Pricing strategies and market applications

¶ … market structures and the pricing strategies which are specifically related to each of them. The introductory section of the paper gives an overview of the four major types of market structures and explains the main features which draw distinguishing lines between them. These major types of market structures are perfect competition, monopolistic competition, monopoly, and oligopoly. The second section discusses the pricing strategies which are used by competitors in each of these market structures in order to compete with the other competitors or operate in a profitable and competitive fashion. A case study has also been included which gives a real life example of the market structure and pricing strategies of a specific company. The paper concludes by giving summary and key findings from the whole discussion.

Introduction to Market Structures

Market structure refers to the number of competitors operating in a particular industry and the level or intensity of competition among them. Market structure is more of an economic concept than a marketing concept as it directly deals with the pricing strategies which companies operating in the same industry formulate to compete with each other, the major costs that influence these pricing strategies, the number of buyers and sellers that play an important role in making the competition more intensive, the patterns of entry and exit of competitors, and the availability of substitute products (Boyes & Melvin, 2012). Modern economists define market structure as a set of characteristics that collectively designs the competitive environment within an industry. Market structure not only takes into account the local businesses that are operating in an industry, but also the international corporations that are either trying to penetrate in its markets or have established their presence and have become an equal participant of the whole industry (Gitman & McDaniel, 2009).

Although the level of competition is mainly characterized by the businesses which have the greatest market share in an industry, but the significance of a large number of small competitors cannot be ignored when the market structure of that industry is discussed. Other main features of market structures include barriers to entry for new businesses, economic efficiency which makes the competition easier or stiffer for the participants, profit maximization strategies, the impacts of competition in the short run and the long run, and the use of product differentiation strategies by the competitors (Mankiw, 2011).

Types of Market Structures

There are four major types of market structure: perfect competition, monopolistic competition, oligopoly, and monopoly. Each of these market structures has its own features, characteristics, intensity of competition, and pricing strategies used by the competitors to operate according to the specific type of competition present in market (McConnell, Brue, & Flynn, 2009). These market structures are now comprehensively described in the following section:

1. Perfect Competition

Perfect Competition (also called Pure Competition or Perfect Market) is an ideal market structure in which there are a large number of small and large-scale competitors offering identical or homogenous products at same prices. The competitors operate in the presence of a stiff competition from the top-notch market leaders as well as from the new entrants. However, none of the competitors holds a large market share due to an extremely large number of competitors. The markets are quite open to new businesses due to the absence of barriers to entry and strict country penetration mechanisms. The governmental policies and regulations are also very relaxed for licensing, registration, or licensing for businesses in a perfect competition. The prices of products and services offered by local and international businesses are purely determined by the supply and demand forces (McEachern, 2008).

Due to an open market competition, substitutes are also found for almost every product in the market. In a perfect competition, the sellers and buyers have full knowledge of prices, technology, and processes. All the competitors in an industry use the same production techniques and technological processes which also keeps their costs of production at the same level. Therefore, they cannot manufacture their products faster or cheaper than other competitors in the industry. Due to extremely identical product and service offerings, the competitors do not generally need to advertise them on expensive media in order to attract potential customers. However, they use frequent advertisements in order to create awareness of their new offers (Taylor & Weerapana, 2009).

2. Monopolistic Competition

In contrast to perfect competition, there are three different market structures in an imperfect competition; monopolistic competition, monopoly, and oligopoly. Monopolistic competition has almost the same characteristic as perfect competition but differs due to the heterogeneity of the products, i.e. The products offered by the competitors are not identical to each other. The market in a monopolistic competition is composed of a large number of small scale competitors with no major holder of the market share. The competitors make variations in the features and quality of their products in order to make them look different than other products in the market. Sometimes, the products offered in a monopolistic competition are referred to as close substitutes to each other. They are offered to fulfill the same consumer needs and requirements, but vary with the level of satisfaction which each product gives to its customers after its purchase. The competitors manufacture their products using same technological processes but variations in the features and quality are made possible through innovative procedures, quality management techniques, and operational excellence. Therefore, a highly competitive business environment exists for the participants of a monopolistic competition (Tucker, 2010).

Monopolistic competition offers very limited or no barriers to entry and exist to the new and existing firms respectively. The penetration in the industry may not be as easy as it is in a perfect competition, but firms do not generally face any strict governmental policies or regulations due to an open competition in the industry. The buyers in a monopolistic competition market have a complete knowledge of technologies and pricing strategies which are used by the manufacturers. It facilitates them in selecting the best brand of their choice and making better purchase decisions on the basis of different parameters.

3. Monopoly

In a Monopoly market structure, there is only one producer or supplier of a particular product or service in the entire industry. Monopoly may be created by a single firm or a group of firms that collectively dominate the market and drive the supply and demand forces according to their own policies and strategies. Monopoly exists due to high business set up costs or critical risks and uncertainties which may exist in a particular industry and restrict new businesses to emerge as competitors. Due to the monopoly power and full control over the industry patterns, the monopoly firm or group may charge a high price or reduce the quality of its products whenever it intends to do so. Monopoly market structure is often discouraged by the Governments and International regulatory authorities. It is because a monopoly does not promote an open competition in the industry which strongly discourages new investments in the country (Hall & Lieberman, 2010).

Sometimes, a government itself creates monopoly in some sector of the economy. It is done when the government feels that a particular sector should not compete with the private corporations in the country. A good example of this monopoly is electricity generation capabilities of a country which are totally controlled by its government. A similar monopoly is created by the government when it intends to take control of the natural resources extracted from the lands of a country. The oil and gas sector of Saudi Arabia is the best example of such type of monopoly where the full control of the industry is in the hands of the Saudi Government.

