TOPIC:

ADMINISTERED PRICES AND OPEN MARKET

PRICES: ANALYSE WITH THE HELP OF CONSUMER BEHAVIOUR.

SUBMITTED TO:
MR.MANDEEP SINGH

SUBMITTE D BY:
SABA MASOD

ROLL NO: B43

Sec :-sm1001

Index

1.Introduction 2. Review of literature 3. Administered price and consumer behaviour. 4. Open market price and consumer behaviour.

5. Alternative price mechanism and consumer behaviour. 6. Objectives of study 7. Analysis 8. Bibliograpy

INTRODUCTION OF ADMINISTERED PRICES:Hide links within definitionsShow links within definitions Price set by the management of a firm, and not arrived at through negotiations between a buyer and a seller. Most retail and industrial prices are administered prices, which are then adjusted in response to the competitors' prices. Administered pricing is also referred to as rigid pricing.or inflexible pricing refers to the setting up of prices by public or private entity and not by market forces.Price set by the management of a firm, and not arrived at through negotiations between a buyer and a seller. Most retail and industrial prices are administered prices, which are then adjusted in response to the competitors' prices.

open market

OPEN MARKET PRICES

A market which is widely accessible to all investors or consumers. In open market prices,prices of goods and services are determined by the forces of demand and supply and not by manipulation by cartels or government policies. For example in an open market for wheat and barley, multiple entities would have the ability to buy grain from western farmers in a competitive environment. These buyers would likely comprise current grain handling firms and could expand to include new entrants as well.

These companies would extend their existing logistics and merchandising efforts from current non-board crops to include export and human consumption of wheat, durum and barley. Under an open market scenario, farmers will market wheat, durum and barley and have The same pricing and delivery alternatives as they do now with non-board crops. Buyers would utilize similar purchase practices, including spot and forward-price contracts to source wheat, durum and barley. In an open market, rail transportation for all grain and oilseeds crops would be arranged on a similar basis as the current arrangements for non-board crops. Direct commercial agreements between shippers and railways, including advance booking of freight requirements, would be used to determine the allocation of rail capacity.

How does the price mechanism operate in a free market

In a free market, price is set to meet the demand which will result in the maximum amount of revenue. Price is relative, it is not a fixed thing. A companies ability to set price is based on many things, customer demand, availability of the product, the uniqueness of the product, the perceived quality of the product, how hard is the product to duplicate, control of raw materials,

customer education of your product, etc. If your product is a monopoly then pricing power rests with the producer, if the product is a commodity then pricing power rests with the consumer. I'm not sure what you mean by "how do they allocate resources", but no the consumer does not make all the decisions. There are many pricing strategies to capture excess demand such as buying in bulk and getting a price break, paying a membership fee and then paying a reduced rate for product, graduated pricing based on how much you buy to name a fees and combinations of the two. Without a price mechanism, socialism lacks the means to relate consumer satisfaction to economic activity, it is argued. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high quality, shoes, to compete with the concentrated interests of the cobblers in expensive, poor quality shoes. Without it, a panel of experts set up to rationalise production, likely closely linked to the cobblers for expertise, would tend to support the cobblers interests in a conspiracy against the public. If this happens to all industries however, everyone would be worse off than if they had been subject to the rigours of competition (economics).

INTRODUCTION BEHAVIOUR

OF

CONSUMER

Consumer behavior is "The study of individuals, groups, or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society The study of consumers helps firms and organizations improve their marketing strategies by understanding issues such as how

 The psychology of how consumers think, feel, reason, and select between different alternatives (e.g., brands, products, and retailers); The psychology of how the consumer is influenced by his or her environment (e.g., culture, family, signs, media); The behavior of consumers while shopping or making other marketing decisions; Limitations in consumer knowledge or information processing abilities influence decisions and marketing outcome; How consumer motivation and decision strategies differ between products that differ in their level of importance or interest that they entail for the consumer; and How marketers can adapt and improve their marketing campaigns and marketing strategies to more effectively reach the consumer.

REVIEW OF LITERATURE
1:-DISMANTLING OF INDIA'S ADMINISTERED PRICING MECHANISM ON SCHEDULE: MINISTER. Asia Pulse News | January 08, 2002 | COPYRIGHT 2009 Asia Pulse Pty Ltd. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information), Jan 8 Asia Pulse - The Indian Minister for Petroleum and

Natural Gas Ram Naik Monday reiterated that dismantling of the administered pricing mechanism (APM) was on schedule and it will be removed by March 31.

