Market Structures and Relating Pricing Strategies
This paper analysis’s the four categories of the market structure; perfect competition; monopolistic competition, oligopoly and monopoly marketing structures. It will also provide pricing strategies as they are specifically related to each market structure. Each market structure possesses it own unique pricing structure that every business follows to achieve its maximum profit. Some market structures pricing strategies are simple and straightforward while others can be complex. This paper exams how each market structure functions in the business world and how businesses set their pricing strategy. The case study also provides a real world example of a company’s pricing strategy for a monopoly structure.
Market Structure controls the goods and set the price by which consumer will pay for a particular goods or service. The four main marketing structures are perfect competition, monopolistic competition, oligopoly and monopoly. The all possess the own unique characteristics as it plays a different role in the economy. But they are all dictated by the law of supply and demand. One of the main characteristics that all four market structure share is competition. Some market structures have little to no competition while other may have a large number of competitors. The type of market structure is determined mainly on the amount of competitors in that particular industry.
Each unique characteristics of the four market structure allows them to be set apart from each other. The perfect competition refers to a market where neither the buyer nor the seller is able to manipulate the structure of the market. Should a seller decided to increase (decrease) its inventory, the increase (decrease) will not noticeably affect the market price. The process is the same for a buyer who increases (decrease) their demands the degree of change will not be significant enough to make a difference in the market structure. According to Samuelson and Marks “The key feature of the perfectly competitive firm is that it is a price taker; that is, it has no influence on market price.” The products provided in this market structure are homogenous and therefore easily substituted. “Together, these two conditions ensure that the firm’s demand curve is perfectly (or infinitely) elastic.” (Samuelson, 2012) This feature also allows for businesses to easily enter and exit this particular market structure. There are no barriers or restrictions that will prevent a business to stay once there is no more profit to be made. Two competitive industries that fall in the competitive market structure are clothing and water.
Unlike the perfect competition Monopolistic Competition products are slightly different which allows firms to set their own prices for their product. The products are in the same market line and the level of competition is the same as the perfect competition market. “The main feature of monopolistic competition is product differentiation: Firms compete by selling products that differ slightly from one another.” (Samuelson, 2012)
In a monopolistic competitive market a business is able to set the price of its product higher than its competition with the calm of producing a much more superior product. This pricing strategy will not necessarily cause the business to totally go out of business. According to Samuelson and Marks “The firm has some discretion in raising price without losing its entire market to competitors.” Businesses that operate in a monopolistic competition market are able to make independent decision when it comes to production and pricing of their product. Demands in a monopolistic competition market are moderately elastic in contrast to the perfect competition market.
Because there are few barriers to enter a monopolistic competition market other firms tend to enter a market...
References: Feulner, Edwin. (2003). US Postal Service: A Government Protected Monopoly. Retrieved from http://capitalismmagazine.com/2003/09/us-postal-service-a-government-protected-monopoly/
Parisi, F. & Depoorter B. (2003). The Market for Intellectual Property: The Case of Complementary Oligopoly. Retrieved from http://apps.americanbar.org/antitrust/at-committees/at-ip/pdf/abstracts/27_parisi_the_market_ip.pdf
Perlman, Seth. (2012). United States Postal Service. Retrieved from http://topics.nytimes.com/top/reference/timestopics/organizations/p/postal_service/index.html
Samuelson, W.F., & Marks, S. G. (2012). Managerial Economics (7th ed.). New Jersey: John Wiley & Sons, Inc.
True To Business. (2011-2012). Market Structures. Retrieved from http://truetobusiness.com/economics/market-structures
United States Postal Service. Postal History. Retrieved from http://about.usps.com/who-we-are/postal-history/welcome.htm
Whittington, O. R. and Delaney, P. R. (2011). Wiley CPA Exam Review 2011, Business Environment and Concepts. Hoboken, NJ: John Wiley & Sons.
Kelly B. Olds, “The Challenge to the U.S. Postal Monopoly, 1839–1851,” Cato Journal, Spring/Summer 95. Retrieved from www.cato.org/pubs/journal/cj15n1-1.html.
Please join StudyMode to read the full document