how markets use information to set prices

8/10/2019 How markets use information to set prices

1/25

1 | P a g e

PROJECT REPORT ON

HOW MARKETS USE INFORMATION TO SET PRICES

AS A PART OF

PARTIAL FULFULLMENT OF

MBA

SUBMITTED BY:

KRISHNA KEDIA (012014008)

ISHAN ASODARIA (012014019)

BATCH:

MBA 2014-16 (BLOCK-II)

MODULE:MANAGERIAL ECONOMICS

MODULE LEADER:

MS. INDRANI SENGUPTA


2/25

2 | P a g e

ACKNOWLEDGEMENT

We take this opportunity to express our profound gratitude and deep regards to our guide (Ms.

Indrani Sengupta) for her exemplary guidance, monitoring and constant encouragement

throughout the project.

We are obliged to our batch mates for the valuable information provided by them in their

respective fields. We are grateful for their cooperation during the period of our assignment.

--Krishna Kedia

--Ishan Asodaria


3/25

3 | P a g e

TABLE OF CONTENTS

TOPIC PAGE NO.

INTRODUCTION 5

LITERATURE REVIEW 6-7

OBJECTIVES OF THE STUDY 8

RESEARCH METHODOLOGY 8

HOW MARKETS USE INFORMATIONTO SET PRICES IN :-

PERFECT COMPETITION

1.

Definition2. Characteristics3. Industries Falling Under This

Market Form4. Whatsaap v/s SMS

9-10


MONOPOLYSTIC COMPETITION1. Definition2. Characteristics3. Industries Falling Under This

Market Form4. Pradhan Mantri Jan Dhan

Yojana

11-14


OLIGOPOLYSTIC COMPETITION1. Definition2. Characteristics3. Industries Falling Under This

Market Form4. Ebola-Crude Connection

15-17


4/25

4 | P a g e


MONOPOLY COMPETITION1. Definition

2. Characteristics3. Industries Falling Under This

Market Form4. Indian Railways

18-19


MONOPSONY COMPETITION1. Definition

2. Characteristics3. Industries Falling Under ThisMarket Form

4. Amazon

20

CONCLUSION 21

RECOMMENDATIONS 22

REFERENCES 23-25


5/25

5 | P a g e

INTRODUCTION

Markets, when they function efficiently, can offer a great deal of information regarding the

beliefs of the people who participate in that market. Prices, and changes in prices, carry a lot of

information on what traders think is currently happening and what they believe will happen inthe future. This piece of information is what forms the cornerstones in determining the price of

the respective goods or service in the market. Furthermore, production, marketing and

consumption of the goods or service is guided by the prices that are determined in the markets.

Economics defined six major markets forms (Perfect Competition Market, Monopolistic Market,

Oligopolistic Market, Monopoly Market, Oligopoly Market and Monopsony Market) which can

distinctly be identified in various economies throughout the world. Be it any economy or any

market form, for a piece of information to have an impact on the price levels of a particular

goods or service in the market, it needs to influence the either the demand curve or the supply

curve innate to that goods or service. Under typical situations, both, the demand curve and the

supply curve may be affected, concurrently, at an even or a variable pace, bringing about a

miscellaneous impact on the price levels. Impact of such dual-edged situations is hard to

approximation because it is very challenging to determine the magnitude by which the

information will have an impact on the demand curve and on the supply curve, respectively. A

common piece of information may have diverse impacts on the economy depending upon thekind of markets, number and kind of players in the market, their behavioral response towards the

information and their future expectations and presumptions regarding the impact of the

respective information on the market and market conditions. Typically, an economy embraces

almost all the market forms, depending upon the types of sector present and contributing towards

the economy. However, all the market forms, be it in any economy, bare certain characteristics

that are unique to them and are clearly evident from the way the markets operate and function

and the kind of ripples that a piece of information may have on them.

Information flow is what forms the lifeblood of any market structure, enabling the participants to

base their decisions and judgments on rational grounds. Information is what gives rise to

speculation and anticipation in the market, which accounts for the element of dynamism in the

market. Information could be positive or negative, but the only thing that marketers are sure

about is that the ultimate market prices will be shaped and molded by this information.


