Main Factors of Product Pricing in the Uk

1416 Words Mar 21st, 2016 6 Pages
Discuss the main factors affecting product pricing in the UK?

The Oxford English dictionary defines price as “ a value that will purchase a definite quantity, weight, or other measure of a good or service”. Simply put, the price of an object represents the overall demand for that product at a specific time. However, every firm had a different ideology about price and they way they set price.
One of these main factors that affect price is the actual objective of the firm. Traditional theory suggests that firms will charge a profit-maximizing price where price is determined when marginal cost equals marginal revenue.
They operate to seek a maximum return on the investment and costs they have input. The diagram below shows how firms
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However most firms in the UK do not operate in these kinds of structures. An oligopoly is a more realistic market structure that most UK firms operate in. It is a market structure that is dominated by two or more firms that sell a range of similar branded products who are price makers.
Due to the high concentration ratios (function of number of firms and respective shares of total production (Anon. Oligopolies. Available: http://www.economicshelp.org/dictionary/c/concentration-ratios.html. Last accessed 6th Nov )) and the fact that oligopolistic firms share market power, pricing theory is heavily based on interdependence between firms. Firms are likely to collaborate on pricing decisions so as to earn monopoly profits and deter new entrants from “ruining the fun”. Formal collusion are referred to as “cartels” e.g. OPEC. They decide what price to set and what quantity to produce so as each member receives the maximum gains. However, there are cases where members cheat and undercut the price, maximizing their revenue e.g. Iran and Nigeria in the early 1980’s cut oil prices to earn more market share. (Sloman, Wride (2009). Economics. 7th ed. London: Pearson. p58.)
In tacit collusion (informal collusion), the dominant firm or the firm with the most market power usually sets the collaborated price e.g. Brooke Bond was the market leader in the late 1960’s in the tea market, and all other firms matched its price. (Sloman, Wride