Pricing Strategies and Market Structures

Overview of Competitive Markets, Pricing Strategies, Perfect Competition, and Monopoly

• Firms compete in the market to increase their customer base, sales, market share, and profits.
• Price competition involves competing to offer consumers the lowest or best possible prices of a product, while non-price competition is competing on all other features of the product.
• Informative advertising provides information about the product to consumers, while persuasive advertising is designed to create a consumer want and persuade them to buy the product.
• The price that producers fix on a product can be influenced by the level and strength of consumer demand, competition from rival producers, the cost of production, and the level of profit targeted.
• Price skimming is when new and unique products are charged a very high price initially, while penetration pricing is when a low price is set to encourage consumers to try the product and expand sales.
• Destruction pricing (predatory pricing) involves keeping prices very low to destroy the sales of existing products, while price wars happen when competing firms continually undercut each other’s prices.
• Cost-plus-pricing involves calculating the average cost of producing each unit of output and adding a mark-up value for profit.
• In a perfectly competitive market, there will be many sellers and buyers, and neither producers nor consumers can influence market price.
• High consumer sovereignty, low prices, and efficiency are advantages of a perfectly competitive market, while wasteful competition and misleading customers are disadvantages.
• Monopolies are dominant firms with market power to restrict competition in the market.
• In a pure monopoly, there is only a single seller who supplies a good or service, and monopolies can raise prices and generate excessive profits.
• Monopolies don’t face competition because the market faces high barriers to entry, such as high start-up costs, expensive paperwork, and regulations.