Market structures describe the nature and level of competition for the purchase and consumption of different commodities, while pricing strategies are specific methods used by organizations to price their products and services. Companies incorporate consumer segments, buyers’ ability to buy or pay, market conditions, and competitive strength, among other dimensions, when developing pricing strategies. Specifically, most business entities set prices on their commodities based on the prevailing conditions in their market structures (Calvet et al., 2020). This paper describes various market structures, including perfect competition, monopolistic, monopoly, and oligopoly competition. It illustrates the influence of pricing strategies on different market structures and provides evidence and real-world examples of how pricing strategies influence the identified market structures. Finally, based on the case study descriptions, the paper provides relevant evidence and conclusions of how pricing strategies relate to market structures.
Pricing Strategy across Different Market Structures
Market structures are useful in differentiating companies in various industries that produce identical or varied commodities. Specifically, the determination of relevant market structure that corresponds to a particular industry depends mostly on the number of operational firms, type of products involved, barriers to entry and exit, and competitive conditions, among other important considerations. The factors affect the behaviors of consumers and sellers in a particular market. Firms operating in different market structures rely on unique pricing strategies to attract sales and remain afloat.
- Perfect Competition
Perfect competition is ideal for purchasers and sellers. The market structure is characterized by the presence of homogenous products and services. In particular, sellers in perfect competition sell standardized identical commodities. The firms also compete with each other for a large number of buyers and have the sole motive of profit maximization (Azevedo & Gottlieb, 2017). However, no single seller can claim any significant influence or control over the market conditions. Another vital characteristic of perfect competition is the free entry and exit of firms from the market because there are no significant barriers. Thus, firms in perfect competition can efficiently respond to the changing conditions without quitting the market. Besides, firms are free to sell into and can choose to exit at will the market. The firms also have comprehensive information about the prevailing prices, technological trends, and profit-making opportunities, which they can use to strategize and streamline their operations in a perfect competition environment.
Competition is not a threat to enterprises in this market structure because they make independent production and sales decisions. For instance, the pricing decision of a single firm cannot influence the prevailing prices in the market. In addition, consumers in the perfect competition have complete information about commodities sold by the firms and justifications for the prices (Azevedo & Gottlieb, 2017). Lastly, entities in this market structure are price takers, implying that the actions or pricing strategies of a single entity cannot affect the market prices of products and services. For example, if one farmer decides to increase the prices of crops, consumers are likely to buy from other farmers selling at fixed prices.
1.2. Pricing Strategies
All firms in perfect competition are price takers because no seller controls market forces and conditions. In particular, the forces of market demand and supply control the pricing strategies for companies that exist in perfectly competitive markets. For example, a company’s aggregate demand curve in a perfect competition depends on the aggregate number of products and services consumers are willing and ready to purchase, everything else being constant. As such, firms in perfect competition can attain optimal pricing at market equilibrium when the demand for commodities and services equal to supply. Besides, the primary assumption behind a perfect competition pricing strategy is that a firm sells its products at a price level that buyers are willing and ready to pay.
In a perfectly competitive environment, the equilibrium or market conditions of a specific product determine the price. For example, firms are more likely to sell their commodities at the ongoing market prices without applying any particular pricing strategy. The only consideration in such cases is the costs of production. Higher production costs and lower market prices can imply loss of profit to a particular company. once there is a prevailing market price, a firm can only sell its commodities without introducing new prices. (Calvet et al., 2020) Any slight increase in prices results in loss of customers and sales to competitors or firms offering substitute commodities. Thus, firms in perfect competition should lower their production costs to compensate for the potentially low market prices. Overall, firms in perfect competition must conduct their market transactions at the same price levels.
- Monopolistic competition
Monopolistic competition is an imperfect market structure characterized by many desirable attributes and strategies. For instance, buyers can benefit from the presence of many firms selling differentiated products and services. In essence, differentiation is majorly based on product tastes and flavors, among other important adjustments. Another important feature of this market structure is the presence of a large number of buyers or consumers seeking differentiated products (Dhingra & Morrow, 2019). Thus, no single market price controls the decision of sellers and buyers in monopolistic competition because of the presence of differentiated products. Similarly, buyers in this market structure make their purchase decisions based on their product preferences and needs rather than on prices. As such, some sellers can charge marginally high prices on certain commodities that are critical to buyers.