6/25

6 | P a g e

LITERATURE REVIEW

As per the research conducted by Ingenbleek (2013), it was discovered that price strategies and

price setting practices are correlated because strategies are instigated through price setting

practices. However, some businesses do not follow any of the strategies specified by pricingtheory, some firms involve in practices for no vibrant strategic reasons, and some firms

inadequately engage in suitable practices to implement their strategic choices.

The study conducted by Copeland and Shapiro (2013) was conducted with an objective to

determine the influence if competition and upstream innovation on the pricing strategies adopted

by various firms. The analysis implies that rapid price changes are caused due to a bolted effect

of the aforementioned factors and that they hold equal weightage in determining the pricing

strategy adopted by the respective firm.

The research by Konieczny and Skrzypacz (2000) was conducted in Poland to study the

behavior of prices in the big-bang market reforms in 1990. It was found that for most goods, the

rapid decline ended within a year. Dispersion was low for goods which were expensive. Inflation

and inflation variability explain only part of the changes of price dispersion over time. The

behavior of price dispersion was consistent with search for the best price and arbitrage. Overall,

prices behave as economic theory predicts they would.

Lipovetsky , Magnan and Polzi (2011) deduced that product pricing is a highly complicated

decision and it is not merely arrived at by the organizations but also by several other factors

affecting the product prices in a dynamic market. Various direct methods su ch as customer s

willingness to pay and indirect methods such as Gabor-Granger and van Westendorp techniques

could be employed to determine the price levels.

The research by Altissimo, Ehemann and Smets (2006) provides a summary of current

knowledge on inflation persistence and price stickiness in the euro area, based on researchfindings that have been produced in the context of the Inflation Persistence Network. The main

findings were: i) Under the current monetary policy regime, the estimated degree of inflation

persistence in the euro area is moderate; ii) Retail prices in the euro area are more sticky than in

the US; iii) There is significant sectorial heterogeneity in the degree of price stickiness; iv) Price


7/25

7 | P a g e

decreases are not uncommon. The paper also investigates some of the policy implications of

these findings.

As per the research conducted by Kiminori Matsuyama (1993) , in recent years, monopolistic

competition models have frequently been applied in macroeconomics, international andinterregional economics, and economies growth and development. In this paper, I present a

highly selective review in this area, with special emphasis on the traps, regional disparities, and

sustainable growth, or more generally, what Myrdal (1957) called the principle of circular and

cumulative causation.

The study conducted by Mika Husso (2011), the findings reveals that the U.S. and European

mobile phone markets are fundamentally different. Firstly, while in Europe several parallel sales

channels exist, the U.S. market is dominated by mobile operators that control access to the endcustomer. Secondly, in the U.S. market phones are generally sold heavily subsidized and

bundled, and either under the operator brand or co-branding agreements. In addition, the U.S.

market has historically split in two technologies, GSM and CDMA, as opposed to Europe where

GSM is the dominant technology.

As per the research conducted Shelby Hunt (2011), by Edward Chamberlin s theory of

monopolistic competition influenced greatly the development of marketing theory and thought in

the 1930s to the 1960s. Indeed, marketers held the theory in such high regard that the American

Marketing Association awarded Chamberlin the Paul D. Converse Award in 1953, which at the

time was the AMA s highest honor. However, the contemporary marketing literature virtually

ignores Chamberlin s theory. The author argues that the theory of monopolis tic competition

deserves reexamining on two grounds. First, marketing scholars should know their discipline s

intellectual history, to which Chamberlin s theory played a significant role in developing.

Second, understanding the theory of monopolistic competition can inform contemporary

marketing thought. Although our analysis will point out several contributions of the theory, one

in particular is argued in detail: the theory of monopolistic competition can contribute to a better

understanding of the prod uct differentiation versus market segmentation controversy in

marketing strategy.


8/25

8 | P a g e

OBJECTIVES OF THE STUDY

To identify and understand various kinds of market forms (Perfect Market, Monopoly

Markets, Monopolistic Markets, Oligopolistic Markets, Monopsony Market,) present in

the world economy. To identify the latest international information/news affecting the market, globally. To identify how this information gets absorbed by the demand curve or the supply curve

or both, ultimately reflecting upon the price levels of goods and services in the respective

markets.

