A market structure is a tool used to determine the pricing power of certain products in diverse firms. Research has shown that there are numerous market structures with unique pricing strategies in place. The price of goods and services in a firm depend on the levels of demand, cost conditions and competition.
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Besides, price fixation is one of the key managerial functions. It is frequently reviewed to ensure that a firm makes a reasonable profit margin. The market conditions determine the type of market structure and pricing criteria to be used in a particular firm. Moreover, businesses cannot operate in isolation.
In other words, a firm requires a robust marketing platform for it to operate effectively. Hence, it is important to select an appropriate market structure for a business to make significant returns. Economists have identified four major market structures that are unique in terms of both operation and effectiveness in meeting the demands of customer. The market structures have been discussed in this paper in relation to pricing strategies.
A market structure can be defined as a core characteristic that makes up a platform for buying and selling goods and services (Samuelson & Marks, 2006). It is common knowledge that a market exists when there are buyers, sellers, products, competition, product differentiation as well as the ease of entry or exit.
From this definition, Rubin and Dnes (2010) highlight that market structures are individual aspects that influence the behavior of buyers and sellers. Ellickson, Misra and Nair (2012) also define a market structure as the number of firms in a market that are able to produce similar goods or services. The nature of a market structure greatly influences the behavior of producers.
Therefore, it affects the market price of a particular commodity or service (Rubin & Dnes, 2010). In addition, a market environment affects the supply of commodities and equally creates barriers for entry. This paper discusses some of the notable market structure by analyzing their pricing strategies alongside relevant examples.
This describes a situation whereby a firm does not have a particular independent pricing policy. Therefore, firms that embrace this market structure have to comply with the prevailing market prices (Samuelson & Marks, 2006). At this point, a firm is at liberty to market its goods and services.
Lack of control over a market often creates an open platform for buyers to choose less costly products. If a firm sets very high prices in a marketplace, it might end up making few or no sale at all. It is important to note that in this type of a market structure, there is no specified price for certain quality or quantity of goods (Rubin & Dnes, 2010).
Therefore, it is upon the seller to decide which quantity to offer and at what price. Typical firms have no influence over demand and supply because new sellers enter the market as they wish. Ellickson et al (2012) assert that typical competitors in such a market end up earning no profit at all. Rubin and Dnes (2010) point out that there are no barriers to enter or exit such a market structure since there are unlimited number of both sellers and buyers.
From an economic perspective, this market structure exists when firms produce similar and standardized products. It implies that different firms only compete for prices. Moreover, buyers are aware that price competition exists. Therefore, all the available products must be sold at a common or poplar market price (Rubin & Dnes, 2010).
Both consumers and firms also tend to countercheck the price even though they have no direct influence on the market. In order for a firm to maintain its customers, it is compelled to sell either at the prevailing market price or at a lower price altogether (Samuelson & Marks, 2006). Therefore, firms end up selling a small proportion of their total output.
Prices are determined by the forces of supply and demand. It is worth to note that there is perfect substitution where all firms produce homogenous, standardized and undifferentiated products. At this point, the demand curve in each firm is perfectly elastic and horizontal to the price line (Rubin & Dnes, 2010).
This implies that a firm can only sell some of its output without altering the price. Any slight increase in price results into lack of sales since buyers tend to resort to a substitute from other competitors. In this type of a market structure, the “law of one price” does not change and all market transactions are done at the same price (Samuelson & Marks, 2006).
In this type of a market structure, a firm ignores a market price and sets it own pricing without considering the causal effects of other firms with different prices. In this case, a group of producers offer a common product that is not identical. Therefore, it triggers competition.
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Firms deliberately differentiate their products and set prices that are competitive in nature (Samuelson & Marks, 2006). It is important to note that there are no market barriers. Monopolistic competition resembles a perfect competition model except that the products of the former are different.
Firms set their own prices that are different from those of competitors since products sold are also differentiated in terms of quality and quantity. In this case, firms aim to create brand names by reinforcing product differences (Rubin & Dnes, 2010).
Product differentiation is one of the strategies that enable producers to set high prices without necessarily losing market dominance to competitors. It is worth to note that the demand is elastic hence; firms can increase their prices whenever they wish to do so (Samuelson & Marks, 2006).
In this case, about three sellers occupy a larger share in a particular market. The firms may experience price wars as they compete against each other for maximum gains. Increasing prices affects the volume of sales of other firms (Ellickson et al., 2012). For instance, when one of the competing firms increases its market prices, consumers will obviously buy from the competitors.
Therefore, producers must assess the impacts of their decisions in order to decrease or increase prices. It is worth to note that few sellers in the market may be rivals. This may eventually lead to conflict (Samuelson & Marks, 2006). However, there is great ease of entry into the market unlike the case with a monopolistic structure.
