The primary objective of any business organization is to maximize the profits from its operations in order to enrich the wealth of its investors. This calls for provision of high quality goods or services at competitive and optimum prices which allow the company to make good returns while, at the same time, not exploiting their clients. As a result, businesses are forced to come up with good pricing strategies to achieve this. However, pricing strategies are different for businesses depending on the market structure in which they operate. Markets can be classified as perfect competition, monopolistic competition, oligopoly and monopoly. Each of these structures has different characteristics and conditions that call for different pricing …show more content…
The number of sellers in this kind of market is very high, with individual firms controlling a very little and insignificant portion of the market. As a result, the pricing decisions of one firm will not affect the price in the market or influence the decisions of the other players. Also, these numerous firms sell similar products which are not differentiated from each other in any way. Consequently, customers freely buy from any seller in the market since all the products are similar (Baumol & Blinder, 2015). This greatly increases the competition.
The presence of numerous firms is compounded by the fact that the entry and exit from the market is free. There are relatively no barriers that may prevent newly found firms from joining the market. For this reason, the number of firms remains high in the long run. Finally, the market is characterized by perfect knowledge of the products and prices being offered. Sellers and buyers easily have access to this information. These characteristics are largely ideal and can rarely be found in any economies. It is however important to understand this market structure and its pricing strategies.
1.2 Pricing strategies
The profit maximization strategy for a perfectly competitive market informs the price setting decisions by the participating firms. The price determination is not influenced by other firms’ decisions since there are a large number of
E., & Gould, J. P., 1966). Furthermore, the members are price takers and do not have the power to influence price changes. We now understand that perfectly competitive markets are very rare and that in reality our product exists in a different type of market. The four types of markets are: Monopoly, Oligopoly, Monopolistic competition, and perfect competition. Our company has gained enough power in the market to influence price and allow it to choose its own optimal price. This means that establishing an equilibrium where QD = QS does not necessarily apply. Perhaps our company has developed an innovation that makes the quality of our microwave meal much better than our competitors or we have developed a process than drastically lowers the cost of processing the ingredients for our product. Regardless of the reason, our company now has a competitive advantage and we must take advantage of it in order to become dominant in our industry.
When a product is produced, the company that produces that particular product falls into one of four categories: pure competition, monopolistic competition, oligopoly, and monopoly. Depending on how many companies are producing a product determines what market structure the company is labeled. Each category determines how a company will use pricing and non-pricing to advance in the economy. The United States economic market is competitive with various buyers and sellers, and each company is constantly looking for ways to be better than its neighbor. The following examples of each category will show different companies and how they use pricing and non-pricing to advance to
There are many characteristic of monopolistic competitions. One of such is that each firm makes independent decision regarding their product pricing and output based on the market and production cost. Each firm has the knowledge and ability to handle
Monopolies are a group of business people who act as one. Any firm that has a monopoly structure will have the most price control for its goods. The firms that operate in competitive structures will have no control over their prices. A firms’ capacity to control the prices of its goods is called price management. This is a critical element in market structure. Monopolies have no public ownership. “When the competition is low and a company is dominating the demand curve it creates a monopoly because
The overall pricing strategy of any company depends upon the type of demand that is being made by the
Price is the value which is paid by the buyer to the manufacturer against the products and services. It is the value of the product mentioned by the seller to the consumers Pricing decisions are one of the crucial factors that shapes by cost factors, profit margin, and possibility of sales at different price levels and the competitor's pricing policy as well as with the number of existing competitors in the market. Pricing is the most critical element of the marketing mix and firms must make strategic preferences about how to price their product to achieve their business goals in the best possible manner by considering the demand and supply relationship. Unlike the three
Market structure from an economics perspective is defined as the characteristics of the market that impacts the behavior or way firms operate, which economists use to determine the nature of competition, and pricing tactics of businesses in the market. Within a market, the market structures are distinguished by key features, including the number of sellers, homogeneous or differentiated goods or services produced, pricing power, level of competition, barriers to entering or exit the markets, efficiency, and profits. The interaction and differences among these features resulted in four market structures of competition: perfect competition, monopolistic competition, oligopoly, and monopoly. Economist assembled the four market structures into two groups; perfectly competitive market and imperfectly competitive market, which are vastly distinct when it come to the different market competitions that need to be satisfied.
A market that has a perfect competition structure has many firms competing in it. In the market, prices are determined by many buyers as well as sellers. Each of the successful firms in the market is well-established. A single firm in the market cannot independently influence the prices in it persistently. Each of the firms is considered a price-taker. The quantity, as well as intensity, of the sellers, as well as buyers, who are ready to transact business
buyers to be the same as that of any other firm. This ensures that no
Optimal pricing policy is also known as perfect price discrimination, which means that a company segments the market into distinct customer groups and charges each group exactly what it is willing to pay. The optimal price and volume refer to the selling price and volume at which a company maximizes its profits. It is impossible for a small-business owner to know exactly what consumers are willing to pay because they would have to poll them at regular intervals. Companies can make reasonable assumptions based on historical sales patterns and set his product mix and pricing strategy accordingly (Basu, 2013)
There are different types of market structures all over the world since business is not done the same way everywhere. Even within the USA different companies use different pricing strategies based on the market structures. As a business and as a consumer it is vital to identify and understand these different types of market structures and their pricing strategies. The ideal type of market is the one where price and demand are not affected by anything, in other words it is always consistent. Of course the reality is that markets are affected by different factors, which can hike up the price for an item or lower it, hence increase demand or decrease it. There are 4 different types of market structures
can substitute for other product actually products are similar but firms try to shows different
Furthermore, other market structures include oligopoly and monopolistic competition. Oligopoly occurs when a small number of firms have a large market share and consequently the market. The products are relatively differentiated and the main area of competition is product marketing. Oligopolies have various barriers to entry and the interdependent characteristics of an oligopoly, sets this market structure apart from others. Similarly a firm experiencing monopolistic competition will also have numerous firms in the market and consequently each firm will only hold a small market share. Unlike in an oligopoly where the actions of rivals could possibly be detrimental to each firm, the firms within monopolistic competition
The connection between characteristics of a market, such as the number and strength of buyers and sellers, severity of complicity amid them, as well as the levels of competition and contrast of product and ease of entry and exit barriers determines the type of market structure. Perfect competition, monopoly, oligopoly and monopolistic competition are four basic market structures. Economists watch the different market structures in an attempt to predict consumer behavior. “Firms use markets to achieve sales and profit goals while consumers use markets to reach various consumption goals” (Redmond, 2013, pg. 433). Evaluating each structure will help in assisting firms with decision making to better understand competition and consumer
A competitive firm produces less than the total amount of this product supplied to the market that its output decisions have no impact on the market. Because of this, firms operating under such circumstances which called perfect competition have no influence over the price of their product. They are called "price takers" because the price established in the market as a whole is the price they will get for their output. This means that the firm’s marginal revenue is constant over the whole range of its possible and that consequently, marginal revenue, average revenue and price are all the same amount. This assumption that price does not change with output is characteristic of a truly competitive firm.