Factors Influencing Pricing

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Different Types of Market Structures

The price that a business can charge for its products or services will be determined by the type market in which it operates.

Perfect markets

In a perfectly competitive market, the firm is a ‘price taker’, i.e. it takes its price from the industry. No market participant influences the price of the product it buys or sells. 

Perfectly competitive markets exhibit the following characteristics:

  • There are no barriers to entry into or exit out of the market.

  • There is perfect knowledge, with no information failure or time lags. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited.

  • Firms produce homogeneous, identical, units of output that are not branded.

  • Each unit of input, such as units of labour, are homogenous.

  • No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry.

  • There are a very large numbers of firms in the market.

  • There is no need for government regulation, except to make markets more competitive.

  • There are assumed to be no externalities, that is no external costs or benefits.

  • Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.

Imperfect markets

Imperfect competition refers to the market structure that does not meet the conditions of a perfect competition. 

Its forms include:

  • Monopoly, there is only one provider of a good or service. The monopolist sells a product for which there are no close substitutes. It controls the market and has great market power. It can set the price of products sold in the market.

  • Oligopoly, a few large companies dominate the market and are inter-dependent. They offer the same product and compete for market dominance eg. Telecommunication costs.

  • Monopolistic competition, products are similar, but not identical. Each firm sells a branded product, hence it is a monopolist for its brand. There is freedom of entry or exit into the industry.

What influences the price of a product or a service?

It is a fundamental rule of business that selling price must be greater than cost. 

The most basic point about pricing is that in the long run, the revenue earned from selling a product or service must exceed the costs incurred.

  1. Cost: - The most straightforward approach to arrive at the selling price is to calculate cost and add on a profit margin/mark up. Using this cost plus pricing approach, ‘cost’ is calculated on the basis of either marginal (this may also be termed ‘variable’) cost or total cost.

  2. Price perception: - Customer-based pricing reflects customers’ perceptions of the benefits they will enjoy if they obtain that product or service.  Quality is an important aspect of price perception.

  3. Competition: - Competition-based pricing means setting a price based upon the prices of competing products, i.e. taking into consideration both substitutes and complimentary products. However, it is important to remember that in many instances, the price will be dictated by the market. If the product or service is provided by a number of competitors, and it is not possible to differentiate between different providers, organisations will have little influence on prices.

  4. Inflation: - In periods of inflation, a company may need to increase the price of its products and services to offset the increases in the prices of materials, labour and overheads.

  5. Innovation: - A company may set a high price for an innovative product – price skimming.

  6. Ethics: - When setting a price, the company will take into account various ethical considerations: if the product is scarce, should it rise its price to exploit these short-term shortages?

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