Pricing Strategy Different Market Structures | CFA Program Level 1 - AnalystPrep (2024)

Pricing strategy can be described as the range of methods that the firms use to price their products and services. Companies and firms always set prices in accordance with the market structure in which they operate.

Perfectly Competitive Market Pricing Strategy

This is determined by the market demand and supply curves of the product under discussion. The demand curve clearly indicates the total amount of a product that consumers are both willing and able to buy. On the other hand, the supply curve indicates the amount of a product that suppliers are willing and able to supply at certain market prices.

Suppliers can only supply what the consumers can consume at given prices. In a perfectly competitive market structure, the market sets the price and firms are merely price takers and therefore operate for as long as production costs fall below revenue.

Monopolistic Competitive Market Pricing Strategy

In a monopolistic competitive market, companies set prices for their products. Since every company sells a product that might be the same as that of another company, each company can successfully set its prices. However, these prices will be dependent on the quantity they desire to produce. Since there are many producers, this will not affect the market as a whole.

A company will use branding, advertising, and packaging to sell seemingly different products. Consequently, there exist many prices in the market due to differentiated products.

Also, since there are many competitors, a firm won’t be affected by another firm’s strategy. As a result, companies will have control over their own prices.

Oligopolistic Competition MarketPricing Strategy

Here, prices are determined by competitors. Firms in this market structure are highly dependent on one another when setting prices. With only a few sellers in an oligopoly, a company can affect the market prices but cannot control the whole market. As a result, competition is based on product differentiation and services, but not on price wars.

Generally, an optimal pricing strategy, in the long run, incorporates the reactions of rival firms to changes in prices effected by competitors.

Monopoly Market Structure

The pricing strategy here is relatively simple. A monopoly can comfortably set prices due to the absence of competitors. However, monopolists are careful not to set their prices too high and consequently attract competitors or excite a change of consumer behavior or consumption habits, if you may, in favor of substitute products. Besides, raising prices may also lead to a fall in sales since prices depend on demand.

Question

In monopolistic competitive markets, firms:

A. are price takers;

B. react to the prices set by competitors; or

C. set their own prices.

Solution

The correct answer is C.

In monopolistic competition, a firm won’t be affected by another firm’s strategy. Companies will have control over their own prices and use branding, advertising, and packaging to differentiate themselves.

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