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
1) An Oligopolistic market structure is a structure where very few large businesses sell a particular standard Good or differentiated Good, and to whose market entry proves difficult. This in turn, gives little control over product pricing because of mutual interdependence (with the exception of collusion among businesses) creating a non-price competition meaning they are the ‘price setters’. A good rule to help classify an
Going back to the four types of market structures we can now say that our company is approaching a monopolistic competition structure, in which there are still many buyers and sellers of products, but we have set ourselves apart from our competition with our innovations and there is no longer perfect substitution of products (Harris, McGuigan, Moyer, 2014, p. 352). In this type of structure a firm can earn profits, break even, or suffer losses. In the short run a new entrant into the
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.
The markets today are so complex and deal with so many variables it can be difficult to understand just exactly how they operate. In the following I will reveal the different kinds of market structures along with their different pricing strategies. Relating to these topics, I will focus on the importance of cost, competition and customer.
buyers to be the same as that of any other firm. This ensures that no
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
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
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
can substitute for other product actually products are similar but firms try to shows different
There are four theoretical constructions relating to market structures, these are oligopoly, monopoly, perfect competition and monopolistic competition. Each theory has its individual assumptions and norms. In turn, these theories will be analysed, compared and contrasted with real life examples. The market structure related to each business reflects the profit maximisation and productions of the firms. The demand curve will also vary depending on the market structure; MC=MR.
The overall pricing strategy of any company depends upon the type of demand that is being made by the
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
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
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.
Today’s highly competitive business world forces companies to create different tactics and relatively rely on multiple pricing strategies to conduct business.