They are aiming towards a final cabinet decision on the APM dismantling. Several financial and regulatory decisions have fallen in place and the issue of subsidies in liquefied petroleum gas and kerosene has been decided. The government has planned to reduce subsidies on LPG and kerosene in a phased manner and also assured that post APM there would be no hike in the prices of petroleum products.
2ADMINISTERED PRICES AND SUBOPTIMAL PREVENTION: EVIDENCE FROM THE MEDICARE DIALYSIS PROGRAMME. Case Western Reserve University - Department of Economics; National Bureau of Economic Research (NBER) February 2001 Abstract:

Pricing methodologies in Medicare vary from one component of the system to another, often leading to conflicting incentives. The dialysis program represents a particularly interesting case, whereby outpatient payments are much more rigid than payments for related hospital care. Failure to recognize the preventive nature of outpatient services may result in inefficient allocation of medical care and higher overall costs. To motivate the analysis, a simple extension of basic prevention and insurance theory to fit a welfare-maximizing regulator is offered. I show that while optimal inpatient payments are standard Ramsey prices, optimal outpatient payments must incorporate net loss due to unnecessary hospitalizations, as well as supply elasticities. A myopic regulator will tend to ignore this, leading to under provision of preventive services. With constant prices, empirical analysis examines the effect of dialysis intensity on various measures of hospital use, for a local sample of patients, using count data models. Results indicate that greater dialysis intensity (measured by a state-of -the-art clinical index) indeed reduces hospital use. Moreover, this is found even at moderate or high levels of intensity, where dialysis is viewed ex ante as being adequate. A simple cost-benefit calculation suggests that for every dollar of

additional spending on outpatient intensity, nearly $2 in hospital expenditures can be saved. The research confirms that the current pricing structure within aspects of the Medicare program is inefficient.

3:-OPEN MARKET PRICES FOR COTTON:- GUNTUR, Feb. 23:

The demand for cotton is increasing in the international market. The traders here are exporting the cotton to Pakistan, Burma, Indonesia and China, during this season. The price of cotton is at Rs 3,200 per quintal in the open market, and the traders are expecting that the price would touch Rs 3,500 per quintal. The Andhra Pradesh Cotton Association president, Mr G. Punnaiah Chowdary, said The price of cotton is increasing in the international market due to low yield in Pakistan and China, which led to more demand this year. While the Cotton Corporation of India has fixed the price of the cotton during this season as Rs 3,000, the cotton is being sold at Rs 3,300 per quintal in the open market. The procurement in the Cotton Corporation of India was affected due to high price in the open market. During last year, the CCI has procured 11.9 lakh bales in Guntur region. This year till now the CCI could procure only 1.15 lakh bales. The farmers are selling the cotton in the open market to get a better price. Meanwhile, the demand for cotton is expected to increase in the domestic market as well. The textile mills are also getting ready to purchase the cotton. Due to Telangana agitation cotton farmers in Telangana districts are not bringing the cotton to CCI procurement centres, as they fear that the agitators would burn the stocks if they bring the cotton to the CCI centres.

4:-THE ADMINISTERED PRICE HYPOTHESIS REVISITED David R Kamerschen-Jae-Hee park-University of Georgia:Abstract:

This hypothesis studies the relationship between market structure and firms pricing behaviour which has been a major and controversial issue in industrial economics.The question of how firms pricing differs across market structures is the focus of administered price thesis.In this paper author review theories providing rationales for the administered price thesis and their empirical underpinnings and methodological controversies concerning price series of different industries.
5:- INDIA: ADMINISTERED PRICING FOR ATF MAY GO SOON

AVIATION Turbine Fuel (ATF) may be freed from administered price mechanism (APM) from next fiscal in tune with the time- frame set for dismantling APM for petroleum products by March 31, 2002, the Union Minister of Petroleum and Natural Gas. The Government will free ATF from administered pricing by the end of the current fiscal after which ATF prices will be linked to import parity levels. The Budget for 2001-2002 is expected to make enabling provisions in this regard. The Union Government had announced the phasing out of APMzzz.
6:- ONGC SEEKS FREE HAND IN PRICING OF CRUDE POST-ADMINISTERED PRICING MECHANISM (permission to access pipelines and the gas infrastructure owned by GAIL requested). India Business Insight

The Oil and Natural Gas Corporation (ONGC) has sought permission of the Government of India to select the market and the price for the crude oil it produces after the dismantling of the administered pricing mechanism (APM) in

the petroleum sector on 31 Mar 2002. The public sector company has made a similar demand for the natural gas produced by it.
7:- ADMINISTERED PRICE AND CONSUMER BEHAVIOUR:Stylized features of consumer price setting behavior in Portugal: 19922001 Abstract

