Discuss the main factors affecting product pricing in the UK
Two surveys on the price-setting behaviour of UK firms published by the Bank of England in 1996 and 2008 concluded that the price, the amount of money expected, required or given for a certain level of output, was most often set as a result of market conditions1. The same report however found that the second largest price differential was the objective of the specific firm surveyed1, and thus product pricing in the UK can be seen to be determined by the interaction between these objectives and the market structures that bind how firms operate. In the UK these dominant structures are monopolistic, oligopolistic and perfectly competitive, within which there are differing degrees of price setting ability and inter-firm competition.
The classical theory of the firm assumes that they will pursue the objective of profit maximisation. As Milton Friedman put it in his 1970 article, ‘‘There is one and only one social responsibility of business - to use its resources in activities designed to increase its profits’2. A firm aspiring to maximise profit will still be constrained by the market structure, best demonstrated in the contrast between perfect competition and pure monopoly. Perfectly competitive markets, while argued by some to be unlikely to exist due to their strong assumptions of multiple buyers and freedom of entry and exit, have experienced a relative resurgence in the UK due to the popularity of e-commerce as a form of market transaction3. Under perfect competition, many firms (as witnessed in the multitude of small online companies) are assumed to experience perfectly elastic demand curves for their product due to the perfect substitution of their homogenous goods. As ‘price-takers’, they are forced to produce where the demand curve of average revenue interacts with the industry supply curve of marginal cost, at price Pc. By contrast, under pure monopoly, the number of buyers and sellers is...
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