RESEARCH METHODOLOGY

The data for the aforementioned project has been gathered through authentic and reliable

secondary sources. The traces of information that has been refereed too for the respective

project has been acknowledged and cited according to the acceptable Hayward Referencing

standards.

Advantages of secondary data are following:

The primary advantage of secondary data is that it is cost effective and less time consuming

Secondly, it prov ides a way to access the work of the best scholars all over the world

Thirdly, secondary data gives a frame of mind to the researcher that guides him/her in the

proper direction


9/25

9 | P a g e

PERFECT COMPETITION / MARKET

The situation prevailing in a market in which buyers and sellers are so numerous and well

informed that all elements of monopoly are absent and the market price of a commodity is

beyond the control of individual buyers and sellers.A market structure in which the following five criteria are met: 1) All firms sell an identical

product; 2) All firms are price takers - they cannot control the market price of their product; 3)

All firms have a relatively small market share; 4) Buyers have complete information about the

product being sold and the prices charged by each firm; and5) The industry is characterized by

freedom of entry and exit. Perfect competition is sometimes referred to as "pure competition".

CHARACTERISTICS OF PERFECT COMPETITION / MARKET

1. Large Number of Small Firms: The large-number-of-sellers condition is met when each

firm is so small relative to the total market that no single firm can influence the market

price.

2. Homogeneous Product: If a product is homogeneous, buyers are indifferent as to which

seller s product they buy.

3. Very Easy Entry and Exit: Perfect competition requires that resources be completely

mobile to freely enter or exit a market.

EXAMPLES OF MAJOR PERFECT COMPETITION / MARKET

Agricultural markets are the closest representation of perfectly competitive markets. These are

marketplaces which have a large number of vendors selling fruit, vegetables, and poultry -

namely, identical produce. The prices of goods are competitive, and no single seller can yield an

influence over the pricing. Consumers are free to pick any seller, depending upon their choice.

Free software also functions along similar lines as agricultural marketplaces. In this case,

software developers are free to enter and exit the market according to their will. Pricing is alsodetermined by market conditions, rather than the sellers.

Street food vendors are also considered to be a part of a perfectly competitive market. Their

products are homogeneous in nature, and they are priced accordingly. Consumers are free to

make purchases at any vendor they prefer, and entry/exit barriers for sellers are virtually non-

existent.


10/25

10 | P a g e

THE CASE OF WHATSAPP V/S SMS

YEAR RATE PER SMS SCENARIO

2006 3 Before Whatsaap entered

Indian market2007 3

2008 2 When Whatsaap entered

Indian market

2009 onwards 1 After Whatsaap entered

Indian market

Large chunk of SMS revenue has fallen due to the advert of applications such as Whatsaap,

Facebook, etc. Yet telecom service provider fell that a large part of Indian population would still

prefer to use Main Stream Messaging Platform, rather than more expensive data. Fact says that,

there are 300 Million people yet to get connected, who will use SMS as a primary means of

sending messages. In Indian market, though SMS usage is declining, SMS will always

maintainers platform. According to UK based research, Indian telecom has lost an estimated $

1.2 Billion in potential revenue from SMS and value added services in 2013, because of social

media messaging services. It estimates this to widen to $ 1.56 Billion this year, $ 2 Billion in

2015 and $ 3.15 Billion the year after that. SMS revenue for Bharti Airtel fell to 5.4% in

September 2014. Income from non-voice services, essentially from offering data, rose in the

same period to 20.2% of total revenue from 16.4%. Vodafone India, which has also seen its data

revenue jump, said SMS revenue was never a significant portion of overall revenue. The

diminishing contribution of SMS to telecom revenue and increasing demand for data has led to

question marks over the survival of text messaging service itself. More than 70% of devices soldin India are still feature phones; i.e. Indian population is more likely to use cheaper devices than

Smart phones, which leads to increase SMS users.


11/25

11 | P a g e

MONOPOLYSTIC COMPETITION / MARKET

Monopolistic Competition, as a market structure, was first acknowledged by American

economist Edward Chamberlin and British economist Joan Robinson in 1930s.

