Abstract
This paper analyzes market structures and related pricing strategies and has a case study illustration. In business and economics, marketing structures constitute the networks linking sellers, buyers, services, and products to each other. Market structures work and interact with various aspects, including diverse types of competition, production levels, different kinds of services and products, sellers, buyers, ease of exit and entry from the marketplace, and agreements between specific agents. The type of market structure that a company adopts determines the pricing strategy it should adopt. To explore the various pricing strategies, it is inevitable that one first has to understand the basic market structures, which include Perfect competition, monopolistic competition, oligopoly, and monopoly. This paper analyses these basic market structures and their related pricing strategies to shed more light on them. It also includes a real-world example of a company’s pricing strategy by identifying its market structure.
Perfect Competition
Perfect competition is a theoretical market structure, although it hardly exists in real-world markets. It offers a helpful model to explain the effect that demand, and supply have on behavior and prices in a market economy. Multiple sllers and buyers characterize a perfect market; prices are a function of supply and demand. Perfect competitive companies seek to earn enough profits to ensure they are in business and no further. If companies made surplus profits, there would be market entry by other companies, which could lower profits.
Description
Perfect competition offers ideal market structures that form the basis for comparison of real-life market structures. It is the theoretical opposite of a monopoly, where a sole firm supplies services and goods. This single firm can alter its price as there are no alternatives that consumers can turn to, and it is challenging for market entry by would-be competitors. There are no monopolies in perfect competition, instead, it is characterized by: Selling identical products by all firms. Market share does not affect prices: companies are not in a position to influence their product’s market price and instead are price takers (Kostis, 2018). Labor and capital resources are perfectly mobile, firms can enter and leave the market without incurring costs. Lastly, buyers possess perfect and complete information regarding the prices each firm charges and the product being sold. In addition, various factors are also critical to a perfectly competitive market, including efficient and cheap transportation, perfect availability of information, lack of controls, and a vast homogeneous market.
Pricing Strategies
Pricing strategy refers to the technique that a company uses to set the price of its products or services with respect to the principal market conditions. The main aim of a company is to ensure maximum profit, which should be reflected in its pricing strategy irrespective of the conditions in the market. In the instance of a perfectly competitive company that also operates in an impeccably competitive market, the main aim of profits, in the long run, is to ensure it earns zero-economic profits. Various factors affect the pricing strategy to be applied, key among them cost, competition and customer. In a perfect competition market structure, production costs are typically identical. A company’s ability to impact price is also hindered by the fact that this is a highly competitive market. As far as customers are concerned, it is impossible to set higher prices than the prevailing ones as the customers are perfectly informed.
Consequently, a company must adapt to the prevalent price regardless of the incurred product or service production cost. Thus, the pricing choice does not determine the pricing strategy; instead, the product decision is vital. Economics asserts that a company’s profit is at its maximum when the marginal revenue and marginal cost are identical. At this equilibrium cost, if a company’s operating cost is lower than the price, then company operations will continue. Thus, the cost has a more significant effect than the pricing strategy. It can be concluded that a perfectly competitive firm’s pricing strategy is mainly dependent on price acceptance.
Monopolistic competition
Monopolistic competition is a market structure that involves multiple companies offering similar competing services and products but are not pure substitutes. Low barriers to entry characterize it, and a single firm’s decision does not necessarily affect its competitors. Marketing and pricing decisions are the major differentiators of competing companies. Typically, monopolistic competition combines the elements of perfect competition and those of a monopoly. Examples include household items, clothing, and hair salons.
Description
Various key features characterize monopolistic competition, the produced products should nearly be indistinguishable. The perception of differences among consumers defines their preferences. Companies’ emphasis on their products’ differences from their competitors defines the profits made. There is no actual price distinction set for the products of companies in the specific sector. It is also easy to exit and enter the market in a monopolistic competition. Another defining feature is that each company brand identifies among its clients by certain indistinguishable features. The little price difference between different products by different companies will lead to the clients preferring the product. It is thus more of preference than it is perception.
Each company has a market share dedicated to the specific brand name. The company is the producer of this market share, and with all aspect’s constant, it dominates in a monopolistic way. The company ensures it does not change its prices as this would result in losing the market share. When a new company enters a monopolistic competitive market, it creates a new set of devotees, meaning the already existing companies will need more advertising on the differences in their products to ensure the new company does not outdo them.