This paper identifies the empirical stylized features of consumer price setting behavior in Portugal using two micro-datasets underlying the consumer price index. The main conclusions are: one in every four prices change each month; there is a considerable degree of heterogeneity in price setting practices; prices of goods change more often than prices of services; price reductions are common, as they account to around 40% of total price changes; price changes are, in general, sizeable; finally, the price setting patterns seem to depend on the level of inflation as well as on the type of outlet.
8:- Price and Consumer BehaviourA Review Author:-Andre Gabor Abstract:- The concepts of the traditional theory of demand have not been found

suitable for realistic studies of consumers' behavior. Since 1954, however, new lines of exploration have evolved, of which that of Professor Jean Stoetzel has proved most fruitful. The idea that, since price serves as a powerful indicator of quality, the consumer bent on a purchase will approach the market with two price limits in mind was verified and further developed by the Nottingham University Consumer Study Group. The theory has been successfully extended to the competition between leading brands and applied to the exploration of consumer behaviour during the decimalization period in the UK. Advances have been made also in the quantitative study of other related problems, such as the price image of retail establishments and the relationship between pack size, price and purchasing behavior.

9:- OPEN MARKET PRICES SCOPE FOR EXPLOITATION OF CONSUMERS THROUGH SPECULATIONS:A DYNAMIC-PROGRAMMING APPROACH TO THE CASE OF THE INDIAN SUGAR INDUSTRY The Journal of the Operational Research Society. Abstract

The Government of India (G.O.I.) controls the quantity of sugar released into the domestic market on a monthly basis. This forms a part of the package of public policies affecting the development of the Indian sugar industry, which includes protection from foreign competition, simultaneous existence of an open market for sugar and distribution of sugar at subsidized prices to consumers through the public distribution system (P.D.S.), minimum support prices for the farmers producing sugar-cane, and differential prices paid to sugar factories for the sugar taken over by G.O.I. for the P.D.S. Using a dynamicprogramming approach, this paper describes a worst case analysis of the scope for the traders to exploit the consumers under the current policy of controls over releases into the domestic market. The results show the marginal importance of such controls in saving the consumers from the exploitation by traders. Secondly, on the basis of wider research done by the authors, it is concluded that the scope provided to the traders for the exploitation of consumers through the other policies of the package is of such a magnitude as to make the controls over the releases into the market a relatively insignificant policy intervention for protecting the consumers.
9:-CAPTIVE SUPPLY MARKETS CONDUCTS AN OPEN MARKET PRICES Author:-Azzeddine Azzam Abstract:-

In this paper I examine the anatomy of the price captive-supplies relationship to ascertain if some of the interpretations offered in the empirical literature are

defensible. Gardner's one-product, two-input model is extended to consider a partially integrated oligopolistic industry. The main result is that, although the empirical relationship between captive supplies and the price received by independent producers is negative, it may or may not be attributed to noncompetitive conduct. Hence, for an econometric model to detect what type of conduct the relationship reflects, more structural detail is needed than what so far has been provided in the literature.
10:-OPEN MARKET APPROACHES FOR SELF ORGANISING GRID RESOURCE ALLOCATION Author:-Torsten Eymann,Werner Stretiberger,Sebastian hudert Abstract:-

Grid computing has recently become an important paradigm for managing computationally demanding applications, composed of a collection of services. The dynamic discovery of services, and the selection of a particular service instance providing the best value out of the discovered alternatives, poses a complex multi-attribute n:m allocation decision problem. Decentralized approaches to this service allocation problem represent a flexible alternative to central resource brokers, thus promising improvements in the efficiency of the resulting negotiations and service allocations. This paper analyses the impact of the service density on the profit and market price estimation using a decentralized service allocation mechanism in a grid market scenario.

ANALYSIS ON ADMINISTERED PRICES:In the litany of economic theory corporate giantism is viewed at best as a mixed blessing the received wisdom being that while large size allows realization of scale economies it also creates an unhealthy potential for excessive market power, anticompetitive behavior, and prices higher than would prevail under more competitive conditions. The social advantage of the latte it is held

frequently outweighs any advantages of the former. And ever since Gardner Means introduced the concept of administered prices in 1935 it has become increasingly fashionable to lay much of the blame for inflation, especially cost push inflation and structural inflation at the doors of giant corporations. It is implicit in the administered price thesis that the emergence of corporate capitalism has rendered the traditional market forces of demand and supply gradually less effective in regulating business behavior in the market place and in governing the size and direction of price changes .Only a short step away, then is the view that inflationary pressure arising out of an economic environment not beset with excess demand conditions can be, and often are attribute to administered pricing and the exercise of market power on the part of large corporations. Indeed in the literature of economics administered prices has come to be more or less synonymous with oligopoly and high concentration, with more emphasis being given to the amplitude of price changes than to the frequency of price changes.