Sellers first understand the behavior of consumers before setting prices. The pricing policy of an individual producer affects others. Therefore, there is an element of price rigidity that compels producers to opt for non-price competition (Samuelson & Marks, 2006). At this point, prices are no longer depicted by demand and supply.
Prices are set after critical, interactive and strategic thinking (Samuelson & Marks, 2006). The fate of oligopoly pricing strategy is interdependent even though it is determined by economic factors such as consumers’ tastes and preferences.
This refers to a market structure whereby there is only one seller of a particular product. In other words, a single firm in the market offers goods or services to consumers. Nonetheless, pure monopolies are rare. From the statistical review of literature, it is evident that a monopolistic market generates approximately 3% of the gross domestic product (GDP) in the developed economies such as the US and UK (Samuelson & Marks, 2006).
Hence, monopoly exists when 90% of the market is dominated by a single firm. Rubin and Dnes (2010) elucidate that barriers to market entry are common in this type of market structure. This is a precondition that is deliberately set to prevent other firms from venturing into the market (Rubin & Dnes, 2010). Furthermore, there are no perfect substitutes. Consumers have no choices to make since they have to buy products available in the market.
Prices of goods and services are determined by single players in this type of a market structure. Most monopolists use trial and error method when pricing their products. Ellickson et al (2012) argue that monopolists also determine prices by balances profits and losses.
When a firm reaches an equilibrium point where marginal costs are in the same level with marginal returns, monopolists decide their best market price (Samuelson & Marks, 2006). Usually, monopolists set higher prices that generate maximum gains. However, a firm may differentiate prices for various buyers in diverse regions. The price differentiation approach depends on the elasticity of demand.
Dumping is also a pricing strategy used by monopolists (Rubin & Dnes, 2010). In this regard, products fetch higher prices at the domestic market than in the international platform. However, monopolists do not just escalate prices. In other words, the optimal price is influenced by demand (Ellickson et al., 2012).
Case Study with examples
In the last few years, intense competition has been witnessed among telecommunication companies that supply cables, satellites and other communication services. Broadcasting networks have also exercised perfect competition for several decades. Internet service providers and social media platforms such as Facebook, Twitter, Instagram and Google plus have thrived in perfect competition (Samuelson & Marks, 2006).
This has greatly encouraged other service providers to venture into the market. Besides, firms that produce and sell foodstuffs such as fast food restaurants and supermarket outlets exercise monopolistic competition. These sellers produce diverse brands that appeal to the larger market niche (Samuelson & Marks, 2006).
The deregulation of products’ varieties and discounts gives clients the freedom to purchase goods or services that they can afford. In the United States, there are limited number of organizations that offer similar services and products. For instance, the Airbus and Boeing companies are renowned aircraft companies that compete against each other (Samuelson & Marks, 2006).
There are also hybrid automobiles that compete with traditional gasoline-powered automobiles. World-renowned soft drink companies such as Coca Cola and Pespi compete through pricing strategies thereby making the market to be oligopolistic in nature (Samuelson & Marks, 2006).
Some countries such as the US and India give firms and business people exclusive rights to sell their inventions for a specified period. Therefore, some firms have patents that grant them authority to sell their products for a period of 10 years (Samuelson & Marks, 2006). This prevents other people from copying, processing or applying such ideas.
A good example is the Microsoft Company that deals with computer software. It spearheads monopoly by preventing the entry of other compute software companies into the market (Samuelson & Marks, 2006). Governments have been known to allow lawful monopolies for a given length of time.
From the above discussion, it is explicit that a market environment influences pricing strategies. There are four major market structures. These market structures have diverse attributes such as the degree of barrier to market access, the extent to which a firm controls the price, and the number of sellers.
In monopolistic and perfect competition, there are numerous sellers hence there is no entry barrier into the market. Therefore, producers set prices that are influenced by elasticity of demand. In oligopoly, there are a few sellers competing against each other and prices are determined by other economic factors apart from demand and supply.
There are significant but less prohibitive market barriers and price rigidity in oligopolistic markets. Contrastingly, a monopoly has a single firm supplying and determining the price of products in a market. There are numerous barriers that prevent other potential sellers from entering a monopolistic market.
Ellickson, P. B., Misra, S., & Nair, H. S. (2012). Repositioning Dynamics and Pricing Strategy. Journal of Marketing Research (JMR), 49(6), 750-772.
Rubin, P. H., & Dnes, A. W. (2010). Managerial economics: a forward looking assessment. Managerial & Decision Economics, 31(8), 497-501.
Samuelson, W., & Marks, S. G. (2006). Managerial economics. Boston: John Wiley & Sons, Inc.