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How will a firms pricing strategy depend on the structure of the market?

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Introduction

How will a firm's pricing strategy depend on the structure of the market? There are many types of pricing strategies that firms may undertake. A price strategy is how much a firm will charge for a product or service that it provides for the consumer. There are many factors behind a price strategy of a firm. The price strategy of a firm will ultimately depend on what type of market the firm is located in, with there being four main types of market structures. These are Perfect competition, Monopolistic competition, Oligopoly and Monopoly. A market with perfect competition has four defining characteristics. The first characteristic is that the industry is fragmented "an industry that consists of many small buyers and sellers1". By this it means that each individual firm, whether it is a buyer or seller in the marketplace, does not affect the overall market due to its financial power, being so small in comparison to that of the whole market. This implies that a firm will be a price taker, "A person or firm with no power to be able to influence the market price2". ...read more.

Middle

However it still must seek to profit maximise, unless it is a state owned monopoly, so needs to find a level of output which would satisfy this. Especially as a monopoly still faces a downward sloping demand curve so still needs to be aware of charging an unfairly high price for a good or service. A monopolist may choose to limit the quantity sold so to increase prices artificially. Another option may be to sell where Marginal Revenue = Marginal Cost, just like all other firms. As monopolies benefit from lower costs due to the scale of production etc. They will make a larger profit than firms in other markets. An example of a monopolist making profit is abnormal profit is below. Figure 1 - Profit for a monopolist A monopsony is a market which has a single buyer and many sellers. The price is determined by how much the single buyer is willing to pay for the good or service, as otherwise no transactions in the market would occur as the sellers don't have any other buyers to sell to. Therefore the sellers have to accommodate towards the buyers needs. ...read more.

Conclusion

Also government owned firms do not seek to gain profits, instead to just provide a product or service that provides a benefit to the public. In these situations the market structure that these firms will be in, will not affect the pricing strategy of the firms. This is due to the firm's aims, not being profit driven so will not look to profit maximise and instead will just look to cover their costs, so will set a price that will enable this. The price level, for this, would be set at Marginal Revenue = Marginal Cost = Average Cost. All firms must have Marginal Revenue = Marginal Cost for it to maximise its profits. This is because either side of this the firm would for MR > MC, be under utilising and therefore be able to increase output and produce profit, and for MR < MC the firm would be over outputting and would not be making the maximum profit compared to its inputs. This is the same for all firms; in all market structures so the actual type of market a firm is in, may not greatly affect the pricing strategy of a firm, as in reality theories often do not occur. ...read more.

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