Managerial Economics

Outline

Introduction

Overview of Market Structure

Overview of Pricing

Relationship between Market Structure and Pricing Strategy

Market Structure Pricing Practices

Pricing Practices for Monopolistic, Monopolistic Competition, and Oligopolistic Markets

Pricing Practices for Perfect Competition Markets

Price Matching

Inducing Brand Loyalty

Randomized Pricing

Conclusion

References

Market Structure Pricing Practices

Market structure is one of the major factors that shape decisions made by business owners and managers. Generally, business owners and managers do not make decisions in a vacuum as they consider various factors including market structure. Market structure is an important aspect of decision-making in businesses as it shapes decisions on how much output to produce and pricing of products/services (Baye & Prince, 2017). The consideration of these factors is essential to promote business success and profitability. Given its impact on pricing or products/services, there is a nexus between market structure and pricing practices. In this regard, decisions on pricing are influenced by consideration of the market structure. This research paper discusses the nexus between market structure and pricing strategies as well as market structure pricing practices.

Overview of Market Structure

Baye & Prince (2017) define market structure as factors like the number of businesses competing in a market, size of these businesses, demand conditions, technological and cost factors, and the ease of entry and exit. A market structure is a term used to refer to a tool used in business decision-making in relation to the external business environment. In essence, the market structure provides business owners and managers with insights regarding the external business environment. These insights in turn shape the decisions and strategies adopted by business owners to ensure and promote the profitability and success of their businesses. Without an understanding of the market structure, business owners and managers will be unable to make appropriate decisions to promote the effective operations and profitability of their businesses. Therefore, market structure is a core characteristic for the operations of a business entity.

As a key factor in determining economic efficiency, market structure comprises different variables that shape managerial decisions. One of these variables is firm size, which implies the considerable variations in the size of businesses operating in a particular market. Each market has firms of different sizes ranging from small to large companies. A firms relative position in the industry is affected by various factors including changes in strategies adopted by rivals and changes in market conditions. The differences in firm size contribute to variations in sales, profitability, and revenues.

The second variable in market structure is industry concentration, which refers to distribution of firms within an industry. Industry concentration is an important aspect of managerial decisions as it determines the level of competition a business is likely to face in a particular industry. Markets vary in terms of industry concentration since some industries comprise many small firms while others are dominated by a few large firms (Baye & Prince, 2017). Technological and cost factors are the other variables of the structure of the market and relate to the technologies and costs of production of goods and services. The variations in technology used to produce goods and services contribute to differences in production techniques and measures across industries. These techniques in turn shape cost factors, which are also affected by the labor required in production processes.

Industries also vary in terms of demand and market conditions as well as the potential for entry and exit. Industries with low demand are characterized by the existence of only a few firms, which are adequate to sustain the market. On the contrary, industries with high demand are characterized by the presence of many firms to produce the demanded quantity of goods and services. Additionally, some industries...

…employed in perfect competition markets to help enhance profits and lessen the intensity of rivalry. Companies that use this strategy seek to induce brand loyalty as a means of reducing the number of customers who will switch to substitute products in the market. By employing this pricing strategy, companies seek to leverage their competitive advantage to remain profitable amidst intense competition. This pricing practice is based on the idea that brand-loyal customers will continue to purchase a companys products or services even if a competitor offers a slightly cheaper or better price. However, this strategy tends to be ineffective if consumers believe that the offered goods and services are homogenous.

Randomized Pricing

The final pricing practice employed by firms in this market structure is randomized pricing in which a company varies the cost of its products and services from hour to hour or day to day. When this strategy is employed, customers cannot identify firms that charge the lowest price in the market. Additionally, when utilized, randomized pricing lessens the ability of rival companies to destabilize its price. The effectiveness of this pricing strategy requires the use of advertising channels with a wider reach.

In conclusion, market structure is a term used to refer to market conditions that shape major business decisions. Some of these conditions include the number of businesses competing in a market, size of these businesses, demand conditions, technological and cost factors, and the ease of entry and exit. There is a strong link between market structure and pricing practices because market conditions influence product and/or service pricing. Market structure affects pricing practices by shaping the behaviors of buyers and sellers as well as the behaviors of producers. Given the difference in market structures, pricing practices differ as businesses seek to enhance their profits and revenues. Busineses set pricing objectives and…