Pricing Strategies
Product differentiation is key in defining the market in a monopolistic competition market structure. Through product differentiation, a company can be at a competitive advantage and is capable of making independent decision and thus exerting influence on the market, including on prices. Therefore, product differentiation is key to pricing in a monopolistic competition market structure. If a taste factor dominates the market, then a firm can, to a certain extent, test the price. Nonetheless, if a product’s quality or taste factor is not central in a market, testing the price would affect revenues adversely. The absence of a taste factor and fewer competitors results in a demand curve that curves sharply.
Oligopoly
Oligopoly refers to a market structure where only a few companies dominate. When a few firms share a market, the market is said to be vastly concentrated. Though typically, the dominance is by a few companies, the market may have multiple small forms in operation. Oligopoly examples include petrol retail, the car industries, coffee shop retail, airlines, and the pharmaceutical industry (Jose & Xavier, 2020). In each of these industries, the dominance is by some big companies. For instance, for air travel, leading airlines, including Air France and British Airways, operate their routes with a few close competitors. Nonetheless, other multiple small airlines still serve specialty services, including vacationers. A key characteristic in the identification of oligopolies is by concentration ratios. This measures the controlled total market proportion by a specified number of firms. When an industry has a high concentration ratio, economists classify it as an oligopoly.
Description
An oligopoly’s main legal and economic concern is that it can lead to increased prices, slow rates of innovation and impede new entrants into the market, which are harmful to consumers. Oligopolies exist due to the presence of certain conditions in the market. These include legal privileges, a platform where more clients’ presence leads to its value gain, for instance, social media, and lastly, due to high cost of entry. Global disruption in trade and tech has altered some of these conditions. For example, the rise of mini-mills and offshore production has had an effect on the steel industry. In the office software sector, Google Docs targeted Microsoft, funded by google using the funds it obtained from its business of searching the web. Companies operating in oligopoly market structures exhibit similar characteristics, including interdependence, strategy, and experience barriers to entry.
Companies operating under oligopoly conditions are supposed to be interdependent, meaning one cannot disregard the other. A company that operates in a market with lone a few competitors should always consider its closest rival’s possible response when making its decisions. Regarding strategy, interdependent firms must ensure that strategy is essential in their day-to-day activities. They should anticipate how a rival will respond to any change they may have on their price or failure to adjust their price.
Having a strategy should entail planning and working on a variety of probable possibilities based on the anticipated expectations of their rivals’ reactions. Strategic decisions that oligopolistic players ought to make include: Whether they should collude or compete with rivals, whether to be the leaders in a new strategy implementation, and whether to wait on their rivals to act fast. Or whether to retain their prices constant or to hike them. In barriers to entry, the main reason oligopolies tend to maintain a dominant position in a market is that it might be too difficult or too costly for rivals to be able to enter the market. These hurdles are referred to as barriers to entry and can be erected deliberately by incumbents or exploit existing natural barriers.
Pricing Strategies
Oligopolies are stable as they capitalize more on collaboration as opposed to competing. This is due to the economic benefits that accompany collaboration. Through collaboration, oligopoly companies find innovative ways to evade the presence of price fixing, including through the use of moon phases. Price fixing refers to the process of artificially setting prices as opposed to letting free-market forces regulate prices. Another pricing strategy that the oligopoly market structure follows is the price leader market strategy, which entails the leader setting a specific price followed by others. Oligopolists also utilize a straightforward pricing technique known as cost-plus pricing. This entails a company calculating the average cost of production and then seeking to attain a certain anticipated profit by adding a fixed markup.
Monopoly
Monopolistic, where a company is the sole seller of a particular service or product in a market. Typically, this is the case due to market barriers that prevent other market entrants. Key among the obstacles is that the cost of good production might be too high for other companies to manage to make profits. The sole seller is thus in control of the market: they control the supply of products and the prices charged for services and goods.
Efficiency and legal monopolies are the two major types of monopolies. An efficiency monopoly is when a firm has innovated a new technology or technique to ensure that production cost is at its lowest to warrant competitors are undercut. A national football league would be a good example. On the other hand, a legal monopoly is where the government subsidizes a company to ensure the company can take over the market effectually. They are protected from competition by law. A legal monopoly example is a state lottery.
Description
Having markets that are purely monopolistic is rare: In fact, where absolute barriers to entry lack examples of these absolute barriers, include a ban on individual possession of all-natural resources or a prohibition on competition. In such instances, it is impossible to achieve monopolistic markets. There exist cultural and political objections to monopolistic markets, mainly based on the fact that in the absence of other suppliers of an identical service or products, this would result in charging of premium to clients. With no alternatives, consumers will be forced to pay the price that the monopolist charges for the goods or services. Particularly the objection is mainly on the high costs arising from monopolistic activities. To protect consumers against such practices, government tends to regulate monopolistic private business behavior, such as the ownership of a lion’s market share. An excellent example of such regulation are the antitrust laws by the European Union, the Word trade organization, and the FCC.
