In the UK, there are factors which affect how a company chooses to price their products. This is known as product pricing. Having a good product pricing strategy is essential to maintain a high profit margin, creating brand loyalty or superiority and remaining competitive. We will discuss the factors affecting product pricing, to see why it is so important for firms to take into different factors and variables when deciding their product price. Factors which affect the product pricing can be broken into two groups – internal factors and external factors. Internal factors are factors which can be controlled by firms such as firm objectives. External factors can’t be controlled by firms so the firm can’t do anything to change it. Different firms are running in different markets and market structures can be classified into two main types, perfect competition and imperfect competition which include monopoly, monopolistic competition and oligopoly. Market structure is thus an external factor because it is not determined by the firm. P
In perfect competition, all the firms are price takers. No one has the power to control the market. The price is determined by the intersection of demand and supply. The demand curve is horizontal and the supply curve is the same as MC curve. So they produce at Q1 and the price is P1. If we switch to a market which a monopolist dominates, monopolist produces at the profit maximizing point where MC=MR. the price would be higher at P2 and the output would be lower at Q2. It shows that a monopolist can charge a higher price than that of a firm in perfect competition. Thus they earn a supernormal profit....