Market Structures and Pricing Strategies
Market Structures and Pricing Strategies
In Economics, market structures are broken down into four main structure types, Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. This paper will elaborate on how they are broken down by variables, such as how many buyers and sellers, cost and direct competition. The price for the consumer is affected under these structure types and this paper will explain the four different types and how the consumer price is affected. After each of the four structures is broken down, I will use Apple as an example and explain its complex market structure. Perfect Competition has a large number of buyers and sellers in a market where the good or service is identical. This requires the seller to accept the going price on their product. The seller is not able to control the market price. The good or service is very common and the information of the good or service is well known by the consumer. Due to the large number of sellers the consumer is able to choose, this can be dependent on price and overall product quality. The price of the good or service is not controlled by market price, but only by supply and demand. An example of perfect competition is a farmers market where sellers are selling the same tomatoes. Monopolistic Competition has a large number of buyers and sellers, but the good or service is similar, not identical. The seller has some choice of in the asking price of the good or service, but not drastic change in price over the market price. The consumer typically does not have all the information about the good or service. An example to think of, as a monopolistic competition is shoe manufactures. Oligopoly has a large number of buyers, however there is a handful of sellers. The good or service is very similar, and the consumer does have information about the item. With only a handful of sellers the price is typically influenced to maximize profits. This has been done and is called market sharing, or collusion, as used by OPEC (Organization of the Petroleum Exporting Countries). Monopoly can have a small or large number of buyers, but only have one seller of a good or service. There is no competition for the good or service so the seller has complete control of the market, and the seller will use this power to maximize profits. The seller has the opportunity to decide the amount of goods and service to provide, which can be used to alter supply and demand to their benefit. An example of a monopoly would be pre 1911 Standard Oil that had a control of the oil business in the world, but was broken up into smaller companies. The United States Supreme Court ruled this to be an illegal monopoly. The pricing strategies differ for the four main market structures. Perfect competition is primarily set by market value. The reason for this is the large amount of buyers and sellers. If a seller was to raise the price, the buyer would have many other choices found at the market price. Monopolistic competition has many buyers and sellers, just as perfect competition does, but the seller’s good or service is not identical. This allows for the seller to adjust the price over the market price, but the same rules apply if the seller raises the price to drastic as perfect competition. Oligopoly is most commonly thought of the larger companies who have primary control of the market and can influence the price to maximize profit. They are able to do this by making it difficult for smaller companies to enter the industry. The price that they can manipulate out of consumers is normally because these larger companies have a similar business plan. Monopolies control a 100% of their competing market, which allows them to demand much higher prices. They can manipulate the supply and demand of their product driving the price up within means of what can be considered illegal. The...
References: How does Apple do it? Case study on Premium Pricing. (31 March 2012). Retrieved November 14, 2013, from http://www.smallbizviewpoints.com/2012/03/31/how-does-apple-do-it-case-study-on-premium-pricing
Liesman S. (28 March 2012). CNBC Survey: Feeling Better, but Still Leery About the Economy. Retrieved November 14, 2013, from http://www.cnbc.com/id/46838034
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