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Running head: An analysis of market structures
Running Head: ANALYSIS OF MARKET STRUCTURES 1
ANALYSIS OF MARKET STRUCTURES 13
An Analysis of Market Structures and Related Pricing Strategies
09 June 2017
Abstract
The paper discusses the features of perfect and imperfect forms of market structures and the resulting pricing strategies that are generally adopted in each of the market structure such as perfect competition, monopolistic competition, monopoly, oligopoly, etc. The pricing strategies under these markets are based on many factors including the three C’s of cost, competition, and customer. After the detailed analysis, we take up the case study of Apple Inc. which can charge higher price in the smartphone market despite intensive competition, on the basis of its innovation and strong customer loyalty. The analysis is followed by the conclusion as to which form of market is the most efficient from the point of efficiency.
An Analysis of Market Structures and Related Pricing Strategies
1. Introduction to Market Structures
Market structure is an important factor which determines how buyers and sellers interact in a market, what prices are charged, and how different levels of the production and selling processes interact. An industry is comprised of many firms and the classification of industry is done based on products or production processes. In general, it is the product which serves as the benchmark for classification of an industry. Each industry has a different market structure based on the type of product, number of sellers, ease of entry and exit, market power etc. Broadly, there are two forms of market structure. One is perfect competition and the other is imperfect competition. Under imperfect competition the market may be of monopoly, monopolistic competition or oligopoly structures. Perfect competition is seldom found , rather the real world is full of imperfections, and thus imperfect market structure is most prevalent. Each of these market structures has a different pricing strategy which in turn is based on cost, competition, and customer. The degree of concentration of the market is also one of the important determinant of the market conduct of firms in the market. This paper analyses market structures and relating pricing strategies that are suitable for each of these structures. The study also takes the case study of Apple Inc. to see how the theoretical analysis applies to the pricing and conduct of a real-world entity.
1.1. Perfect competition
Perfect competition is that form of market where there are many sellers and buyers for a commodity. There exists perfect information about the price and other features of the product among purchasers and sellers. Hence all the firms producing the commodity compete on a very fair basis and there is no rivalry among the firms.
When we talk about perfect competition it becomes important to distinguish between firms and industry. Firms are the production units where the actual production of the commodities takes place, whereas an industry is the sum of all the firms.
The characteristics of perfect competition are:
· Large number of buyers and sellers: In perfectly competitive market there exist large number of buyers and sellers in the industry, where each firm produces a small fraction of the total output of the industry. Hence each firm has an insignificant market share and thus cannot impact the price or output of the industry.
· Homogeneous products: Perfect competition is featured by the production of homogeneous goods i.e. identical goods.
· Industry is the price maker and firm is a price taker: Since there exist various small firms in perfect competition, therefore the firms cannot decide the price of the product. Hence the price is determined in industry with the help of the market demand and supply of the goods by the firms and then the same price is given away to the firms at which each firm has discretion to sell as many quantities to sell as they want.
· Free entry and exit of firms: Whenever the industry will have opportunities to earn supernormal profits more firms will enter the industry to earn profits and whenever firms will earn losses, they will leave the industry. This feature implies that in the long run, firms will be earning only normal profits.
1.2. Monopolistic Competition
The concept of monopolistic competition is more near to reality than perfect competition. Under monopolistic competition a large number of sellers sell differentiated products, which are near substitutes for one another but not identical. Here, a close substitute is one whose cross-elasticity is close to unity or greater. The differentiated product gives each firm some amount of market power over the production, pricing and sale of its product under this market structure. In the shoe industry for example, there exist a number of
ands like hushpuppies, Nike, Reebok, etc. Each of these
ands sell differentiated shoe (in terms of quality or anything) and enjoy
and loyalty of the consumers. Apart from this there exist variety of products e.g., electrical tubes and bulbs, TV sets, refrigerators, air conditioners, personal computers, textile goods, tea, coffee, cigarettes, soft drinks, cold creams, shampoos, detergents, shaving blades, shaving cream, hair oils, hair dyes, shoes, wrist watches, steel, cement, mobile phones and so on, where the element of competition is present but firms are innovating and gra
ing their market share.
The features of monopolistic competition are:
· Large number of buyers and sellers: This is the similar feature as of the perfect competition. However, there is one difference that competitive firms are very small relative to the magnitude of the market whereas in monopolistic competition, the firms are not so small with respect to the size of the market.
· Product differentiation: Since various firms under this form of market compete with each other, thus, they compete by...