Market Structures and their Different Pricing Strategies

Abstract

 When it comes to the business world, there are four main market structures that are typically utilized. These market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. This paper is going to look further into each of these market structures and define them, as well as look into the pricing strategies that each of them use. Towards the end of the paper there is going to be a real life case study that will review these market structures and pricing strategy in order to provide a better understanding of how this works.

Market Structures and Their Different Pricing Strategies

 In the world of business and economics, marketing structures are considered to be the structures that assist with connecting buyers, sellers, products and services to one another. Some of the elements that market structures connect and work with are production levels, different forms of competition, different forms of products and services, ease of entry and exit from the marketplace, buyers, sellers, and even the agreement between particular agents (Hardison, n.d.). Depending on what type of market structure a company is either choosing to use, or is forced to use, will determine what type of pricing strategy they are going to need to utilize. To look further into the different pricing strategies, there needs to be an understanding of the basic market structures, which are perfect competition, monopolistic competition, oligopoly, and monopoly.

Perfect Competition

 Perfect competition occurs when there are many buyers and sellers, no particular barriers to entry or exit, and also when the products or services that are traded are considered to be identical (Perfect Competition, 2018). Another definition of perfect competition by Samuelson and Marks (2014) says that perfect competition is when there are identical standardized products created and sold. According to Gallant (2018), perfect competition must include an identical product, be a price taker, have a small market share, have buyers that are aware of the products that the company sells and what the prices are, and lastly perfect competition allows companies to enter and exit the industry for free. When it comes to perfect competition, many economists are not believers in that this is actually possible due to the fact that there are many barriers for entry, there are very high costs in order to start up a business, and there are also strict government regulations that make it pretty difficult for a company to enter and exit an industry (Gallant, 2018). 

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 According to Masibo (2016), the pricing strategy for the perfect competition market structure involves the demand and supply curves of the product, and will show the amount that the consumer is capable and willing to purchase. The supply curve also shows what the particular supplier is capable and willing to supply within the market prices (Masibo, 2016). The pricing strategy for perfect completion has to be equal when it comes to the supply and what the consumers can pay. Masibo (2016) describes this as the marketing being in charge of what the product or service price should be, and as long as the production cost is below the revenue then this market structure can continue to function properly.

Monopolistic Competition

 Monopolistic competition can be described as the market that is often similar to the perfect competition in that it has many small companies that are competing within the market which ends up leading to a monopoly power for each individual producer (Monopolistic Competition, 2013). Monopolistic competition can also be identified as being the market structure that has product differentiation (Samuelson & Marks, 2014). Examples of a monopolistic competition market would be any type of small business, independently owned businesses, and even high-street stores and restaurants (Monopolistic Competition, n.d.). In this type of market, companies are given the freedom to enter or leave without any barriers. An example of a company that would fall under this type of market structure would be Nike. Many think Nike would fall under a monopoly market structure, but according to ……..

 When it comes to the pricing strategy for the monopolistic competition market structure, the company typically sets their own product prices. This means that each small business or independently owned business would make their own decisions on the pricing and production costs. In order for the company to set the right price for their product, it would be ideal for the managers to do some research ahead of time to find out what their competitors are selling a similar product for. In order to help the product or service sell, the company can use their own logo and brand in order to help with marketing and advertising (Masibo, 2016). Marketing and advertising are critical for this type of market structure due to the fact that competition with others is usually very tough.

Oligopoly

 Oligopoly is the market that typically falls in the middle of the perfectly competitive and the monopolistic markets. This is when a smaller number of large companies tend to take over the market (Samuelson & Marks, 2014). Some examples of oligopolies would be the national mass media outlets such as Rupert Murdock’s News Corporation, Viacom, CBS Corporation, Walt Disney, and NBC Universal because there aren’t many of these companies, but they rule the mass media market (Kramer, 2018). Another example would be the auto industry with Ford, GMC, and Chrysler being very dominate in the automobile market (Kramer, 2018). Later the case study of Apple and Google will also be looked at, as these two companies are a great example of an oligopoly market structure because together they dominate the smartphone market.

 With the Oligopoly market structure, the prices of products and services are usually set by the company’s competitors surprisingly (Masibo, 2016). This means that the company and their managers must do thorough research in order to see what their rivals are charging for a product, and ultimately attempt to match it or price it where they can be competitive in the market against the other firms. One way that companies in this market structure keep their power, is by causing there to be barriers to entry. For example, this might look like the oligopolies making their market too costly or difficult for new businesses to enter into the market (Oligopoly, n.d.). While this may seem like a dirty trick, it keeps the larger and more powerful companies running because newer firms can’t compete with these types of pricing strategies due to the fact that many people wouldn’t know their brand just yet and they haven’t built trust with many customers.

Monopoly

 A monopoly is typically when there is one company, or firm, that is very dominate and doesn’t usually have many competitors, which provides a lot of power (Samuelson & Marks, 2014). One example of a company that is on its way to becoming a monopoly is Netflix because the company has roughly 50 million subscribers, and even with their other competitors they still come out on top (Chirila, 2015). Other examples of companies that fall under this market structure would be Google, Facebook, and Microsoft (Chirila, 2015). These companies are great examples of what a monopoly looks like, because Google controls more of the web search on the internet than Yahoo, and Facebook is the main social media outlet that adults are using for their connections. This doesn’t mean that other companies aren’t in the mix of a particular market, but it just means that there is a more powerful company that is usually dominating most of the market.