ANALYSIS OF OPEN MARKET PRICES:A key official with the finance ministry has called for wide-ranging reforms in the way open market food prices are managed, suggesting direct distribution of foodgrain to consumers.The Food Corporation of India (FCI) should release grain in small batches to the people, instead of bulk sales to states, which usually sell it to traders through auctions. The governments effort to manage prices by releasing food through open market operations has failed to elicit much response due to high sale prices. Open market release of grain is priced by the FCI at the minimum support price (MSP) plus a markup for storage and transportation cost. This cost plus pricing has made foodgrain costly as MSPs have been rising steadily in recent years. This price is often out of sync with market realities. Mr Basu has suggested that the release price should be set at some level below the market price. The FCI

has 471 lakh tonne of wheat and rice in its godowns. Despite this, the inflation in wheat and rice prices was 13.8% and 14%, respectively, for the week ended January 2, 2010. The release from FCI through Kendriya Bhandars and favored expanding the programme . Currently, there are only 37 such outlets all over the country. Agriculture economists agree that if the open market prices have to come down then food must reach consumers directly. It will help reduce prices. The government could use Kendriya Bhandar, Apna Bazaars and even public distributions shops to reach retail consumers, said PK Joshi, director of National Academy of Agricultural Research Management, Hyderabad. Removing middleman will certainly help, but we do not have retail outlets in rural areas, Selling below the cost will cause the food subsidy bill to go up sharply. The food subsidy bill for the current year is pegged at Rs 52,145.44 crore. But, it is expected to cross the Rs 60,000 crore mark in the current financial year. There has been a suggestion payment in kind under the National Rural Employment Guarantee Scheme (NREGS) to reach food directly in small quantities to people. At the moment the rural economy is suffering from increase in the prices of all food articles. We need to meet all the nutritional needs and so payment through just wheat and rice only may not meet the nutritional aspect .Moreover, there is a concern on leakage in this distribution model. The direct money transfers into the accounts of village poor under the NREGS was essentially aimed at cutting such leakages.

PRICING IN INDIA

The country has traditionally operated under an Administered Pricing Mechanism for petroleum products. This system is based on the retention price concept under which the oil refineries, oil marketing companies and the pipelines are compensated for operating costs and are assured a return of 12% post-tax on networth. Under this concept, a fixed level of profitability for the oil companies is ensured subject to their achieving their specified capacity utilisation. Upstream companies, namely ONGC,oil and GAIL, are also under retention price concept and are assured a fixed return. The administered pricing pilicy of petroleum products ensures that products used by the vulnerable sections of the society, like kerosene, or products used as feedstocks for production of fertilizer, like naphtha, may be sold at subsidized prices. Gradually, the Government of India is moving away from the administered pricing regime to market-determined, tariff-based pricing. Free imports are permitted for almost all petroleum products except petrol and diesel. Free imports are permitted for almost all petroleum products except petrol and diesel. Free marketing of imported kerosene, LPG and lubricants by private parties is permitted. It is contemplated that in a phased manner, all administered price products will be taken out of the administered pricing regime and the system will be replaced by a progressive tariff regime in order to provide a level playing field for new investments in a free and competitive market 97% ONGC gas sold under administered pricing

Administered pricing mechanism in india:The country has traditionally operated under an Administered Pricing Mechanism for petroleum products. This system is based on the retention price

concept under which the oil refineries, oil marketing companies and the pipelines are compensated for operating costs and are assured a return of 12% post-tax on networth. Under this concept, a fixed level of profitability for the oil companies is ensured subject to their achieving their specified capacity utilisation. Upstream companies, namely ONGC,oil and GAIL, are also under retention price concept and are assured a fixed return. The administered pricing pilicy of petroleum products ensures that products used by the vulnerable sections of the society, like kerosene, or products used as feedstocks for production of fertilizer, like naphtha, may be sold at subsidized prices. Gradually, the Government of India is moving away from the administered pricing regime to market-determined, tariff-based pricing. Free imports are permitted for almost all petroleum products except petrol and diesel. Free imports are permitted for almost all petroleum products except petrol and diesel. Free marketing of imported kerosene, LPG and lubricants by private parties is permitted. It is contemplated that in a phased manner, all administered price products will be taken out of the administered pricing regime and the system will be replaced by a progressive tariff regime in order to provide a level playing field for new investments in a free and competitive market