It is a type of imperfect competition in which there are large number of producers that produce

and sell almost similar kind of product with a nominal differentiation, making then unique them

in their own sense and hence are not perfectly substitutes. In monopolistic competition, the firms

act as price makers rather than price takers because the product offered b y each of the producer

is differentiated to certain degree making it unique.

CHARACTERISTICS OF MONOPOLYSTIC COMPETITION / MARKET

1. Each firm makes autonomous decisions about price and output, based on its product, its

market, and its costs of production.

2. Information is widely spread between contestants, but it is doubtful to be perfect.

3. The entrepreneur has a more noteworthy role than in firms that are perfectly competitive

because of the amplified risks allied with decision making.

4. There is liberty to enter or leave the market, as there are no major barriers to entry or exit.

5. A dominant feature of monopolistic competition is that products/services are

differentiated.

There are four main types of differentiation:

i. Physical Product Differentiation

ii. Marketing Differentiation

iii. Human Capital Differentiation

iv. Differentiation Through Distribution

6. Firms act as price makers and are faced with a descending sloping demand curve. Because each firm makes a unique product, it can charge a higher or lower price than its

rivals. The firm can set its own price and does not have to take' it from the industry as a

whole, though the industry price may be a guideline, or becomes a constraint. This also

means that the demand curve will slope downwards.
http://www.economicsonline.co.uk/Business_economics/Costs.htmlhttp://www.economicsonline.co.uk/Competitive_markets/Producer_supply.htmlhttp://www.economicsonline.co.uk/Business_economics/Barriers_to_entry.htmlhttp://www.economicsonline.co.uk/Business_economics/Revenue_theory.htmlhttp://www.economicsonline.co.uk/Business_economics/Revenue_theory.htmlhttp://www.economicsonline.co.uk/Business_economics/Barriers_to_entry.htmlhttp://www.economicsonline.co.uk/Competitive_markets/Producer_supply.htmlhttp://www.economicsonline.co.uk/Business_economics/Costs.html


12/25

12 | P a g e

7. Firms functioning under monopolistic competition typically have to involve in

advertising and marketing. Firms are often in aggressive competition with other (local)

firms present a similar product or service, and may need to promote on a local basis, to

let customers know their variances.

8. Monopolistically competitive firms are expected to be profit maximizers, because firms

tend to be small with businesspersons actively involved in handling the business.

9. There are commonly a large numbers of liberated firms competing in the market.

EXAMPLES OF MAJOR MONOPOLYSTIC COMPETITION / MARKET

The Banking Industry The Film Industry The Advertisement Industry The Fashion Industry The Furniture Industry The Hotel Industry The Software Industry The Automobile Industry, etc.

PRADHAN MANTRI JAN -DHAN YOJANA

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure

access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit,

Insurance, Pension in an affordable manner.

IMPORTANT FEATURES

(Impact on Banking Sector)

1. Under the scheme, account holders will be provided zero-balance bank account with

RuPay debit card. The account holder will get an additional accident insurance cover of

Rs.1 lakh, a life insurance cover of Rs.30, 000 and a bank overdraft of Rs.5, 000.
http://www.economicsonline.co.uk/Business_economics/Profits.htmlhttp://www.economicsonline.co.uk/Business_economics/Profits.html


13/25

13 | P a g e

Impact Following this, more and more people will shop using debit cards, reducing

manpower, time and risk involved in transaction. Also, more relevant data will be made

available to the businesses and government to perform various analysis. The government

will be able to maintain a proper record regarding smallest of the transactions under this

provision.

The Aftermath - On the very first day, more than 1.5 crore Saving Bank Accounts were

opened up under this scheme with an average deposited amount of Rs.900. Within a

couple of months the number rose to 5 crore Saving Bank Accounts, with an aggregate of

more that Rs.1500 crores in deposited under the respective scheme.

