MARKET STRUCTURE AND PRICING MODELS

Market Structure and Level of Competition Factors that determines the market structure:
Nature of products Number of firms Size of firms Barrier to entry The above factors will determine the market structure of the firm and the level of competition faced.

PERFECT COMPETITION MARKET MODEL

Characteristics of perfect competition model: i. Produce homogenous product ii. Large number of firms in the market iii. Small firms competing with each other iv. It is easy to set up business. Given that firms assumption of profit maximization, output will be produced at MR = MC condition. The firm has no control over pricing strategy.

PERFECT COMPETITION MARKET MODEL

Under perfect competition market model, firms are to compete to the their level of efficiency. In a very competitive environment, the firms will have to be cost-efficient to survive since they have no control over pricing and no way of differentiating their product to induce demand. By promoting competition, firms benefit through profit maximization, while consumers benefit by having lowest possible price. Resources are said to be efficiently allocated.

PERFECT COMPETITION MARKET MODEL

Decision rule on stay open or shut down. Under a depressing market price, a firm incurring a low profit or loss may have to decide either to stay open or shut down. The decision rule is: If TR > TVC or P > AVC the firm should stay open

MONOPOLISTIC COMPETITION MARKET MODEL

Characteristics of monopolistic competition model: i. Large number of competitive firms ii. Products are differentiated iii. Firms are relatively small (SMEs) iv. Ease of entry and exit from market as a whole. The firm do have control on price and output Level. This would depend on the firms objective

MONOPOLY MARKET STRUCTURE

Characteristics of a Monopoly market model: i. Only one firm. ii. Product is specific in nature, eg. Public utilities iii. Firm is normally large. iv. Substantial barrier to entry. A monopoly have significant control over market price and would have a low price elasticity since there is no substitute for its product.

OLIGOPOLISTIC MARKET MODEL

Characteristics of Oligopolistic market model: i. Few number of competing firms. ii. Products may be homogenous or differentiated. iii. Firms are generally large (MNCs, GLCs). iv. Entry of potential firms is difficult. Firms in Oligopolistic market do have control over pricing. However, they compete on other than pricing strategies.

OLIGOPOLISTIC MARKET MODEL

Why is that in Oligopolistic market, the price is found to be rigid? Among the models/approaches: - Kinked demand - Dominant price leadership

PRICE DISCRIMINATION AND ELASTICITY

In market A In market B MRA = MCA MRB = MCB Since the MC is assumed to be the same for both markets, thus: MRA = MCA = MCB = MRB Therefore, MRA = MRB Given that, MR = P ( 1 + 1/e ) Therefore, PA(1+1/eA) = PB(1+1/eB) Example, eA = -2 and eB = -6

PRICING MECHANISM IN ESTABLISHED PRODUCT/MARKET

Marginalist Pricing MR = MC Mark-up or cost-plus Pricing P = AVC + X% (AVC) Reconciliation to marginalist pricing Under constant MC, marginalist pricing: MR = MC = AVC, hence AVC = P ( 1 + 1/e ) P = AVC ( e/e + 1 ) P = AVC + ( -1/(e + 1) )AVC

PRICING STRATEGIES FOR ESTABLISHED PRODUCTS/MARKET

Price positioning Pricing relative to competitors Product-line pricing Pricing according to product series Pricing to infer quality Pricing according to product branding Product-bundle pricing Pricing as a package deal Promotional pricing Pricing during seasonal sales

PRICING STRATEGIES FOR NEW PRODUCTS/MARKET

Price Skimming It is pricing at a relatively high price when the product is newly introduced to the market with the intention of getting as much profit as possible. Price Penetration Setting a relatively low price in the current period to achieve broad penetration of the market and ensure a larger market share in subsequent periods.

MEETING CHALLENGES OF COMPETITIVE MARKET ENVIRONMENT

At the firm or industry level, the extent of competitiveness is determined by the market structure. Marketing Strategies

Product Differentiation Cost Efficiencies Market Segmentation (focus)

SUSTAINING MARKET COMPETITIVENESS

Besides meeting the challenges of a competitive market, firms need to sustain its competitiveness by continuously developing and maintaining: i. external or market position perspective ii. Internal or resource-based perspective a. assets b. Competencies (what you are good at) c. Capabilities (what you are able to do)

COMPETITION IN THE GLOBAL MARKET

At the countrys level, the extent of competition depends on its comparative advantage/competitive. Theory of comparative/relative advantage: labors productivity factor endowment economies of scale technology Porters theory of competitive advantage conducive environment that nurtures innovation

SUSTAINING COMPETITIVE ADVANTAGE According to Porter, A firms long-term international competitiveness usually depends much more on its capacity to continuously innovate Several favorable conditions must exist in order to have a positive influence on the firms innovativeness.

Porters Diamond Model

Firms Strategy, Structure and Rivalry Factor Conditions Related and Supporting Industries Demand Conditions