Market Structures and Relating Pricing Strategies

Introduction

Today, various companies are being established frequently as digital and light manufacturing’s entry barrier became relatively low. Consequently, competitiveness increases in those industries and businesses need to create strategies to maintain their demand. Market structures such as perfect and monopolistic competition, oligopoly, and monopoly require the firms to adjust their approaches and consider the rivals’ existence at different rates. The research project explored the market competition structures and introduced pricing strategies for each, based on their demand curve, advantages, and drawbacks. In addition, the case study of the online streaming services industry with the monopolistic competition structure analyzed Netflix as the significant market shareowner. The company history, current pricing structure, and competitive advantages are examples of operating in a broad and diverse economy.

Perfect Competition

A hypothetical market’s competition defines as perfect when an industry’s contest level is at its peak, forcing the businesses to improve their products continuously. Consumers receive the best offers possible in those conditions, and the producers make rational decisions to avoid failure for their companies (Salin, 2019). The perfect competition also does not include entry or exit barriers, and trading is based on a price taker’s solid market value (Salin, 2019). Companies receive expected profit in the long run, based on the industry’s average, yet they can make a considerable income in a shorter period if they beat the competitors.

Description

A market’s conditions where the entry barriers are low, the demand for products is high, and sellers operating at the same prices are described as the perfect competition. It must sell identical goods with a price taker and have the consumers aware of the products and the average values (Salin, 2019). Entry and exit barriers must be low in the perfect competition conditions, therefore the governmental regulation, starting costs, and supplying strategies must not exist or be easy to reach. The perfect competition equilibrium is reached at the point of a market’s demand and supply equity, determining a product’s pricing.

Productive and allocative efficiency achieved in the long run help competitors achieves stable success (Head & Spencer, 2017). Both factors affect the competition, in the long run, however, the increased demand would change the equilibrium in a shorter period.

Pricing Strategies

The perfect competition forces businesses to operate within the market price and accept its limitations. However, the strategies can involve reducing production costs and lowering the product’s price, thus making a firm more competitive. A company’s tactics must consider the demand and supply curves of the goods produced and knowledge of the consumers’ purchasing behavior patterns (Rekettye & Liu, 2018). The supply curve is crucial to reduce the initial production costs as the supplier must work within the market price range. In the perfect competition market, a company can remain profitable in the long term when the balance between production costs and the average product’s worth is achieved.

Perfect competition markets do not exist in the modern economy because most products differ in their quality or production methods. However, industries like agriculture are close to that conditions, and their pricing strategy can be applied as an example (Jégourel & Chalmin, 2017). Raw materials’ production involves various countries with different economic structures and situations, therefore the average production costs are low (Jégourel & Chalmin, 2017). The price is also established by the price taker or a main mining country, and the companies regulate their strategies in accordance with the supply and demand curves.

Monopolistic competition

Monopolistic competition is the market structure where the level of competitiveness is high, but the companies sell different goods. Various industries operate in these conditions, and it profoundly impacts small-business developments. Edward Chamberlin and Joan Robinson created the theoretical basis of monopolistic competition in the 1930s as the number and technological level increased and led more products to appear in markets (Salin, 2019). The companies can make a normal profit in the long run if their costs and pricing strategies are correctly set or earn supernormally in the short period by differentiating what they produce.

Description

Industries where the firms can produce and sell goods that are not necessarily the same function in monopolistic competition. That market type has low entry and exit barriers, making it possible for small companies to operate and for entrepreneurship to thrive. The products are differentiated by such factors as physical products, marketing, human capital, and distribution (Kennedy, 2021). Companies increase their competitiveness by introducing diverse appearance, features, and capabilities of their goods. They also pay attention to advertising and branding strategies, employ people with specific skills to improve their products and offer special distribution services.

As there is no price set on the industry’s end, firms have an inelastic demand curve. Equilibrium under monopolistic competition in the short run makes it possible to get supernormal profit (Kennedy, 2021). When many small businesses enter the market, the demand for products stretches and lowers the prices. Consequently, companies continue to exist with the normal profit in the long-run equilibrium and develop new features or other differentiations to beat the new competitors.

Pricing Strategies

In monopolistic competition, firms do not have a price taker; thus, they can establish their own prices and outputs based on the market’s demands, trends, and production costs. It is crucial to research the companies that sell similar goods, and assess their quality, promotion approaches, and consumers’ demands before setting their own prices (Rekettye & Liu, 2018). Besides, marketing, advertising, and branding play a significant role in monopolistic competition because reaching the customer and guessing their needs is necessary to beat the contestants.

Companies’ pricing strategies do not affect the market, however, the quality standards might increase when a company begins selling a more expensive product than the competitors (Kennedy, 2021). Various modern industries operate in monopolistic competition, such as fast food, restaurants, hotels, and consumer services. Indeed, the hotel chains exist worldwide and offer the same service – accommodation, but include different options, and have their pricing structures, loyalty programs, advertisement, and marketing strategies.