As per the analysis and calculations of the RBI, the government of India would have to

pay and interest of Rs.200 crores on these bank accounts every quarter. Thus, to

minimize the impact of excessive infusion of capital in the economy, the RBI revised theCRR from 4.25% to 4.00%, the Base Lending Rate form 10.25% to 10.15%, the Repo

Rate from 8.25% to 8.00% and the Deposit Rate from 6.50% to 5.00%.

Thus, all the government banks followed the trail. However, the private banks did react to

this change, but not with a similar impulse.

The current CRR Rate, Base Lending Rate and the Deposit rate of Major Private Banks

(ICICI Bank, HDFC Bank and Axis Bank) are as follows:-

CRR Rate Base Rate Deposit Rate

ICICI Bank 4.25% 10% 5.50%

HDFC Bank 4.25% 10% 6.00%

Axis Bank 4.25% 10.25% 6.00%

Acknowledging the fact of greater risk and in order to attract more customers towards it,

the Private Banks in India did not reduce the aforementioned rates by the same degree as

the Government Banks. They intend to offer higher degree of returns on the same amount

of capital invested. Thus, even the Private Banks are offering similar kind of services as

that of the Government Banks, they are trying to differentiate themselves form


14/25

14 | P a g e

Government Banks by offering a higher degree of return on the same financial

instruments.

(Impact on Electronics Industry)

2. With the introduction of new technology by National Payments Corporation of India

(NPCI), a person can transfer funds, check balance through a normal phone which was

earlier limited only to smart phones so far.

The Aftermath In Q2 of 2014, 18.42 million smart phones were shipped to India

owing to its increasing demand in the Indian market. However, 71% of the users are still

using the conventional devices. Thus, as per the new technology introduced by the NPCI,

mobile users will be able to access their account information using the normal phones,

which was previously limited to smart phones only. This has given a boost to the dying

market for conventional cellular devices, causing a hike in the demand by 14% within a

span of 3 months. The cellphone manufacturers see this as an opportunity to leverage

upon and come up with special handsets that serve the immediate cause, thereby

differentiating their product from the existing market offerings and creating a new

segment of cellular hand held instruments in the Indian market. Companies like Nokia

India Ltd., Motorola and Samsung will be coming up with a new segment of cell phonesthat are compatible with the technology introduce by the NPCI. This is likely to cause a

hike in the price levels of normal phones throughout the market.


15/25

15 | P a g e

OLIGOPOLYSTIC COMPETITION / MARKET

An oligopoly is a market construction in which a small number of firms govern the market. Such

a market is said to be highly concentrated. Even though only a few firms dominate, it is probable

that many minor firms may also function in the market.

An Oligopolistic market may be recognized using concentration ratios, which quantifies the

percentage of total market stake controlled by a given number of businesses. When there is a

high concentration ratio in an industry, economists tend to identify the industry as an oligopoly.

KEY CHARACTERISTICS

1. Interdependence among the Players

2. High importance of Advertising and Selling Costs3. Group Behavior

4. Elements of Monopoly

5. Price Rigidity

EXAMPLES OF MAJOR OLIGOPOLYSTIC COMPETITION / MARKET

1. Steel and Metal Industry

2. Aluminum Industry

3. Film Industry

4. Television and Entertainment Industry

5. Cell phone & Communication Industry

6. Gas & Energy Sector

REAL TIME EXAMPLES OF MAJOR OLIGOPOLYSTIC COMPETITION / MARKET

1. Four Music Companies control 80% of the market - Universal Music Group, Sony

Music Entertainment, Warner Music Group and EMI Group

2. Six major Book Publishers - Random House, Pearson, Hachette, HarperCollins, Simon

& Schuster and Holtzbrinck

3. Four Breakfast Cereal Manufacturers - Kellogg, General Mills, Post and Quaker

4. Two major producers in the Beer Industry - Anheuser-Busch and Miller-Coors
http://www.economicsonline.co.uk/Business_economics/Competition_and_market_structures.htmlhttp://www.economicsonline.co.uk/Business_economics/Competition_and_market_structures.html


16/25


17/25

17 | P a g e

The aforementioned graph shows that for the first time in a decade, crude oil supply has

exceeded the demand, causing its prices to take a nosedive in the international markets. The

predominant reasons for this, as stated by the experts which has caused the prices to came down

from $ 106/ barrel to $ 78/ barrel, is the increasing technological advancement in the respective

field and the reduced demand of crude due to a fall in the international travel, majorly caused due

to spread of Ebola. The prices of diesel have also gone down substantially owing to reduction in

overall road travel, worldwide. Thus, the major importers of crude from the OPEC nations have

started cutting back on the quality, further leading to a drop in the price levels.