Both consumers and sellers have perfect information on the prevailing market conditions in perfect competition. For instance, they have information about prevailing market prices, technological trends, profit-making opportunities, and new product flavors, among other important factors. They can use such information to respond to market competition for a large number of buyers in the market (Dhingra & Morrow, 2019). Furthermore, there is a low barrier to entry and exit of firms and buyers in a monopolistic competition. Indeed, firms can enter and exit from the market at will. Besides, the primary objective of sellers in monopolistic competition is to maximize profits by determining their respective price and output levels. Lastly, all firms in this market structure have some control over certain market conditions, such as pricing because of the presence of slightly differentiated products (Calvet et al., 2020). An example of monopolistic competition is the restaurant industry, in which many firms compete based on the quality of their food products and prices. Any investor can obtain relevant permits and resources to open a restaurant. However, the success of the restaurant depends on factors, such as the firm’s ability to satisfy customers’ tastes and preferences of the cuisines.
2.2. Pricing Strategies
Firms in monopolistic competition are price setters because of the elastic demand. Specifically, the firms make key decisions about the selling prices of their commodities without any serious consequences. For instance, corporations can deliberately differentiate their commodities and set competitive prices to attract consumers with varied preferences and needs. They can also increase the prices of their products and services whenever they wish to do so without attracting related consequences such as loss of consumers. The differentiation can be in terms of enhanced product quality and other value additions. Firms in monopolistic competition can also use unique branding, comprehensive promotional campaigns, and personal selling, among others, to differentiate their products (Calvet et al., 2020). Consequently, the firms can rely on different prices to sell their differentiated products instead of the prevailing market prices.
The pricing strategies or actions of other competitors have limited impacts on the operations of a firm in a monopolistic competition. For example, the decision by company A to reduce its product prices does not affect firm B because both companies attract buyers based on the quality and quantity of their differentiated products irrespective of the prices. For instance, a firm with high product quality can set higher prices without necessarily losing its market control or dominance to competitors under this market structure.
Oligopoly is another type of market structure and has various features. It is characterized by the presence of a few sellers with higher control over market conditions. The actions or decisions by one seller can directly affect other sellers’ market operations and profits. Notably, the decision by a seller to increase the prices of goods and services can affect the sales projections of others (Azar &Vives, 2018). For example, consumers are likely to purchase products from corporations in an oligopoly with relatively lower prices and higher quality commodities. As such, competition in this market structure is high because firms are in constant competition against each other to gain maximum profits. Sellers must conduct comprehensive assessments and comparisons of their pricing decisions with those of their market competitors to develop appropriate responses and plans. Additionally, the high competition between firms in an oligopoly can have a direct impact on a seller’s profit potentials.
Another important characteristic of an oligopoly is the presence of various barriers to entry. New sellers may struggle to establish their market operations under this market structure. The barrier to entry is attributable to the high initial capital requirements and expensive marketing campaigns, among other factors (Azar &Vives, 2018). Lastly, the inelastic demand in oligopoly means that firms can sellers control the pricing of different commodities. Firms in the retail industry, such as supermarkets, are examples of an oligopoly. Investors require a substantial amount of starting capital to establish a supermarket chain store (Calvet et al., 2020). The new firm may also require intensive marketing campaigns to help attract shoppers loyal to correlated business entities operating in the market structure. Lastly, the pricing decisions and marketing strategies applied by one supermarket can affect other firms in the oligopoly. For example, consumers are likely to shop in a supermarket charging lower prices on quality products and services.
3.2. Pricing Strategies
Consumers in this market structure are price takers, while sellers are price sellers. The few firms in oligopoly competition can use their market influence and control to set prices and to maximize profits. Similarly, consumers in this market structure buy commodities at the prevailing prices set by the firms because of a lack of substitutes. Therefore, firms in an oligopoly are very sensitive to each other’s pricing strategies. For instance, a firm is likely to set its prices as low as possible to attract and maintain its market share against competing entities.
Firms in an oligopoly must first understand the behaviors of their consumers before setting prices. For instance, a company should know how economic factors such as consumers’ tastes and preferences, affect the pricing of its products and services. A company can apply various approaches, such as product differentiation, quality services, and comprehensive advertisement campaigns, to affect prices. For example, highly differentiated products suiting consumers’ needs and preferences can encourage the firm to set higher prices. However, the price war is not a significant issue in this market structure because firms concentrate on maintaining situational awareness on their competitors to avoid possible loss of sales (Calvet et al., 2020). For example, a company selling at lower prices attracts higher sales over its competitors. Therefore, a firm must develop appropriate responses to any form of market competition to maintain relevance and control over a market.
