pricing strategies influencing market structures

pricing strategies influencing market structures

Abstract

This discussion highlights the different pricing strategies influencing market structures. Market structures include monopoly, perfect competition, oligopoly, and monopolistic competition. The market structures are what determine certain products’ pricing powers in different companies. Alongside the descriptions are several firms matching the market structures with the products produced and the barriers that may influence exit or penetration into the market. Because of the different market structures’ nature, they also have different strategies of pricing. Some arrangements may borrow pricing strategies from others, hence multiple-applicability. A real-world case of personal laptops is used to explain how it may fit into the different market structures described and the relationship to the pricing strategies as well. It is seen that the industry of personal laptops fits three of the discussed market structures, including monopoly competition, perfect competition, and oligopoly.

Introduction

A market structure refers to a primary characteristic that makes the buying and selling platforms for services and goods. It is common sense that where there is a market, there are also products, buyers, services and sellers, product differentiation, competition, and the ease of exit or entry. Dnes and Rubin (2010) go-ahead to explain that market structures are factors influencing both the sellers’ and buyers’ behaviors. Therefore, they also impact the pricing of certain services and commodities in the market.

Additionally, the environment of the market may affect the commodity supply as well as create entry barriers. Besides, fixing a price is one primary managerial function. It is often monitored and reviewed to ensure that companies make reasonable margins of profit. Conditions in the market are what determine the pricing criteria and marketing structure to be utilized. It is impossible for a business to operate in isolation. For a firm to work effectively, a platform for marketing is required. Choosing a market structure that fits your business is the first step to getting significant returns. In this discussion, notable market structures will be highlighted, digging deeper into their pricing strategies together with relevant examples.

1. Perfect Competition

1.1 Description

Perfect competition type of market structure is characterized by the following:

• The market involves a lot of sellers selling products that are standardized. The firms involved are large in number, and with a significant number of sellers, so are the buyers.
• In the market, the share belonging to the total output sold is small. This is because both the firms and consumers countercheck the prices despite their indirect market influence. Maintaining a customer for a firm would be mean selling at the current market price or lowering it all together.
• With the availability of price information, profit opportunities, and technology, firms in this type of market structure cope up with the dynamic conditions. Since customers are aware of the prices, it is paramount that the products be sold at a typical rate. Lack of market control has enabled an open platform for a buyer to go for the less expensive products. If very high prices are set by a particular firm, then it may make a few or no sales altogether.
• The firms in this market structure are not afraid of competition, and this is because no competitor decision can affect the market price.
• There are minimal entry and exit market barriers. It is easy for the firms to get into the market and choose to leave at their pleasure.

1.2 Pricing Strategies

The firms in this market can be referred to as price takers. Why? Because the forces determining the prices are supply and demand, and hence, the market shares cannot be controlled by any business. Optimum operation is achieved when there is market equilibrium, meaning the supply is equal to demand. It is, therefore, impossible for one seller to influence product prices.

This market structure is non-existent in the real world. However, some businesses may be qualified to be close to the perfect competition type of market structure. Take the agricultural market; for instance, similar fruits and vegetables are made available in the grocery store by farmers. Individuals also have the freedom to grow their fruits and vegetables. This influences the buyers who will quote to get these products. Because a grocery store has tagged the products, the buyers are aware of the prices, and if they do not want to get the goods from ne seller, they may move to the next. Some fruits and some farm products are seasonal. Therefore, when there is a surplus of products (high supply), then the prices go down so that the excess inventory will get out of the market. When the supply is cut, prices shoot to the roof hence;, great adaptation to prices is needed.

Considering the last few years, telecommunication companies have experienced intense competition. Companies in this industry supply satellites, cables, and other devices used for communication. In the same period, networks used for broadcast have exercised perfect competition market structures. Platforms in social media such as Google, Facebook are among the oldest, which was followed closely by the boom of Twitter, Instagram, and WhatsApp. These have excelled in perfect competition.

2. Monopolistic Competition

2.1 Description

These firms cut across the perfect competition market structure and monopoly. The main feature is monopoly since they can control their products’ prices. Every firm produces its unique and precise products, and product differentiation is common in this market structure (Zhelobodko et al., 2012). Differentiation is in four types, including physical differentiation by size, color, design, and shape; marketing differentiation through distinctive packaging styles; differentiation by human capital through unique uniforms, training level, and employee skills; Distribution differentiation, for example, through mail orders or online shopping. Many firms sell each product hence, becoming a market structure with perfect competition. Some differentiation, however, produces utility less likely than it generates more unnecessary waste like excessive packaging. Likewise, to the perfect competition market structure, freedom of exit and entry is high with little or no barriers (Zhelobodko et al., 2012).

