American Public University Systems
Market structures influence a firm’s behavior and profit opportunity and are therefore critical to understanding how a market functions. The conditions that distinguish each market structure define the level of competition observed within the market which in turn determines the profit level that can be made. Because pricing strategies are intended to maximize a firm’s profit, understanding market competition is necessary when deciding an appropriate pricing strategy approach. The third section of this paper gives the pricing strategy for a real-world firm for each market structure.
An Analysis of Market Structures and Their Related Pricing Strategies
An average or typical market does not exist. However, models of market structures give a general representation of a type of real market. There are extremes seen in market structure models that are not likely to happen in the real world, but they allow us to compare and contrast real world and model information. The information gathered can be used as a benchmark. Firms may function under four primary market structures; perfect competition, monopolistic competition, oligopoly, and monopoly. These market structures affect a market’s outcomes based on its influence over a firm’s behavior and profit opportunity. The first section of this paper will provide a detailed analysis of the four market structures which can be distinguished based on various conditions. These conditions or characteristics may include the number of firms within the market, the concentration or market power of firms as measured by their market shares, the purchasing behavior of buyers, the product type including differentiation or degree of homogeneity, the substitutability of the product, the elasticity of demand, the entry and exit barriers, the control over market price or output, and the level of profit maximization to name just a few. These conditions determine the level of competition that is present within the market. When competition between firms is not present, the market is considered concentrated as seen in monopolies. Conversely, when competition between firms is at its strongest, the market is considered less concentrated as seen in perfect competition. The second section will describe the pricing strategies that are appropriate for each market structure and how these strategies have the ability to maximize a firm’s profit. The conditions that distinguish the four market structures determine the level of competition that is present and because pricing strategies are intended to maximize profit it is necessary to understand how competition works in determining the appropriate pricing strategy approach. Lastly, a case study of a real world business for each of the market structures will be given. Each firm’s pricing strategy will be identified and analyzed. Market Structure
Market structures are critical to understanding how a market functions. One way the structure of the market may be defined is according to the conditions that are present within the market such as the number and size of the firms within the market, entry and exit barriers, characteristics of the products, and information availability such as perfect or imperfect knowledge. These conditions affect the level of competition observed between firms within a market. The level of competition present within the market determines the classification of the market structure. Market structures that are absent of competition are classified as concentrated markets. Pure monopolies fall into this classification. Conversely, market structures with the greatest amount of competition are classified as less concentrated. Perfectly competitive markets are in this classification. Monopolistically competitive markets and oligopolies are found in the middle of this range with...