Pricing under Different Market Structures

Price-fixation is an important managerial function in all business enterprises. If the price set is quite high, the seller may not find enough number of consumers to buy his product. If the price fixed is too low, the seller may not be able to cover his cost. Thus, fixing appropriate price is a major decision-taking function of any enterprise. Price- decisions, no doubt, need to be reviewed from time to time.

Market Structures and Pricing Decisions

A firm operates in a market and not in isolation.Under Perfect Competition price is determined by the forces of demand and supply. The point of intersection between demand and supply curves is the point of equilibrium which determines the equilibrium price. Each firm under perfect competition is a price taker and not a price maker. The Average Revenue Curve of a firm under perfect competition is horizontal and that AR = MR. Further there is always a tendency towards the prevalence of only one price under Perfect Competition; the respective changes in the forces of demand and supply alone influence the price.

In case of Monopoly the situation is slightly different. A monopolist can be a price maker. He can fix the price of his product, initially through a process of trial and error, by balancing losses and gains. He is in equilibrium at a point where MR = MC and corresponding point on the Average Revenue Curve determines the price that he would charge so as to earn maximum profit. As there are barriers to entry and no close substitutes, the monopolist will charge a high price and subsequently enjoy monopoly profits. The monopolist may also practice price-discrimination i.e. he may charge different prices to different buyers and in different regions for the same product depending upon the elasticity of demand for the product. In case of dumping also different prices will be charged for the same product. In fact selling his product in foreign market at a price lower than his own market is itself referred to as Dumping.

In case of, Monopolistic Competition each producer is a monopolist of his product and a group of producers producing same, though not identical product compete with each other in the market. They differentiate their product and instead of having a price war with each other they practice product-differentiation. However, the prices charged are quite competitive in nature.

Under Oligopoly there are few sellers competing in the market. They may be rivals or may form collusion. The price policy of one producer is affected by the price policy of the others. Each producer before he fixes the prices of his product tries to understand the price behavior of other producers in the market. For instance producer A thinks that if he lowers the price of his product and others don’t then he will be able to capture wider market but it may so happen that if he lowers the price of his product and others also lower their prices then he will not be able to get more buyers and therefore all the producers may subsequently suffer. On the other hand, he may feel that if he raises the price of his product and others also raise their prices he may not loose out on many customers but it may so happen that when he raises his price and others don’t raise their prices, then demand for his product will go down. Therefore under Oligopoly there prevails the phenomenon of price rigidity. They may prefer to resort to non-price competition leaving each other to follow their own policies.