A large number of firms exist, supplying goods to a small market share demand, and they include restaurants, pubs, hotels, and hairdressing consumer services. Firms produce one product variety. It is important to note that demand is elastic, and firms are free to increase their market prices. There are substitutes in this market, and buyers, if not pleased with one’s pricing, would switch to another. However, for market cubs (new sellers with new brands or services) often face difficulty when penetrating the market because it is hard to put up a stronger reputation that those who have already established theirs. As a competitive economic model, it is more realistic than perfect competition. Many common and familiar markets exercise this type of market structure.

2.2 Pricing Strategies

The company producing the products is in charge of setting the prices in the monopolistic competition. The power of monopoly is what makes this possible. Companies in this type of market structure can produce products they wish and place a price tag on them without affecting the market (Zhelobodko et al., 2012). Their pricing strategies are based on short and long-run approaches that involve massive investment in marketing campaigns to keep their share of the market. With this, the companies will try to develop what differentiates their product from others that may be similar by using branding, advertising, customer segmentation, and selling with a personal touch. Sometimes advertising may be wasteful since most of it is informative and not persuasive (Zhelobodko et al., 2012).

A perfect example is the toothpaste and breakfast cereals manufacturing industry. Toothpaste and breakfast cereals such as cornflakes gain their share of the market through intense advertising and brand imaging. They alter their physical and also the composition of their products. They also include special packaging to gain market advantage and product superiority. Also, supermarket outlets and fast food producing companies are exercising monopolistic competition. Diverse brands are produced by sellers to appeal to the market niche with the most significant number.

3. Oligopoly

3.1 Description

Oligopoly can be termed as monopoly’s plural form in that few sellers between three to ten occupy larger market shares accounting for more than half of the sales. Market sharing between a few firms makes the market to be highly concentrated (Vogelsang, 2013). Products sold may be standardized or differentiated, and some of the firms have larger market shares compared to others. To give examples of the oligopolistic market’s differentiated products include automobiles, cigarettes, and beer. Aluminum is an example of standardized products. In the United Kingdom, there are only four fixed broadband suppliers, including BT, TalkTalk, Sky, and Virginia Media, owning the largest market shares. Also, the fuel retailing market is dominated by only six suppliers, including Esso, BP, Shell, Sainsbury, and Morrisons.

Entry barriers protect oligopolistic structures; hence, the difficulty for new sellers to penetrate the market (Vogelsang, 2013). This is present when only a few numbers of firms can handle the supply of an entire market at a low-cost average in the long run compared to other firms. The following are some of the constraints divided into natural and artificial barriers explained further:

• Natural Barriers
• Large scale economies of production have already been exploited, leaving no room for new entrants. There is also control or ownership of a primary resource, for example, an airline controlling access to a particular airport. High costs of set up which delay profit possibilities, and increase output of break-even. Also, before entering the market, new entrants are required to invest heavily in research as well as development to compete fully.
• Artificial Barriers
• These involve price lowering to push predators out of the market. Another barrier is limit pricing, where a low price is set for prices with a high output so that new entrants cannot profit at the same expense. Incumbents have superior knowledge; hence, they have more power and significant competitive advantage. There is also buying of a rival’s shares in sufficient amounts to gain an upper-hand interest or buying them out completely. In addition to patents, contracts, and exclusive licenses, they also utilize loyalty schemes such as club cards that assist in retaining customers in oligopolistic market structures; hence, detaining new entrants.

3.2 Pricing Strategies

The strategies of pricing are interdependent on another’s actions for companies in this type of market structure. Companies are watchful or sensitive to their competitor’s changes in price; thus, it is safe to say that their competitors determine the costs. Rates have to be altered from time to time to maintain large market shares and competitive advantage. Companies sell their products at competitively low prices. On the other hand, consumers benefit maximally, even if the company may not be profiting.

It is noteworthy that companies only impact the market but do not control the prices. The firms in this market structure type focus on competitive aspects such as better service provision, product differentiation, and intense advertising. Pricing strategies are all founded on market manipulation, collusion, and strategy at the end of the game. Oligopolies’ nature and how they price their products can be better explained with game theory (Byun, 2014). The firms monitor their competitors’ prices for appropriate adjustments. For example, if a company decides to sell its products at lower prices and the others do not notice, the company trading at a lower price will increase its sales at the expense of others. This can also be explained using the analogy of the prisoner’s dilemma where parties choose to protect themselves and act in their self-interest (Byun, 2014). Prices can only be set after critical, strategic, and interactive thinking. They have to choose whether to collude with the rivals or compete with them; lower, raise, or keep the prices constant or not to implement a strategy or to wait for their opponents to see what they would do. Coming first or going second are called the advantage of the first and second mover. It may pay to be first and take advantage, giving others a head start on the profits, but it may also matter to wait for others to implement it, then improve on them and come up with a way to use the same strategies to undermine them. The oligopoly’s fate of pricing strategy is interdependent on the major firms, despite the influence of economic elements such as customer preferences and tastes (Vogelsang, 2013).

