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Econ: Marketing Segments Essay

2914 words - 12 pages

Market Structure and Pricing Strategies

In today’s economy there are four types of market structures which all firm activity falls. This paper introduces each of the four market structures; perfect competition, monopolistic competition, oligopoly and monopoly. It also highlights the pricing strategies for each, as this strategy is the most significant determinant of how firms will fare in terms of their respective market structures. It is of paramount importance for each firm in its industry to know which type of market structure they are competing (or in some cases not competing) in. A firm cannot properly build business and functional level strategies without a clear ...view middle of the document...

All firms sell an identical product 2. All firms are price takers 3. All firms have a relatively small market share 4. Buyers know the nature of the product being sold and the prices charged by each firm 5. The industry is characterized by freedom of entry and exit” (, n.d.). Most of these factors are intuitive.
In the middle of the spectrum we define monopolistic competition, which refers to a market structure that is composed of many differentiated products and competitors. This type of market structure is the “real-world” example of perfect competition. Meaning it is a more realistic market structure, as monopolistic competition is better defined as an approximation of the characteristics/factors that make up a perfect competition. Monopolistic competition does not match perfect competition in terms of its place in the market structure for benchmarking purposes. Few barriers to entry or exit exist in this market structure. The firms have more flexibility in setting its own prices, as differentiation exists between substitute products. Often times there exists a customer loyalty with this market structure that allows a firm to increase price without driving its customers away. “This form of competition is called monopolistic competition because at the optimum output the firm sets a price that is higher than marginal costs” (AmosWEB, n.d.). Furthermore, in a monopolistic competition a firm may also have the freedom to decrease its price without reprisal from its competition. This is mostly because in this market structure there are many small firms, of which sell nearly the same – but not identical – products. Thus the price should be different; higher or lower dependant on the firm’s own capital, inputs, and differentiation strategies. Each firm is competitive certainly, but owns its own pieces of market control – another major difference between monopolistic and perfect competition. By definition, it would seem that the market is dominated by this structure. To follow the same paradigm, there are four factors that a firm needs to meet in order to be said to be operating in the monopolistic competition: 1. Large number of small firms 2. Products/goods are seen as substitutes, but not perfect substitutes (as there is some physical or perceived difference) 3. No substantial barriers to entry or exit and 4. Buyers are armed with the right amount of knowledge in terms of the products and that there are similar substitutes available.
Positioned also in the middle of the market structure spectrum, is an oligopoly. It is characterized by having few large firms, each selling similar or identical products, like automobile manufacturers. Successfully oligopolies “…are torn between: 1. cooperating to increase profits by obtaining the monopoly outcome or 2. competing to try to gain advantage over competitors” (Mehta, n.d.). Perfect Competition firms are able to ignore other firms as they are price takers, and as later...

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