4. Oligopoly

Oligopoly is the fourth major type of market structures. It is classified in between the monopolistic competition and monopoly. Oligopoly refers to the level of competition among a few large competitors in an industry. There are also a large number of small competitors, but they do not have a major role to play in the competition or driving the demand and supply forces for the economy. The market in an oligopolistic competition is said to be highly concentrated. There barriers to entry or exist in this type of market structure are higher than they are in a monopolistic competition. However, new firms can enter in the industry if they use effective market penetration and promotion strategies, The entry of new firms facilitates an open competition between the few market leaders and numerous small competitors from the local and international markets. The demand and supply factors are driven by the market leaders which hold the major market share in the industry. These market leaders have a great influence on the entire industry with respect to the pricing strategies and quality of products (Mankiw, 2011).

The level of competition between these few firms is also very high which requires them to stay on the most competitive edge in order to compete with other top rivals in a profitable fashion. Oligopoly is the most common type of market structures which is found in most of the industries in a developing economy. This market structure is also influenced by some important factors from the external environment, including political, governmental, social and demographic, economic and technological forces. Due to an extremely stiff competition in the industry, the top industry rivals (the oligopoly participants) have to use expensive advertisements and marketing campaigns in order to attract the customers towards their products. The competition also requires them to expend a large portion of their budget on Research and Development section which helps them in manufacturing innovative products according to the requirements of the customers (McConnell, Brue, & Flynn, 2009).

Pricing Strategies in different Market Structures

The competitors in each type of market structures use different pricing strategies which are either determined by the supply and demand forces or by their own control over the pricing mechanism. Pricing strategies are among the major factors which distinguish these market structures from each other.

a. Perfect Competition:

In a perfect competition, the customers are fully aware of the prices which are prevailing in the industry. They have to keep the prices of their products in line with the prices charged by the whole competition. If some competitor increases the price of its products in a view to increase profit margins, the customers totally reject this increase and immediately switch to other competitors' products. This thing makes it impossible for a competitor to make high revenues by charging high prices from the customers. They are simply the price takers in a perfect competition as they cannot charge prices of their own choice and have to accept the ones which are charged by other competitors. The transportation costs are also minimal as all the sellers operate in a single market and get supplies of raw material from same locations. It also facilitates equal pricing strategies by all the competitors. Generally, the competitors in a perfect market promote their products with the strength of their brand image which helps the well-established competitors in attracting potential customers towards their brands and giving a tough time to the new competitors (McEachern, 2008).

b. Monopolistic Competition:

Unlike perfect competition, the competitors in a monopolistic competition charge different prices for their products which are based on the features and quality of their products. Hence, they are not price takers in the industry. The pricing strategies used by one competitor may affect its top rivals in the industry, but they do not have any impact on the overall market structure. As the buyers have full knowledge of the pricing strategies of different competitors, they choose a brand which best meets their requirements within the available budget. In a view to attract the customers, sellers expend a huge amount on the marketing and promotional efforts for their products (Taylor & Weerapana, 2009). It puts a heavy burden on their profit margins which they have to manage by selling the products at higher rates. Sometimes, the competitors in a monopolistically competitive market act like monopolies which help them in charging the highest price for their products as compared to all other competitors in the industry. This short-term monopoly prevails when some competitor introduces some astonishing feature in its product which then becomes its core competency unless some other competitor copies this feature and ends that competitor's leadership. In the long run, no competitor can charge a high price for its products due to great competitive pressures from a large number of competitors (Boyes & Melvin, 2012).

c. Monopoly:

Being the only producer or supplier in the whole industry, a monopoly has full control over price mechanism and quality of its products or services. It is the only price setter in the industry. The prices of products in a Monopoly market structure are very high due to the absence of competition and slack control of the Government. Therefore, the pricing strategies of a monopoly firm or group are totally based on its intentions to make higher revenues with the same line of products. The customer base for a monopoly firm is also strong and stable due to non-existence of competition (Hall & Lieberman, 2010).

d. Oligopoly:

As the competitors in an oligopolistic competition produce both identical and differentiated products, the prices of these products also vary according to their features and quality. Generally, the pricing strategies of the few large competitors of an oligopoly market are based on their competitiveness in the industry. For example, if some competitor offers the best product in the market with respect to its technology, features, or design, it can charge the highest price from the consumers. However, the price range of products is set by keeping in view the social and economic forces in the country which are directly linked with the consumption patterns and preferences of the consumers. The buyers in an oligopoly market have full knowledge of the products; their quality, technology, and prices charged by different competitors. Therefore, they make purchase decisions after evaluating all the alternatives or substitute products (Gitman & McDaniel, 2009).

Market Structure of Apple Inc.

Apple Inc. -- a well-recognized name in the world's electronics, IT, and cell phone market operates in an oligopolistic market structure. It offers a wide range of products including personal computers, laptops, smart phones, music players, software, printers, digital cameras, computers and cell phone accessories, etc. Each of these products has a separate market segment to target. The overall competition in the world's electronics, IT, and cell phone market is Oligopoly in nature as there are only few large competitors that have dominated the market in each of its segments. For example, the major competitors of Apple Inc. For its Macintosh systems are Microsoft, IBM, Dell, HP, and Acer. The competitors for Apple iPhone are Nokia, Samsung, Sony, and HTC. Similarly, the competitors for other Apple products like iPad, iTunes, digital cameras, etc. also operate as top industry rivals and make the market structure purely oligopoly in nature.