Coca-cola was founded in 1886, and ever since, its main goal has been to be the best distributor of quality beverages. Coca-cola is known worldwide as the biggest soft drinks manufacturer. Currently, it sells over five hundred brands to more than two hundred company depots all over the world. Pepsi follows closely behind as its competitor making this soft drinks industry a duopoly. Coca-cola is always on its toes to demand because it is dependent on the demand curve to know how to control its prices.

Coca-cola takes advantage of this duopoly to maximize profits. How? On Christmas, Kwanzaa, Halloween, and other holidays, Coca-cola uses predatory pricing where it reduces their prices to maximize and increase sales and profits, respectively (Henry, 2012). Coca-cola utilizes the cut-throat approach to outdo Pepsi and attract more consumers and maintain their loyal ones. When the competitor is no longer a threat, it re-raises its market prices to normal. The low prices discourage new sellers and bar them from entering the market. Coca-cola and Pepsi have signed a cartel contract to avoid losing the share of the market to potential competitors (Henry, 2012). This duopoly can be likened to a monopoly in this soft drinks industry.

4. Monopoly

4.1 Description

Monopoly is a word with a Greek origin; mono meaning single or one and ‘polein’ to mean seller. As the name suggests, a structure like this exists when an industry has only a single product seller with no close competitors or substitutes (Schmidt, Spann & Zeithammer, 2015). This structure is commonly experienced less in national markets than in local markets. There are various barriers to market entry, and they include:

• Firm’s statuses to be single sellers are granted by the franchise and governmental license, as evidenced by the communication and transport sectors as well as public utilities like energy from electricity.
• Natural monopoly. This is where a company is capable of eliminating its competitors because of lowered costs of production.
• The unique ability, knowledge, and owning the entire resource supply gives a firm monopoly.
• Powers provided by copyrights or patents. India and the United States, for example, give businesses and companies exclusive rights to vendor their inventions for a specific period (Schmidt, Spann & Zeithammer, 2015). Some companies have patents that would grant them permission and authority to sell up to ten years at most. However, as described, the powers are only short-lived (limited periods or years). A company may put up barriers against competitors who want to gain market share.

4.2 Pricing Strategies

Unlike perfect competition, monopolies make the prices. The set their prices but are under the government’s regulation. Their primary objectives are maximum profit and eliminate competitors’ entry to their supposed market. They do this by:

1. a) Segmenting the market

This is a market division into more than two segments, and based on purchasing power, different prices are presented to different buyers. This is a strategy that requires strict control to ensure there is no leakage experienced between or among the segments (Bergemann, Brooks & Morris, 2015).

Multipart pricing

To the same customer, the same products are charged differently. When the first block of produce is introduced at a high price, the second batch’s price is lowered. The seller incurs the higher cost of a transaction.

1. b) Discrimination by perfect price

This is a strategy whereby monopolies charge differently each excessive unit bought by every customer. For example, an electricity supplier, since they are the only company of their kind existing in a country, they charge highly for their first block but lower prices for the second unit bought. This also results in price discrimination (Bergemann, Brooks & Morris, 2015).

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5. Case Study

Personal Computers

Personal computer vendors range from Apple, Lenovo, Dell, Hp; different sellers all selling hardware constituents. Therefore, the demand for personal computers is made highly elastic. Considering this market structure, we can conclude that personal computers fir into the group of perfect competition. The fact that many sellers exist is a clear indication that entry is not that restricted as compared to monopoly. The sellers can penetrate the market and are therefore referred to as price takers. It is common knowledge that personal computers cannot run without software parts for optimum operation. This is what differentiates individuals in this personal computer market structure. They have and use different systems of operations. The central systems of operation include Linux, Windows (Windows 7,8,9, 10…), and IOS for Apple.

The personal computers selling windows compete with themselves. Those personal computers utilizing Linux and Apple’s IOS have differentiated their products largely. To them, this makes it a monopolistic competition rather than the aforementioned perfect competition. This market structure enables them to be price makers and set their prices. Personal computers using Linux and Apple’s IOS are charged higher compared to low priced personal computers using Windows as their operating system.

It is interesting how personal computers exhibit three market structure types, including monopolistic and perfect competition and oligopolies. It is, therefore, safe to say, subsets for personal computers exist for demand elasticity. Consumer’s demand from manufacturers for personal computers is highly elastic, while the demand from manufacturers to suppliers is inelastic. Demand’s elasticity influences prices for each of the market structures explained above.

6. Conclusion

The pricing strategies for each market structure are affected by the elasticity of demand. In the perfect competition market structure, sellers are large in number hence, making firms in this type to be takers of the price because they have no power over prices. Demand is not as elastic in monopolistic competition brought about by product differentiation, and thereby, companies have control over product prices. Demand is also inelastic in the oligopoly market structure. There are fewer companies in this type; hence pricing is interdependent. When a company has no substitutes (only a single firm), then they are price makers. Despite the different market structures, the strategy of pricing for every firm is often aimed at profit maximization….