 According to Masibo (2016), the monopoly market structure has the easiest pricing strategy, because here the prices that are set are based on the demand.

Case Study

 Companies have different market structures depending on what type of business they are running. As mentioned above, depending on what type of market structure the company has will determine what type of pricing strategy they use. Two companies that are a good representation of an oligopoly market structure are Apple and Google, because these two large companies dominate the smartphone industry. On the other hand, Apple and Windows dominate when it comes to computer operating systems. In an oligopoly market, there are usually a small number of larger companies, such as Apple and Google, that have taken over a particular market, which in this case would be the smartphone industry (Wong, 2013). For example, in 2016 Android and iOS accounted for 97 percent of cell phone activations, and 57 percent was from Android while 40 percent was from Apple’s iOS (Reisinger, 2016).

 Apple’s and Google’s pricing strategy falls in line with oligopoly’s market structure, meaning product pricing is solely based on what their competition is doing. Apple and Google are directly in competition with one another for the smartphone industry, which means their prices reflect what is going on with the competing company. For example, when the new iPhone X was released by Apple last year for $1,000, many people didn’t understand why the company would price it that high and fully believed no one would purchase it. However, it was the exact opposite that happened, and the iPhone X product has been the most successful Apple device yet (Dolcourt, 2018). When this happened, Google Android started making steps towards their new $1,000 smartphone, and many of their phones have started to increase their price to be able to compete with Apple. Since the start of smartphones there have been consistent changes with pricing strategies. Table 1 shows how prices have changed from 2016-2018, and how Apple and Google dominate, but also have to continue to adjust their prices due to the other company’s price change. Dolcourt (2018) also mentions that Apple has now set a example of what the iPhone X smarphone can do and provide, which is going to set the new price point for the whole cell phone industry. For Google to compete with Apple they are going to have to make sure to provide many similar options on their smartphones in order to raise the price and make a profit. However, the iPhone X is the most expensive Apple smartphone but there are other iPhones that are offered at a lower price, which also allows for Google to have some wiggle room when it comes to their price range as well.

Conclusion

 This paper covered the different market structures that are often utilized when it comes to economics: perfect competition, monopolistic competition, oligopoly, and monopoly. This paper also discussed the importance of the pricing strategy for each market structure, and explained how each one differs from the other. A great example of an oligopoly market structure was also provided, showing how Apple and Google basically dominate the smartphone industry. Their pricing strategy is focused on what their direct competition is doing, and this means they must continue to stay alert to their market, and always be thinking about different pricing strategies.

References

Chirila, A. (2015, January 29). 10 Companies You Probably Never Realized Had Monopolies. Retrieved from https://www.toptenz.net/10-companies-never-realized-monopolies.php

Dolcourt, J. (2018, September 1). Why iPhone and Android phone prices will get even higher. Retrieved from https://www.cnet.com/news/why-iphone-and-android-prices-will-get-even-higher/

Gallant, C. (2018, February 1). Does perfect competition exist in the real world? Retrieved from https://www.investopedia.com/ask/answers/05/perfectcompetition.asp

Hardison, K. (n.d.). How do market structures determine the pricing decisions of businesses? Retrieved from https://www.enotes.com/homework-help/how-market-structures-determine-pricing-decisions-290148

Kramer, L. (2018, January 9). What are some current examples of oligopolies? Retrieved from https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oligopolies.asp

Masibo, B. (2016, October 7). Describe Pricing Strategy under each Market Structure. Retrieved from https://analystprep.com/cfa-level-1-exam/economics/describe-pricing-strategy-under-each-market-structure/

Monopolistic Competition. (2013). In D. Rutherford, Routledge Dictionary of Economics (3rd ed.). London, UK: Routledge. Retrieved from http://ezproxy.apus.edu/login?url=https://search.credoreference.com/content/entry/routsobk/monopolistic_competition/0?institutionId=8703

Monopolistic Competition. (n.d.). Retrieved from http://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html

Oligopoly. (n.d.). Retrieved from http://www.economicsonline.co.uk/Business_economics/Oligopoly.html

Perfect Competition. (2018). In Helicon (Ed.), The Hutchinson unabridged encyclopedia with atlas and weather guide. Abington, UK: Helicon. Retrieved from http://ezproxy.apus.edu/login?url=https://search.credoreference.com/content/entry/heliconhe/perfect_competition/0?institutionId=8703

Reisinger, D. (2016, April 21). Apple and Google’s Android Take 97% of U.S. Mobile Market. Retrieved from http://fortune.com/2016/04/21/apple-google-cirp/

Samuelson, W.F., & Marks, S. G. (2014, November) Managerial Economics, 8th Edition. Retrieved from https://platform.virdocs.com/app/v5/doc/108593/pg/32

Wong, K. (2013, June 30). A view on the smartphone market – An Oligopoly. Retrieved from http://economicsmalaysia.blogspot.com/2013/06/a-view-on-smartphone-market-oligopoly.html

Appendix

Table 1

Note: This table shows how mobile phones have continued to increase overtime. Each company is forced to raise their prices in order to compete with one another.

Retrieved from https://www.cnet.com/news/why-iphone-and-android-prices-will-get-even-higher/