Analysis of Market Structures and Pricing Strategies
The markets today are so complex and deal with so many variables it can be difficult to understand just exactly how they operate. In the following I will reveal the different kinds of market structures along with their different pricing strategies. Relating to these topics, I will focus on the importance of cost, competition and customer. 1. Analysis of different market Structures Different market structures are basically compared by the number of competing firms and the extent of entry barriers. ) A perfect competition structure has zero entry barriers with a lot of firms. This means it has a large number of competitors, with each firm has only a small amount of the market share. A perfect competition structure has no single firm that controls the market or its pricing. Another important aspect of a prefect competition structure is that each firm sells the same exact product(s). Keep in mind that there are no barriers for new firms to enter the market which means that a good number of new firms tend to come and go. (Adams and Brocks, 200). ) Monopolistic competition is very similar to a perfect competition in the sense that there are many small companies competing with zero entry barriers. The key component that distinguishes it from a perfect competition structure is that they produce different products, unlike perfect competition where the firms produce the same or very similar products. (Samuelson and Marks, 2010). c) Oligopoly structures have moderate to high entry barriers with a few number of firms. Here there are limited companies that control the market.
This type of market structure has a competition which they must constantly be working on improvements to compete with rivalry companies. d) A monopoly has high entry barriers with only one firm. This single firm also doesn’t really have any competitors. In a monopoly, this one firm has the power to raise their prices as high as they please to increase their profits. This of course is only done to a certain point to where their clients will still pay the price for their products. Again, with high entry barriers they are not bombarded with other firms coming and going from their market. (Samuelson and Marks, 010). 2. Analysis of pricing strategies specifically related to each type of market structures a) In a perfect competitive market, the sole determinant of pricing is the market demand and the supply curves. A demand curve refers to the total amount that consumers will pay for their products. The supply curve is the total amount that the producers can actually make to supply to the company at the price they can afford or are willing to pay. Another factor in a perfect competitive market structure is the equilibrium price which is basically when the supply of the market meets the market demand of the consumers.
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Anther unique feature of a perfect competition market is that it is a price taker. In essence, this means that the company doesn’t have any influence on the price. Again, this can only be caused through a market that has a large number of firms with identical products. (Samuelson and Marks, 2010). b) In a monopolistic competition structure, although there are numerous firms, they carry different products. Due to product differentiation, each company is able to somewhat control their own pricing. c) In an oligopoly structured market, pricing seems to be a bit more complicated.
The reason for this complication lies in the fact that each company can set their own prices, which in turn changes other firm’s prices because here profit relies on competitive pricing. Typically here, the lowest priced firm wins so it stirs up things such as price wars. (Bulow et al, 1985) d) In a pure monopoly structured market, they are the only company with extreme entry barriers to prevent others companies from coming in. Due to the face that there is only being one company, they can pick their own prices.
A firm has to be careful here though so that they don’t raise their prices so high that people don’t want to purchase them. The key is getting the demand high so that they can keep the price higher and make more of a profit. With monopoly markets, you can have two different cost pricing. The first is average-cost pricing which means that you can determine the appropriate price by the demand and the average cost curve. Marginal-cost pricing is the outcome of using average cost pricing so that it meets the demand and the marginal cost curve. Nelson, 2005). 3. Case Study The day care market is a prime example of a perfect competition market. Again, this type of market has a large number of firms without any barriers. Also, no one company controls price; supply and demand are the price determinants. One specific example would be Amanda’s Day Care. In order to determine what to charge, she has to figure the consumer demand or the marginal benefit curve. For example, if Amanda charges $4. 00 an hour with 8 million hours purchased each week, gives us a consumer surplus of $32 million. Samuelson and Marks, 2010). 4. In conclusion, pricing strategies greatly vary according to different market structures. In order to make the most of your company and the highest profit possible, you have to take these different approaches into consideration. The structure of these different marketing strategies are not the same and therefore their pricing guidelines cannot be the same or they would be efficient for all types. All things related, all pricing strategies have to take into consideration 3 valuable aspects: cost, competition and the customer.
Each one of these variables greatly affect the pricing strategies each firm will decide on. You must keep your prices at a level where you can make a profit yet not too high that you will lose customers. You must also keep your prices at a level where they can compete with other firms for pricing and products. Lastly, you have to keep these variables under control and on top the market as much as possible so that you can cater to your customers’ and their needs as efficiently as possible.