Oligopoly

Oligopoly competition structure includes perfect and monopolistic market characteristics, yet it establishes when a few significant players take the leading role. The race towards making the most innovative product or gaining most of the consumers between them moves the industry forward. Consequently, the entry barrier is higher, and the leading companies’ actions might regulate the prices. The oligopoly structure was developed in 1838 by the French economist Antoine Cournot, who built the theory applying two firms’ dominance in a certain production (Head & Spencer, 2017). The modern world economy shows various markets where a few companies become the key elements and influence the whole industry. For example, Google and Facebook in digital technology, or Ford and GMC in the automobile market.

Description

Oligopoly is a structure of a highly concentrated market with a few firms maintaining dominating positions and influencing the whole industry’s development. However, the smaller companies can still exist and reach normal profit in the long-run equilibrium. Oligopoly’s high concentration ratio reveals leading businesses’ authority by making all the other players interdependent and raising the entry barrier for the new ones (Head & Spencer, 2017). Indeed, each company needs to craft its strategies by considering or forecasting the actions that the dominators could take. A firm also might decide to compete with its rivals by searching for their weak points or ways to get their customers. The entry barrier in an oligopoly appears due to the factors like high costs, a limit in price setting, or strong branding of the leading companies.

The interdependence among the firms in a market causes the appearance of two demand curves to consider. The oligopoly company might perform as a price taker by lowering a product’s value, and the others might react and change their pricing structure or ignore it (Head & Spencer, 2017). In that case, or if the price was increased, the demand curve of a leading company will be kinked. Although the price changes affect the companies, they still can reach normal profits due to the limited number of new competitors.

Pricing Strategies

The most significant competitors set the prices in oligopoly markets, and the other players’ strategies inevitably depend on those conditions. Moreover, oligopolists can establish predatory pricing making their products the cheapest and eliminating the smaller companies unable to lower the production costs. Considering the interdependence, a firm’s financial strategy in the oligopoly market can be to make attempts to beat the leaders or apply the rule of thumb pricing (Salin, 2019). The latter is based on calculating average manufacturing costs and adding the profit benchmark to achieve (Rekettye & Liu, 2018). The rule of thumb pricing strategy is effective for the long existence in the market, however, the risk of oligopolists setting the more flexible conditions still exists.

Monopoly

Industries, where only one company is in a dominant position and unreachable to the competitors, have a monopolistic structure. Monopoly is submitted if a certain firm controls 25% of the whole market, and in developed countries, governments act towards decreasing the possibility for businesses to become that significant (Kennedy, 2021). The term a single seller was created inside a game in 1903 by American antimonopolist Lizzie Magie to explain Henry George’s single-tax theory (Kennedy, 2021). Monopolies appear when a company has an exclusive production technology, access to the demanded materials, or the key market players’ merging or acquisition.

Description

A monopoly is described as a market structure where only one crucial seller exists and obtains most of the industry’s processes. Such conditions appear due to the objective benefits of having only one firm involved in a specific production or the merging of oligopolists. The entry barrier is the highest, therefore there is no risk of losing the authority, and a company sets its own pricing and manufacturing standards based on the consumers’ demands (Salin, 2019). Monopolies have several drawbacks, such as lowering the output to a market, overpricing, choice restriction, and innovation deceleration (Kennedy, 2021).

Consequently, such markets become less productively and allocatively efficient, severely affecting the overall economy. The earnings level usually depends on the competitiveness among the industry’s representatives, and in the monopolistic scenario, that condition does not exist (Kennedy, 2021). Monopoly is the only market structure where supernormal profits can occur in the long-run equilibrium.

Pricing Strategies

Monopoly pricing strategies exclude any competitive factor due to the high entry barrier and the absence of interdependence. However, the government might establish limits or benchmarks for a product’s quality and value, forcing a monopolist to follow the criteria. In general, the pricing strategy for a monopoly is based on the demand and production costs (Rekettye & Liu, 2018). The seller can also achieve supernormal profit in the long run by investing in technological improvement and increasing the goods’ value.

Case Study

The company selected for the case study is Netflix, a successful online service that extends the audience worldwide and applies unusual strategies to maintain a significant role in the video streaming industry. The company operates in the monopolistic competition market as numerous similar businesses offer different sorts of content. Companies that combine streaming of movies they licensed with their original creations as Netflix does are its major rivals – Amazon, Hulu, and Disney Plus.