Pricing Strategies
The aim of companies in this market structure is to come up with a pricing strategy that will ensure maximum profits. The demands for services and goods are the major determinants of the market price. A key component is ensuring that all manufactured goods are sold at the highest possible price. It is thus essential to determine the appropriate output level to ensure maximum profits. Monopolistic competition enjoys an advantage over other market structures in price determination because it is not easily possible for consumers to exchange their product for an alternative similar to one from a local provider. A good example is that there are no alternatives comparable to electricity.
Case Study: Nike’s Oligopolistic nature
The sports goods and sportswear industry are subjugated by a few multinational players. These players include, Nike, Adidas, Puma, Wilson, Fila, and Champion (Shraddha, 2021). These players clash in nearly all markets and thus produce global oligopolistic market conditions. This case study analyses Nike’s strategies and nature in relation to oligopolistic market characteristics. Product differentiation is a vital feature of an oligopolistic market, where every product exhibit uniqueness. Oligopoly is not reliant on the price only, it is also dependent on marketing strategies, product differentiation, quality, cost reduction, and innovation.
Nike has operations in various subsegments with various product offerings: in the sportswear category, it offers jerseys, t-shirts, and track pants, among others, for women, kids, and men. It also offers sports equipment, including gym bags, ball caps, and footwear for men, kids, and women. A majority of these product offerings by Nike can be cross classified into other categories: for instance, footwear can be categorized into the specific sport it belongs to, such as skiing or skateboarding, or even into a general-purpose category.
This product differentiation strategy by Nike for the footwear and sportswear sectors has depended on having state-of-the-art technology on its products, for example, breathable clothes, innovative devices that help in exercise, footwear that helps reduce instances of injury, and shoes with air cushioning (Shraddha, 2021). Nike’s branding message has been based on personal excellence to inspire persons to fitness and health. The company has also actively promoted its brands on social media platforms. It has used several celebrities to approve its brands, including Tiger Woods, Michael Jordan, Michelle Wie, Gretchen Bleiler, and Serena Williams (Shraddha, 2021). This positioning has helped incorporate an emotional touch to Nike, thus evoking consumer trust.
In comparison with Adidas, a player in the same industry, they also use social media platforms for marketing, utilize celebrity endorsements, and has a mission to be the principal sports brand. However, what is most imperative in Adidas, Nike, and the other brands in the segment is the distinguishing campaign that generates a unique aspect regarding each despite their almost similar product offering: this is a typical feature of oligopoly.
As far as Prices are concerned in Oligopoly market structures, with great competition, a few huge companies dominate pricing. Nonetheless, each price decrease is planned carefully, as when one company reduces, competitors follow suit. This results in an overall drop in similar products’ prices in the market. All players will thus experience a loss of revenue and value. Therefore, Nike has adopted various pricing strategies, including premium pricing, value-based pricing, and price leadership, among others. On the other hand, other players, such as Adidas, have implemented the market skimming strategy. Despite their diverse pricing strategy, the fact that both offer premium brands means they have high prices. The prices are also highly influenced by competition and by market forces. Combining all these forces creates a power cycle that favors large companies in oligopolistic markets.
In conclusion, from analyzing the marketing structures, the relating pricing strategies, and the case study key conclusion can be drawn. It is clear that only Monopolistic competition, oligopoly, and monopoly market structures exist, and there are multiple examples of them. On the other hand, a Perfectly competitive market is theoretical and almost non-extant; if any happens to be, it can only do so for a very short duration of time. From the discussion, it has been possible to identify all the market structures, discuss them, and understand their pricing strategies. Through the case study, it has been possible to investigate into the real world and particularly have a clear picture of an oligopolistic market structure and the real forces that influence it. The analysis serves as a critical source of information to business and economic scholars in their studies and even entrepreneurs who wish to start their own companies.
References
Jose, a., & Xavier, v. (2020). General equilibrium oligopoly and ownership structure. IESE, 1-10. Web.
Kostis, i. (2018). Market structure and pricing objectives in the services sector. Journal of Services Marketing, 792-804. Web.
Shraddha, v. (2021). Insights into the oligopolistic nature of Nike. Web.