Contrary to this, the Aviation Industry is facing a mixed impact caused doe to spread of Ebola.

The reduction in the International Travel has downsized the bottom line profits generated by the

international airlines. However, the reduced prices of the Aviation Turbine Fuel (ATF) has kept

them motivated enough to continue operations by lowering the air fare.

Since the OPEC nations, functioning as a cartel in an oligopolistic market, are highly

interdependent and have to stick together due to price rigidity of this type of market, they have

no other option to showcase proper group behavior and reflect upon the market conditions

appropriately by maneuvering the price of crude in the international market, unless of course

they are willing to indulge in a price war.


18/25

18 | P a g e

MONOPOLY COMPETITION / MARKET

A monopoly exists when specific enterprise is the only supplier of a particular commodity.

Monopolies are thus characterized by a lack of economic competition to produce

the good or service and a lack of viable substitute goods. The verb "monopolies" refers to the process by which a company gains the ability to raise prices or exclude competitors. In

economics, a monopoly is a single seller. A situation in which a single company or group owns

all or nearly all of the market for a given type of product or service. By definition, monopoly is

characterized by an absence of competition, which often results in high prices and inferior

products.

In a monopoly market, factors like government license, ownership of resources, copyright and

patent and high starting cost make an entity a single seller of goods. All these factors restrict theentry of other sellers in the market. Monopolies also possess some information that is not known

to other sellers.

CHARACTERISTICS OF MONOPOLY COMPETITION / MARKET

1. Profit Maximizers: Maximizes profits.

2. Price Maker: Decides the price of the good or product to be sold, but does so by

determining the quantity in order to demand the price desired by the firm.3. High Barriers: Other sellers are unable to enter the market of the monopoly.

4. Single seller: In a monopoly, there is one seller of the good that produces all the output.

Therefore, the whole market is being served by a single company, and for practical

purposes, the company is the same as the industry.

5. Price Discrimination: A monopolist can change the price and quality of the product. He

or she sells higher quantities, charging a lower price for the product, in a very elastic

market and sells lower quantities, charging a higher price, in a less elastic market.

EXAMPLES OF MONOPOLY COMPETITION / MARKET

1. Indian Railways has monopoly in Railroad transportation

2. There is Government monopoly over production of nuclear power.
http://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Competitionhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Substitute_goodhttp://www.investopedia.com/terms/m/market.asphttp://www.investopedia.com/terms/m/market.asphttp://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Competitionhttp://en.wikipedia.org/wiki/Company


19/25

19 | P a g e

3. State Electricity board has monopoly over generation and distribution of electricity in

many of the states.

INDIAN RAILWAYS

TRAIN NAME PRE MODI GOVERNMENT POST MODI GOVERNMENT

Ranthambore Exp. Fair -125 Passengers-1900 Fair - 135 Passengers-2190

Vasco Express. Fair -315 Passengers-1500 Fair -365 Passengers-1820

Gujarat Express. Fair -535 Passengers-1800 Fair -610 Passengers-2100

Gomti Express. Fair -620 Passengers-1650 Fair -695 Passengers-1900

Darjeeling Mail. Fair -805 Passengers-1700 Fair -910 Passengers-2100

Swaraj Express. Fair -2490 Passengers-1850 Fair -2795 Passengers-2000

Duranto Express. Fair -4330 Passengers-1800 Fair -4900 Passengers-2000

Shatabdi Express. Fair - 710 Passengers-2000 Fair - 860 Passengers-2260

Jan Shatabdi Exp. Fair -400 Passengers-2000 Fair -450 Passengers-2380

Garib rath Exp. Fair -770 Passengers-2400 Fair -870 Passengers-2700

Since the Indian railways operates in a monopolistic market, which is completely in-elastic, the

price sensitivity is either very low or nil. Due to the aforementioned reason, it can be observed

even after a hike in the basic railway tariffs, the number of travelers has grown over the period of

time. A year-to-year comparison shows that the figure has skyrocketed by 10-20% on an average

and is still growing by leaps and bounds. This market is a classic example of a real time

monopolistic market as it showcases all the characteristics of a monopoly market.