The competitors maintain or increase their market share by creating new entertaining and educational content, collaborating with film production companies, and executing various profitable pricing strategies. As of May 2020, Netflix is the largest streaming service with more than 180 million subscribers worldwide (Ofek et al., 2020). The company started in 1997 as a DVD rental service and reached an unexpected supernormal profit in short-run equilibrium when the executives decided to implement a subscription model (Ofek et al., 2020).

Instead of picking disks one by one with an expiration date, Netflix members could pick an unlimited number of items without any deadlines for the monthly fee. By 2003, the company reached 1 million subscribers, issued a patent to cover the rental service, and expanded to 5 million customers by 2006 (Netflix, 2021a). Netflix grew by becoming available abroad, and with the development of online streaming, the company turned into the industry leader.

The filmmaking industry had significantly changed when people began prioritizing customization and selecting what they wanted to watch instead of letting the TV channels decide. Besides, the DVD industry’s popularity decreased when the movies became downloadable from the Internet. Consequently, offering subscriptions to watch numerous pieces of content with a price lower than a couple of DVDs turned into a successful pricing strategy. With its history of being a DVD rental service, Netflix was able to obtain a significant market share quickly. Moreover, in the early 2010s, the company expanded its presence by starting its own content production (Netflix, 2021a). Today Netflix has thousands of original projects and offers streaming for all the most famous TV shows of the previous decades.

Pricing strategy in the streaming industry is a crucial competitive factor because the most convenient offer can affect consumers’ choice of a platform. Netflix offers three types of accounts – Basic, Standard, and Premium, based on the number of devices to connect and the video’s quality (Netflix, 2021b). The price varies between the countries, and the subscriptions can only be paid monthly (Netflix, 2021b).

These conditions give Netflix a competitive advantage as the rivals like Disney Plus, or Hulu are not available in many countries, and Amazon is too tied with its ecosystem (Ofek et al., 2020). Moreover, the absence of an annual account setting helps the service maintain a steady normal profit and makes it easier for customers to cancel a subscription. Customers’ choices can be driven by their willingness to watch certain movies created by Disney, Netflix, Amazon, or Hulu, or their loyalty to other services a company like Amazon offers.

The modern online video streaming industry is an example of a monopolistic competition market structure. Netflix, with its rivals such as Amazon, Disney Plus, and Hulu, offer similar services but with different features, branding, and distribution strategies. The competition helps the industry develop, and the relatively low entry barrier makes it possible for smaller streamers to appear and operate on their own. Besides, the main rivals have diverse subscription models and pricing strategies, making it more convenient for consumers to select the best option.

Conclusion

A market structure highly depends on the competition type as it determines the demand, pricing, production costs, and profitability and is the main point to consider in strategizing. In perfect competition, rivals have enough perspectives to develop, grow, and co-exist with the new entrants.

The companies receive normal profit, and the consumers get the best offers possible. In monopolistic competition, a firm’s strategy must include the differentiation approaches to beat the competitors and set up convenient pricing. The businesses act independently, and the tough competition between them drives the industry’s development. In contrast, oligopoly markets’ conditions make the smaller players interdependent from a few leaders who set the prices and affect the demand curve. A monopoly is a structure where only one company has the power to rule the market, and competition is primarily impossible in such industries.

Netflix is an example of a company that successfully operates in a monopolistic competition market structure. The streaming service has several advantages based on the demand in their content and the subscription model’s convenience. Netflix is available in many countries where the competitors like Amazon, Hulu, or Disney Plus do not offer their products. The pricing structure is flexible, it makes a consumer choose the most convenient option and helps the company receive stable normal profit.

References

Head, K., & Spencer, B. J. (2017). Oligopoly in international trade: Rise, fall and resurgence. Canadian Journal of Economics, 50(5), 1414-1444. Web.

Hemsley, P., Morais, R., & Di Iulio, K. (2020). Market structure and knowledge acquisition by firms. Journal of Economic Studies. Web.

JĂ©gourel, Y., & Chalmin, P. (2017). The dynamics of the price of raw materials and industrial strategies in African producer countries: What are the challenges?. International Development Policy Revue Internationale de Politique de DĂ©veloppement, 8(1). Web.

Kennedy, J. (2021). Monopoly myths: Are superstar firms stifling competition or just beating it?. Information Technology and Innovation Foundation. Web.

Netflix. (2021a). The story of Netflix. Web.

Netflix. (2021b). Plans and pricing. Web.

Ofek, E., Bertini, M., Koenigsberg, O., & Klopfenstein, A. (2020). Pricing at Netflix. Harvard Business School Case, 521(4), 1-33. Web.

Rekettye, G., & Liu, J. (2018). Pricing: The new frontier. Transnational Press London. Web.

Salin, P. (2019) Competition and free trade. Routledge. Web.

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BusinessEssay. "Market Structures and Relating Pricing Strategies." December 12, 2022. https://business-essay.com/market-structures-and-relating-pricing-strategies/.