THE IMPORTANCE OF PRICING STRAGETIES IN MARKET STRUCTURES
American Public University Systems
October 15, 2011
The importance of pricing strategies is different depending upon the type of market structure because each market structure has special components that affect the pricing schema and determination of output. Although the pricing strategies are different, it is highly important for a select market structure to choose the optimal pricing policy to insure that the firm is able to be successful and earn long-term profit. It also important to remember that pricing policies are subject to change considering that the business environment is ever changing as well; implementation is critical for a firm to remain stable within its industry and competitive. The importance of pricing strategies influence firms within its market structure to make the necessary adjustments to pricing depending upon the demand of it consumers, most importantly. According to Bobette Kyle (n.d.), “A higher or lower price can dramatically change both gross margins and sales volume” (para. 1). If a firm sets a price that is not appealing to the consumer then it has a higher chance of losing a sale or forcing a consumer to shop around for a substitute with a cheaper price tag. Ineffective pricing strategies may generate overstock which will then cause the profit to be stored in the warehouse until some type of action is taken to move the overstock through advertising or sale promotions (Kyle, n.d.). Pricing policies are critical depending on the type of market structure to avoid the business failure. The analysis of perfect competition, monopolistic competition, oligopoly, and monopoly market structures builds a the foundation on which pricing strategry is necessary to generate the optimal profit.
Perfect competition market structures depict a market were single firms do not effect the price and consist of many buyers and sellers. Additionaly, the firms offer homogeneous products with a demand that is highly(perfectly) elastic; giving them the opportunity of free entry or exit of the industry without extensive entry barriers. “A perfectly elastic demand curve is a horizontal line at the price” (Perfect Competition, n.d., “Demand”). “[Perfect competition] have make profit as their one and only goal” (Competition, n.d., para. 1). Moreover, perfect competition mareket structures mean they are price takers and have no market control or the buyers and sellers have no influence on the price or quantity of a product . Perfect competition does not truly exist rather it is used as a measurement against other market sturctures such as monopolistic competition, oligopoly, and monopoly (Competition, n.d.) .
Monopolistic competition is somewhat the same as a perfect competition market structure; the only difference betweent is “[…] perfect competition is charaterized by firms producing identical standardized products, monopolistic competition is marked by product differentiation” (Samuelson & Marks, 2010, pg. 265). There are a large amount of number of small firms that charaterize this type of market structure. Due to the inability to sell/produce identical products as the perfect competition market structure, there is a competitive arena which demonstrates that some market control is given to firms. Moreover, the competitve arena is not based on pricing of products instead on the differiantation of it (The charateristics of a monopolistically competitive market, 2009). “This means that an individual firm’s demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule” (The charateristics of a monopolistically competitive market, 2009, para. 2). Additionally, monopolistic market structures have a little more freedom of entry and exiting the industry. These types of market structures fall...