A pricing strategy is important to any firm in realising its corporate objectives, whether that be its sales revenue, market share or indeed profit, and thus there is much preoccupation within a business about its pricing strategy. Ultimately, this will be guided by many factors; not least the market power it has to set the price of its products and the nature of the demand curve it faces. This essay will attempt to outline how a firm’s pricing strategy is influenced by the characteristics of the market in which it operates, looking at various market structures, including perfect competition, monopoly and oligopoly.
One particular market structure worthy of consideration in addressing the question is perfect competition. According to Besanko and Braeutigam (2005) firms in this market structure act as price takers. Due to the industry being fragmented, each firm’s output is a significantly small proportion of the industry supply and demand, which determines the market price. In addition, it is assumed that firms operating in this industry produce products that are homogeneous and consumers possess perfect knowledge about the prices and availability of products. Consequently, the consumer will purchase the good at the lowest available price. Varian (1999) asserts that firms operating in this market structure will face a horizontal demand curve at market price. If the firm sets its price above market price, then it will sell nothing. If the firm sets its price below the market price, then it will capture the entire market demand but will not cover its costs in the long run. Thus, the only sensible pricing strategy available to the firm is to take the market price, where it can sell all it can produce.
By contrast, a monopolist is able to set the market price for the product that it sells. Besanko and Braeutigam (2005: 404) define a monopolistic market as one which “consists of a single... [continues]
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