20/25

20 | P a g e

MONOPSONY COMPETITION / MARKET

It is a market categorized by a solitary buyer of a product or service. Monopsony is the buying-

side correspondent of a selling-side monopoly. Much as a monopoly is the only seller in a

market, monopsony is the only buyer. While monopsony could be scrutinized for any sort ofmarket it tends to be most pertinent for factor markets in which a solitary firm is the only buyer

of a factor. While the actual world does not hold monopsony in its true sense, labor markets in

which a sole large factory is the governing employer in a small civic comes as close as any. Like

a monopoly seller, a monopsony buyer is a price maker with comprehensive market control.

Monopsony is also equivalent to monopoly in terms of incompetence.

KEY CHARACTERISTICS

1. A single firm/business buys all the output in the market2. No other buyer exists in a Monopsony market

3. There are heavy restrictions or barriers on entry into a Monopsony market

AMAZON: AN E-BOOK MONOPSONY

Amazon has been dominating the E-Book market since the day of its inception. Currently, the

American super-brand occupies 71% of the total e-books soles worldwide. Following its BMV

(Books, Music and Videos) model, the company has created a Monopsony in the e-book market.

Such was the case on July 21, 2007 when the seventh part of the famous Harry Potter series waslaunched. Looking at the market sentiments and het excessive demand, the e-book was priced at

$40 by the Scholastic Publishers that were catering to the demand in the US. In the very year, the

first Kindle (e-book operator) was launched by Amazon, sealing its dominance in the e-book

market. In order to promote the Kindle, Amazon priced the e- book of the Harry Potter and the

deathly hallows Part- 2 at $30 apiece. This was quite different from the ongoing market price of

$40. Initially, the Scholastic Publishers were unwilling to lower down the price of the

commodity, however, considering the fact that the Amazon was, then, the only global e-book

retailer and also that Amazon was willing to switch from Scholastic Publishers to Bloomsbury

Publishers, their immediate rival, if their demanded price was not met, and the Scholastic

Publishing Co. had to kneel down to the demands put forth by Amazon. This situation depicts a

classic example of a Monopsony market, where there are many sellers but only one buyer who

dominates the market.
http://pop_dsp%28%27pop_gls.pl/?k=labor%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=monopoly%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=price%20maker%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=market%20control%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=inefficiency%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=inefficiency%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=market%20control%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=price%20maker%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=monopoly%27,500,400)http://pop_dsp%28%27pop_gls.pl/?k=labor%27,500,400)


21/25

21 | P a g e

CONCLUSION

Every market structure possesses and showcases certain distinct characteristics that are unique to

it and defines the respective market form. Each market has varying behavioral and functional

approach towards a situation. However, a common thing that forms the basis of existence ofthese market structures and keeps them bolted as a part of an economy is information.

Information flow is what forms the lifeblood of an economy and enables the different market

forms to function effectively and efficiently. Information forms the basic tool of Price that

maneuvers an economy. Price is the first and the most important variable factor that reacts to any

information flow in the market. It not only determines whether the information is positive or

negative but also the state of economy and the future prospects. Different markets use

information differently and to set price levels, which forms an integral part of the economy. This principle follows the conventional thumb rule of Demand & Supply, but the way a piece of

information impacts a market the way the market prices react towards varies from market to

market. This varied perception is what outlines each market structure differently and forms the

basis of their existence. The way a market uses information to set prices and arrive to other

important market decisions is highly unique and subjective and is triggered by a number of

factors which characterize the market form.


22/25

22 | P a g e

RECOMMENDATIONS

Marketers need to make sure that the source of the information that is affecting the price

change is authentic and based on facts rather than being mere speculation or assumption.

Such unattended piece of information may give rise to a market bubble which will

ultimately cause the economy and the market structure to crash.