APPLICATION OF ADMINSTERED PRICE MECHANISM :-

Out of ONGC's total gas production, approximately 97 per cent is APM (administered pricing mechanism) and only three per cent is non-APM gas. This information was given by the Minister of State for Petroleum & Natural Gas, Mr Jitin Prasada, to the Rajya Sabha on Tuesday.While in case of Oil India Ltd (OIL), out of its total production, approximately 88 per cent is APM and 12 per cent is non-APM, the Minister said. The gas produced by ONGC and OIL from the blocks given to them on nomination basis prior to the NELP (New Exploration Licensing Policy) regime is sold at a Government controlled price or under administered pricing mechanism (APM).The gas produced by ONGC and OIL is being sold to power and fertilisers sectors at APM rate of Rs 3,200/mscm (thousand standard cubic meters) outside North-East and at Rs 1,820/mscm in North-East. To other APM customers Court mandated customers and customers up to 50,000 scmd (standard cubic meters per day) natural gas is sold at Rs 3,840/mscm outside North-East and at Rs 2,304/mscm in North East. Further, the gas produced by ONGC and OIL is sold at non-APM rates of $4.75/mBtu (million British thermal unit) in Gujarat, Maharashtra and along HVJ network at Rs 3,200/mscm in North-East and at $ 3.86/mBtu in the rest of the country. These prices exclude royalty, transportation charge, and taxes.Dynamic Pricing: It Worked for the Airlines, but Can It Work For Theatres?

ALTERNATIVE PRICE MECHANISM

DYNAMIC PRICING:An Introduction to Dynamic Pricing:Dynamic pricing essentially means that in order to maximize profit, the price changes as market demand changes. In the context of theatres, the price of a ticket is determined by how well seats are selling, how many of them are remaining, and other variables that affect demand, like the weather and traffic perhaps. Theatres monitor the house as it fills for each performance and make decisions each day on whether to adjust prices up or down based on demand. Does it Work? Whenever the viability of this type of pricing scheme comes into question, proponents usually point to the fact that it been working for the airline and hotel industries for decades. But, there are three distinct difference between the airline industry and non-profit theatres: 1. People needto buy airline tickets because, in most cases, they have to be somewhere at a particular time. People don't need to see a show; theatre is considered by many to be discretionary spending. 1. Airlines are primarily interested in making a profit, while theatres have other objectives like making arts accessible, educating, or getting a particular message out and they rely on the generosity of supporters who believe in their mission to survive.

2. Airlines have relatively few competitors, which makes it easy for them to charge what they like. Theatres, on the other hand, have an abundance of competition. A Bit of Advice If you do decide to try dynamic pricing, here are some tips: 1. Be very cautious about taking it too far. You don't want to loose sight of your mission and undercut your case for support. 2. Make sure that advertising does not give the wrong impression of prices. Supporters will undoubtedly get upset if the price they have to pay for a seat is different than what was advertised. For that reason, you may want to print a price range instead of precise prices on tickets, on your website and anywhere else prices are visible. 3. You may only want to apply dynamic pricing to parts of the theatre. For example, perhaps you want to leave the best seats in the house at a static price so they don't loose their perceived value. 4. Set the goals that you want to achieve by dynamic pricing and define metrics of success in advance.

5. Experiment and analyze. In order to find out what works, you may need to experiment with several price triggers and variable prices. Each time you change your method, make notes about it for future analysis. Also take note of the costs to administer dynamic pricing, how people attending the theatre like it, and other factors that may have an effect on ticket sales and supporters' overall experience. All of this information will help you determine whether dynamic pricing is successful, and what contributed to it's success

BIBLIOGRAPHY
1:http://www.informaworld.com/smpp/home~db=all 2:- http://www.ssrn.com/ 3:- http://www.proquest.com/ 4:- http://www.managementparadise.com/ 5;- http://www.wordiq.com/definition/aDMINISTERED prices 6:-http://en.wikipedia.org/wiki/open market pricing 7:http://www.informaworld.com/smpp/content~db=all~content=a776388179 http://WWW.CONSUMER BEHAVIOUR.com/dt20090625ptan20090165010.php

journals Congressional Research Service document "Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition" by Jasper Womac.