MARKET STRUCTURE AND PRICING DECISIONS
ONIKOYI O. OLUWATOBI
A Presentation submitted to the department of business Administration and marketing Management and Social Sciences.
In partial Fulfilment on
ECONS 801 (MANAGERIAL ECONOMICS)
Associate Prof. Didia P. O
In order to maximize profits or shareholder wealth, managers must use the information that they have relating to demand and costs in order to determine strategy regarding price and output, and other variables. However, managers must also be aware of the type of market structure in which they operate, since this has important implications for strategy; this applies both to short-run decision making and to long-run decisions on changing capacity or entering new markets. Managers must tailor their decisions to the specific market environment in which their firms operate. For example, a manager of a business that is the patent holder and the only supplier of a new wonder drug will act differently than a manger of a firm trying to survive in the very competitive fast-food industry. Because the decision making environment depends on the structure of the market, it follows that no single theory of the firm can adequately describe all of the conditions in which firms operate. However, it does not follow that there must be a unique theory corresponding to every conceivable market structure. By categorizing markets in terms of their basic characteristics, it may be possible to identify a limited number of market structures that can be used to analyze decision making.
TYPES OF MARKET STRUCTURE
Economists usually classify market structures into four main types: Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly. These types of market structure are different according to the following characteristics:
CHARACTERISTICS OF MARKET STRUCTURE
- Number and Size Distribution of Sellers.
The ability of an individual firm to affect the price and total amount of a product supplied to a market is related to the number of firms providing that product. If there are numerous sellers of nearly equal size, the influence of any one firm is likely to be small. In contrast, in a market consisting of only a few sellers, an individual firm can have considerable impact on price and total supply. The size of distribution of firms is also an important characteristic of market structure. When the market includes a dominant firm or a few large firms that provide a substantial proportion of total supply, those large businesses may be able to exert considerable influence over price and product attributes. For example, in the market for computer software, Microsoft is the dominant firm. The product of many smaller software suppliers are designed to be compatible with those of Microsoft and their prices are influenced by prices set by Microsoft. Conversely in a Market with firms of nearly equal size, individual sellers are likely to have less influence.
* Number and Size Distribution of Buyer
Markets can also be characterized by the number and size distribution of buyers. Where there are many small purchasers of a product, all buyers are likely to pay about the same price. However, if there is only one purchaser, that buyer is in position to demand lower prices from sellers. Similarly if a market consists of many small buyers and one or a few firms making volume purchases, the larger firms may be able to buy at lower prices. For example, because of their sales volume, IBM and AT&T may be able to obtain electronic components at prices below those of competitors.
* Product Differentiation
Product differentiation refers to the degree that the output of one firm differs from that of other firms in a market. Where products are undifferentiated, decisions to buy are made strictly on the basis of price. In these markets, sellers who attempt to charge a higher price are unable to sell their...
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