How Will a Firm's Pricing Strategy Depend on the Structure of the Market?

1780 words 8 pages
How will a firm’s pricing strategy depend on the structure of the market?

A pricing strategy is important to any firm in realising its corporate objectives, whether that be its sales revenue, market share or indeed profit, and thus there is much preoccupation within a business about its pricing strategy. Ultimately, this will be guided by many factors; not least the market power it has to set the price of its products and the nature of the demand curve it faces. This essay will attempt to outline how a firm’s pricing strategy is influenced by the characteristics of the market in which it operates, looking at various market structures, including perfect competition, monopoly and oligopoly.

One particular market structure worthy of
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This acts as an incentive for other firms to enter the market, resulting in an increase in the fringe supply and consequently a reduction in the dominant firm’s market share and profit. Gaskins (1971) cited in Besanko and Braeutigam (2006) argues that a limit pricing strategy would be effective in this case where the current price has induced a large expansion of fringe firms. Therefore, the dominant firm may not set a price that maximises its profit in the short term, instead choosing a limit pricing strategy that keeps price below the profit-maximising level to discourage entry by these firms and protect future levels of market share and profit.

So far this essay has concentrated on two extremes of market structure, perfect competition and monopoly. However, a more common form of market structure in the real world is that of oligopoly. This consists of a small number of firms operating in the industry, each of which possess a large share of the market, thus having some power to set prices. However, one central feature of this market structure is interdependence, where pricing decisions by one firm will directly influence the pricing strategy of rival firms. This leaves the oligopolist with a choice of whether to cooperate with them or not, in terms of the strategy it adopts. If the firm chooses not to collude, then its


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