Optimal pricing varies from one market structure to the other. The marketing structures that are going to be looked at in this paper include the monopoly market, the perfect competition market, monopolistic market and oligopoly market.
Perfect Competition market
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In this market structure, there are many firms offering a homogenous product. Here each firm is a price taker since no firm offer a product that is seen to be superior. All the firms operating in this market have common knowledge of the product or market and there is free entry and exist in to and out of this market. No firm in this industry is able to set the price and therefore, they are price takers and the products are sold at the market prices determined by the forces of demand and supply. There is setting of output at the level where the marginal cost is equal to the marginal revenue. These firms earn normal profits in the long run and this is at the point where the marginal cost is equal to the average revenue (Anonymous: perfect competition, 2004). According to (Townley, 2006) the best example of the perfect competition market, taking the case in the US, is the bicycle industry.
This is a market structure in which there is only one seller but many buyers.
The monopolist charges any price that he or she deems to be appropriate. There is no competition in this market. In relative terms, the pricing guidelines in this market are straightforward as compared to other markets.
Just in the same way as those businesses in perfect competition, a monopolist follows economic rationality of carrying out the optimization of a profit function when subjected to particular constraints. The decision that is optimal here is to ensure equating of marginal revenue and the marginal cost. However, a monopolist is in a position change the market prices to levels which this monopolist can see as being convenient. A monopolist may also carry out price discrimination by charging those who are in more need of a product or service that is being offered and are ready to pay more. This behavior enables the monopolist to make more profit.
Monopolistic competition market
This is a market structure where there is a combination of the characteristics of both the perfect competition market and monopoly market. In this industry, there exist a large number of firms, there is differentiation of the product, there is free entry and exist, and the decisions are made by the firms in this industry on an independent basis.
In this industry, the firms engage in competition basing on differentiation of the product. Through differentiation, some firms may gain some sought of the monopoly power in the industry.
Under this market structure, in the case where a firm increases its price, it will have to lose some customers but not all of them. On the other hand, in the case where a firm decreases its price, it will gain few more customers but this can not enable it to gain the whole market share.
In this market, the optimal price is higher and the output level, as compared to the competitive market structure, could be lower. The profits that are gained by firms in this industry may not be necessarily higher and this is for the reason that there is an expenditure that is incurred by the firms to maintain the level of the monopoly power. The competition in which the firms in this industry engage in can not necessarily yield higher profits to the marginal firm but in overall terms, the firms will make the normal profits (Anonymous: Theory of monopolistic competition, N.D). An example of this market structure can be given by the cold drinks industry where we have companies like Coca Cola and Pepsi. These firms engage in optimal pricing. For instance, Coca Cola engages in differentiating its products by offering a wide range of the products.
This is a market structure in which there is domination of a limited number of firms. Since there are few firms operating in this industry, an action undertaken by any particular firm can easily be noticed by another firm or firms. The actions taken by one firm are influenced by those actions taken by other firms in the industry. In this market, firms carry out the maximization of the profit by engaging in production at the point where the marginal cost is equal to the marginal cost. Here, the firms are not the price takers but they are price setter instead.
Under this market, if any firm in the market increases the price above the existing price, the other competing firms will not increase their price and this firm will end up losing the market share. On the other hand, if a firm decreases the price below the current price on the market, the action to be taken by the competitors will be to as well decrease their price for the reason of maintaining the market share they have.
Taking examples of the firms operating in the oligopoly market, on the worldwide basis we can take the accountancy market in which this market is controlled by four companies that include Ernst $ Young, PriceWaterCoopers, Deloitte Touche Tohmatsu and KPMG.
These firms engage in optimal pricing.
It can be concluded that, in all the market structures, there exist varied characteristics that make the firms to come up with optimal pricing strategies that are unique for each market structure which enable the firms to remain competitive in the market.
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