Competitive market oligopoly
In a competitive market, utility maximizing consumers and profit maximizing producers freely determine prices and the point where an equilibrium price is charged for quantity supplied, which is equal to quantity demanded (Kolmar, 2022). Conversely, oligopoly firms act like monopolies by together deciding to hold down the industries output and charge a higher price than in competitive markets, and then ultimately divide profits among themselves. Oligopolies manage to have such a market structure by forming cartels that agree to fix market prices or divide the market among them, or restrict competition in order to allow oligopolistic firms to earn monopoly profits (Wall, 2022). When the firms are successful in colluding to fix prices and are certain of each firms output, they are able to maximize profits at a point where marginal cost of the quantity supplied is equal to the marginal revenue.
Effects of maximizing costs on marginal costs
A cartel is a group of firms that come together to make unified price and output decisions. The firms involved join the cartel with the aim of increasing market power and the firms work together to jointly establish the level of output each member produces and/or the price that each member charges. By members of a cartel working together, if they would behave like a monopolist, that is, each firm sells an undifferentiated product then the demand curve would be horizontal at the market price. However, if the firms form a cartel to establish output and price, they will jointly have a downward sloping market curve (Sarafopoulos & Papadopoulos, 2019). The cartels will establish combined output at the point where their combined marginal revenue is equal to their marginal cost and the cartel price is determined by the market demand curve at the level output is established by the cartel.
Notably, cartels are hard to maintain because its members are tempted to cheat on the agreement to scale down production because in doing so, the firm can up their share of the cartel profits. From the game theory, this equilibrium is unstable because each firm has incentive to deviate because they have the marginal cost function equally and where it is optimal and therefore, they make contingency decisions.
Effects of price discrimination as a result of peak load pricing
Peak loading pricing strategy involves charging high prices for goods and services when the demand is at peak. This form of price discrimination occurs on the basis of efficiency, that is, a company discriminates on the basis of high traffic, high usage, high demand times and low demand times. Sellers set higher prices when the demand is high and it counts as price discrimination because consumers with highly elastic demand wait to buy the product at lower prices during the off-peak season while those with less elastic demand are forced to purchase the product or service at higher prices during the peak period. In some instances, peak loading pricing is advantageous to the consumer. This pricing increases the total consumers’ surplus because consumers with highly elastic demand buy more of the product at lower prices during the off-peak season than they would have if the firm charged one price at all times (Herrera & Young, 2022). For instance, most phone companies charge lower prices for calls in the evening and during the weekends compared to those charged during normal business hours. Therefore, a caller with a fairly elastic demand will wait until off-peak times to make calls. However, businesses are less elastic in demand and are forced to pay more for calls during day peak hours.
Description of price discrimination
Price discrimination refers to a selling strategy a firm charges different prices for the same product based on what the sellers feel can agree to depending on the relative elasticities of demand in the submarkets. Consumers with a relative elastic submarket pay less while those in relatively inelastic subgroup pay higher prices. There are three types of price discrimination namely personalized pricing, product pricing and group pricing (Hupperich, et al., 2018). Also known as first degree pricing, personalized happens when a firm charges the maximum possible price for each unit consumed where prices vary among units. Industries practicing client services charge a different price for each service sold in an effort to capture all available consumers surplus for itself. Second degree price discrimination or product pricing happens when a firm places different prices on different quantities purchased like in the case of quantity discounts on bulk purchases. Lastly, third degree price discrimination occurs when a company charges different consumer groups like when a theater charges different rates for adults and children for watching the same movie.
Differences between marginal pricing and cost-plus pricing
A marginal cost pricing strategy entails placing price ahead of the margin such that there is no profit left over for the business. This strategy is designed to recover overhead costs and move old inventory off the shelves. Margin cost pricing happens when a product is released to promote sales or during end of the year sales. On the other hand, full cost pricing strategy is formulated to return a maximum yield profit because a firm sets product margins against the overhead for each unit. Additionally, the price of unit is set on the full cost of efforts used to sell the unit. For instance, a crafts company incorporates the transportation and booth space costs into the price of the product (Farm, 2020). The main difference between marginal price and cost plus pricing is that marginal cost pricing is intended to move inventory without necessarily creating profit while cost plus pricing factors the entire overhead production cost into the price of the product.
Farm, A. (2020). Pricing in practice in consumer markets. Journal of Post Keynesian Economics, 43(1), 61-75.
Herrera, C., & Young, C. A. (2022). Revenue management in restaurants: the role of customers’ suspicion of price increases. Journal of Foodservice Business Research, 1-25.
Hupperich, T., Tatang, D., Wilkop, N., & Holz, T. (2018, March). An empirical study on online price differentiation. In Proceedings of the Eighth ACM Conference on Data and Application Security and Privacy (pp. 76-83).
Kolmar, M. (2022). Firm Behavior Under Perfect Competition. In Principles of Microeconomics (pp. 377-397). Springer, Cham.
Sarafopoulos, G., & Papadopoulos, K. (2019). Chaos in oligopoly models. International Journal of Productivity Management and Assessment Technologies (IJPMAT), 7(1), 50-76.
Wall, W. P. (2022). Global Competition—The Battlefield. In Global Competitiveness (pp. 1-6). Springer, Singapore.