Product pricing is the price fixed upon a product by producers or suppliers to achieve sales in order to gain profit. There are a number of factors affecting product pricing in the UK. The first factor is the structure of the market. Oligopoly is a type of market that can be seen in the UK, for example, electricity and gas supply industry in Britain. Oligopoly is a market structure where there are few enough firms to enable barriers to be erected against the entry of new firms. Firms will come together (collude) and try to maximise their joint profits either by a formal agreement or tacit. However, formal agreements are illegal in the UK and it may also be unstable to due incentive for individual member firms to ‘cheat’.
Non-collusive oligopoly is when firms do not collude and work independently for their own businesses. Firms are, however, interdependent when it comes to pricing policy. There is a variety of models to explain non-collusive oligopoly. The first model is the Cournot model where one firm changes its output, assuming their rival firm will keep their output fixed. There is also the Bertrand model which is when one firm changes its output in assumption that their rival firm will keep their prices fixed. Lastly, the kinked demand theory shows how price reduction of a firm is followed by others but not an increase in price. Figure 1 shows the kinked demand diagram but it does not show how price P1 and quantity Q1 came to exist.
Another type of market structure that can be seen in the UK is monopoly. An example will be Royal Mail, which was monopolising the postal service in the UK for 350 years. In a monopoly structure, demand for a product is relatively inelastic at each price, therefore, a monopolist can raise the price of its product and consumers will have no choice but to adhere to it as there will be no other firm to turn to. A monopoly firm is the ‘price maker’ but it is constrained by its demand curve. Monopolists can determine...
References: * http://www.guardian.co.uk/money/2008/may/21/householdbills.britishenergygroupbusiness
* Russell, Walters, Young (2010) : UK Economy: Microeconomics and Macroeconomics, page 4, 63-64, 340, 351, 403
* Russell, Young : Lecture slides : Topic 1, Topic 2, Topic 2a, Topic 2b, Topic 3
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