A monopoly is a type of market structure characterized by the presence of a single firm selling specific commodities. There is no competition in this market environment because only one firm engages in the production and sales of products and commodities. The single firm in a monopoly controls the entire market and is responsible for setting the prices of its commodities (Calvet et al., 2020). Buyers cannot access any substitute products that can fulfill their varied needs and preferences. sole control over an industry implies that a monopoly can also determine the level of output, prices, and profits. For instance, consumers are willing to pay any prices charged by monopolies because of the absence of substitute products and entities.
There are multiple barriers to entry and exit in an industry with a monopoly. Some of the barriers to entry include intellectual property rights, such as patents and copyrights. Similarly, complex bureaucratic processes in the industry, such as the complicated acquisition of government licenses, can also prevent other firms from gaining entry into an industry controlled by a monopoly. The last barrier to entry is the high start-up costs that investors may struggle to raise to venture into the industry. A monopoly may face a barrier to exit, mainly if the company is producing essential services and products. For instance, the government may prevent public utility companies, such as electricity and gas distribution enterprises from exiting the market without viable and stable substitutes (Calvet et al., 2020). The American Tobacco Company was a monopoly in the United States before the introduction of antitrust regulation. The organization maintained singular control over the production and supply of tobacco and related products over the U.S. market.
4.2. Pricing Strategies
The pricing strategy in a monopoly is relatively simple. A monopoly firm is a price setter while consumers are price takers. There are no alternative or substitute products and services in a monopoly, and buyers must pay the prices set by the single firm controlling the production and supply of different commodities. The firm can set and raise prices without any negative consequences such as loss of customers or a reduction in sales potential. However, the demand for a particular product in a monopoly determines the pricing strategy (Calvet et al., 2020). For example, higher consumer demand can encourage a monopoly to set higher prices to generate maximum gains. The firms should also avoid setting prices too high to attract competition. In essence, too high prices can influence the consumers to change their consumption habits in favor of close substitutes. Therefore, a proper understanding of the elasticity of their product demand will help a monopoly to develop an approximate pricing strategy and maximize its sales potentials.
- Case Study
The selected company is Apple Inc., a multinational technology company that designs, develops, and sells consumer electronics such as smartphones. The company is in the smartphone operating system industry, which is an oligopolistic competition because it has a few entities, such as Samsung and Nokia, selling similar commodities and controlling a larger market share. Apple uses strategies such as product differentiation to maintain its large market share. For instance, the unique design and development of the iPhone series have helped the corporation to maintain its control of the industry. However, the high cost of operation is a significant barrier preventing rival firms from competing with the established entities in the market (Calvet et al., 2020). The actions of another company in an oligopolistic competition do not affect other competing firms. For example, if competitors such as Nokia decide to reduce the prices of their smartphones, Apple will lose some of its customers to companies producing cheaper and high-quality products. However, companies in an oligopolistic competition draw their market share from loyal customer bases whose primary objective is product quality rather than prices.
Apple and other companies operating in the oligopolistic market structure must understand various market conditions. For instance, the firms should know that the demand for products in an oligopolistic competition is highly inelastic. As such, oligopoly firms in the selected industry must sell commodities at prices that their consumers are willing and ready to pay. For example, Apple customers are willing to pay higher prices for some of the differentiated products such as the iPhone smartphone series. Therefore, non-price competition strategies such as the production of products that are resonating with consumers’ tastes and preferences can help Apple to maintain its loyal customer base.
From the above descriptions and discussions, it is clear that market structures can influence the corresponding pricing strategies. For instance, in perfect competition, firms are price takers because they have little to no control over prices due to the highly elastic consumer demand. Similarly, production differentiation in a monopolistic market structure implies that firms have greater control over the prevailing prices. Under oligopoly, the pricing strategies are independent of the corresponding actions of other entities. Few sellers competing against themselves in a monopoly make independent decisions on the demand and supply of their products and services. Lastly, a monopoly has higher control over the prices of commodities due to a lack of substitutes and highly inelastic demand.
Azar, J., &Vives, X. (2018). Oligopoly, macroeconomic performance, and competition policy. Available at SSRN 3177079.https://www.econstor.eu/bitstream/10419/185387/1/cesifo1_wp7189.pdf
Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection. Econometrica, 85(1), 67-105.https://doi.org/10.3982/ECTA13434
Calvet, L., de la Torre, R., Goyal, A., Marmol, M., & Juan, A. A. (2020). Modern Optimization and Simulation Methods in Managerial and Business Economics: A Review. Administrative Sciences, 10(3), 47.https://www.mdpi.com/2076-3387/10/3/47/pdf
Dhingra, S., & Morrow, J. (2019). Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy, 127(1), 196-232.http://eprints.lse.ac.uk/59226/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_Dhingra%2C%20S_Monopolistic%20competition_Dhingra_Monopolistic_competition.pdf