Prices prevailing in the market should be highly sensitive towards the information flow

so as to avoid the situation of Sticky Prices and ensure smooth functioning of the market.

The price levels must not be inclined towards either positive or negative information. It

must be unbiased and must be allowed to react freely to any piece of information.

The market prices must be driven by the amalgamation and mutual outcome of market

information arising from different markets. International trade agencies must discourage Monopolistic and Oligopolistic market

competition because the price levels in such markets are dominated by a few, dismantling

the integrity of an efficient market. Such a competition is not always healthy for the

economy.

The is a need to establish a formal body that looks into the authenticity of the information

that the marketers use in setting prices so as to avoid any mismanagement, such as the

one that took place when the real estate market of USA collapsed in 2007-08.

The price level fluctuation must provide an equal opportunity for all the parties to

leverage upon the situation. It must carry an equal chance for all the participants of

making profit or loss from the prevailing market conditions.

Governments need to increase their participation in international trade setups so as to

monitor and regulate the flow of information through the market and the market s

reaction towards the information.

All the participants must strive to behave ethically so as to avoid any malpractices in

markets that may bring down the economic system.

There is a need for a mechanism that pitches in and regulates the price levels in

international as well as domestic markets under extreme situations, so as to avoid any

mindboggling situations that are difficult to rectify.


23/25


24/25


25/25

Airline investors weigh impact of Ebola fears against lower fuel prices | Dallas Morning

News. 2014. Airline investors weigh impact of Ebola fears against lower fuel prices |

Dallas Morning News.

[ONLINE] Available at :http://www.dallasnews.com/business/airline-industry/20141019-

airline-investors-weigh-impact-of-ebola-fears-against-lower-fuel-prices.ece. [Accessed

02 November 2014].

Crude Oil: Supply Exceeds Demand For The First Time In A Decade - iPath S&P Crude

Oil Total Return Index ETN (NYSEARCA:OIL) | Seeking Alpha. 2014. Crude Oil:

Supply Exceeds Demand For The First Time In A Decade - iPath S&P Crude Oil Total

Return Index ETN (NYSEARCA:OIL) | Seeking Alpha. [ONLINE] Availableat:http://seekingalpha.com/article/677321-crude-oil-supply-exceeds-demand-for-the-first-

time-in-a-decade. [Accessed 02 November 2014].

. 2014. . [ONLINE] Available at :http://video.cnbc.com/gallery/?video=3000319987.

[Accessed 02 November 2014].

AmosWEB is Economics: Encyclonomic WEB*pedia. 2014.Amos WEB is Economics:

Encyclonomic WEB*pedia. [ONLINE] Available at: http://www.amosweb.com/cgi-

bin/awb_nav.pl?s=wpd&c=dsp&k=monopsony. [Accessed 02 November 2014].
http://www.dallasnews.com/business/airline-industry/20141019-airline-investors-weigh-impact-of-ebola-fears-against-lower-fuel-prices.ecehttp://www.dallasnews.com/business/airline-industry/20141019-airline-investors-weigh-impact-of-ebola-fears-against-lower-fuel-prices.ecehttp://seekingalpha.com/article/677321-crude-oil-supply-exceeds-demand-for-the-first-time-in-a-decadehttp://seekingalpha.com/article/677321-crude-oil-supply-exceeds-demand-for-the-first-time-in-a-decadehttp://video.cnbc.com/gallery/?video=3000319987http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopsonyhttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopsonyhttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopsonyhttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopsonyhttp://video.cnbc.com/gallery/?video=3000319987http://seekingalpha.com/article/677321-crude-oil-supply-exceeds-demand-for-the-first-time-in-a-decadehttp://seekingalpha.com/article/677321-crude-oil-supply-exceeds-demand-for-the-first-time-in-a-decadehttp://www.dallasnews.com/business/airline-industry/20141019-airline-investors-weigh-impact-of-ebola-fears-against-lower-fuel-prices.ecehttp://www.dallasnews.com/business/airline-industry/20141019-airline-investors-weigh-impact-of-ebola-fears-against-lower-fuel-prices.ece

how markets use information to set prices

Documents