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Government in India plays an important role in product pricing. The way through which government influences product pricing are
Types of Government interventions
1) Direct Intervention
a) Price pegging -> All output & partial
b) Price ceilings
2) Indirect Intervention
a) Taxes->Sales(specific,Advalorem), profit, realestate
b) subsidies
1)Direct Interventions:
In direct interventions the government fixes the price of all output of a good when the goods produced by public sector or it happens to be a basic good produced by private and public.
Eg: prices of electricity, petroleum, cooking gas, telephone, railway, airline, post & telegraph offices etc.
Lifesaving drugs, steel, fertilizers etc.
a)Price pegging:
Price pegging means keep prices wages etc at a particular level.
Eg: petroleum products, Electricity tariffic etc.
All output: The price level is kept minimum for all output.
Partial: In dual pricing the price is pegged for a part of the output (ie.) A fixed part of the total output has to be sold at the government fixed price.
Eg: Sugar, fertilizer, major drugs
b) Price floor:
Price floor exist for many important agricultural goods in India, services unskilled labour, rent on residential or office accommodation, prices of life saving and other basic drugs.
Price floors are imposed by government inorder to safeguard the interest of the producers and also people.
2)Indirect Interventions:
Indirect Intervention means through which government control prices for various kinds of commodity taxes such as excise duties, sales tax, custom duty tax on profit, tax on real estate and subsidies.
a) Subsidies:
Subsidies available for the production of the selected goods across the country and for most goods if they are manufactured in the notified backward areas.
Government imposes taxes of various kinds on goods and services to collect revenue.
b) Advalorem:
This is also one kind of tax. The tax rate is fixed based on the value of goods.
PRICING UNDER DIFFERENT MARKET STRUCTURE:
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.
The market structure is classified as follows
1) Perfect competition
2) Imperfect competition
a) Monopoly
b) Monopolistic
c) Oligopoly
1) Pricing under perfect competition:
Perfectly competitive market includes the following
* A large number of buyer's and sellers.
* Homogeneous product -> same product for all the sellers.
* Free entry & exist
* Perfect knowledge
* Indifference
In perfect competition all the sellers will jointly determine the price.
2) Pricing under imperfect competition:
a) Monopoly:
The Monopoly market includes the following characters
* Single seller
* No close substitute.
Under this market the firm and industry coincide. The demand function facing a monopolist is the same as that facing the Industry.
The equilibrium of a profit maximizing monopolist will be at the point where MR=MC.
b) Pricing under Monopolistic competition:
It includes the following feature
* A larger number of buyer's and sellers
* Differentiated product
* Free entry and exit
In monopolistic competition product are similar but not identical, there will be no unique price. The price of an individual firm's product is determined by it's cost function, demand it's own objective and by government regulations.
c) Pricing under Oligopoly:
* It is characterized by a few sellers.
* The action of any individual sellers have an influence upon his competitors.
* The products of competitors could be both homogeneous and heterogeneous.
* Interdependence in the decision making of the various sellers is the main feature of an Oligopoly market.
* Any change in price on the part of one firm may leads to chain of reactions among other firms.
* Models used in Oligopoly are collusion model, market model, market share model and leader follow model.
PRICE DISCRIMINATION:
* Price discrimination arises when a firm sells homogeneous product at different prices at the same time.
* Price discrimination are found in service industries, scarce goods industries and industries which meet both domestic and international demand.
Eg: railway, airfare at concession rate to students.
Price discrimination is possible if
1) The market is segmentable:
The various parts of a market must be divisible into sub markets. That is customers should be distinguishable on some basis
Eg: rich & poor, Nationals & foreigners, consumers & producers.
2) There is no resale:
The resale of the product is either not possible or banned.
Eg: Services like consulting and a domestic customer may not be allowed to resell in the foreign market. If resale is possible then some of the customers who buy at the cheaper rate would renders price discrimination ineffective by selling to customers who could buy only at the higher rate from the firm.