larger player is a trigger for the other movesLegal or not? Just because small players increase price after larger players price became public – not enough info to establish any explicit collusionPrices in oligopolies tend to be higher than in perfect competition resulting in opportunity to earn profit greater than zero. Sellers prefer it to perfect competition.In a monopoly, the single seller has considerable control over pricesIn theory - Monopolist can set any price they wishIn practice – there are constraintsFor most goods, as price increases demand generally decreases. Beyond some point, the drop in demand may produce a reduction in revenue and in an extreme case this effect is so great that total revenue may be insufficient to cover the cost of the sellersHigh prices provide incentives for new entrantsFederal and state laws also limit the monopolist’s pricing policyPrice in monopoly is generally higher than in oligopoly, but there are constraints on how high price will go. A single supplier has considerable control over price.Prices in monopolistic competitionIndividual sellers in perfect competition may attempt to gain some control over price by differentiating their productsThese differentiated products target different market segmentsToothpaste = package size, type (paste/gel), cavity fighting or whitening agents. Each target different market segmentsPrice also variesAll things equal, first movers have considerable control over pricing, moderated by the same forces as may affect monopolist. For our purposes, there are 2 differences between monopolistic competition and normal monopolyTotal size of market (segment vs entire market)Presence of differentiated rather than homogeneous productPrices in oligopoly, monopolistic competition, and monopoly tend to be increasingly higher than in expected in perfect competitionHigher prices tend to produce higher profitExcess rents to refer to these higher profits that tend to emerge when actual price exceeds equilibrium priceMonopolistic rent and oligopolistic rentFrom a pure price perspective, buyers prefer perfect competition while sellers prefer oligopoly, monopoly, or monopolistic competitionWhy?Buyers favor the lower equilibrium priceSellers favor opportunities to earn excess rentsFirms are both buyers and sellers. Firms prefer perfect competition in their input markets and oligopoly, monopoly, or monopolistic competition in their output marketsPrice and non-price competitionPrice vs pricingPrice is the amount of money that a seller is willing to accept in exchange for a product of specific attributes, at a given time and under given circumstancesPricing is a decision-making process by which one party to the transaction (usually, but not always the seller) decides what price to ask for a product given attributes at a given time and under given circumstancesDemand increases if price goes down, and demand decreases if price increases. For some products, price change has little or no effect on demand and in some instances we observe price and demand move in the same directionPrice competitionA firm may decide to compete on price by setting prices lower than that of the competitionWhy would they do this?To steal customers from competitorsTo induce non-buyers to enter the marketIt may be an attempt to drive others out of businessPossible increases in revenue or profitWhat effect does lowering the price have on revenue?If could increase, decrease, or have no effect on revenue, depending on the relative decrease in price vs the increased quantityRevenue equals price per unit (p) * volume of units sold (q)Current revenue is p*q=RAssume I cut my price by 10%  new price = .9pIn order for this decision to produce no change in revenue, the new q has to increase by 1/.9 or slightly more than 11%If q increases by more than 1/.9 – firms revenue will increaseIf q increases by less than 1/.9 – firms revenue will decreaseIf the new lowered price has no effect on revenue – revenue neutralIf new lowered price increases revenue – revenue enhancingIf new lowered price decreases revenue – revenue detractingWhat effect will dropping price have on profit?Increasing revenue is fine, but more important is the effect on profitThe key issue is the relative increase in revenue vs the relative increase in costsEach product made incurs some costTotal