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Pricing methods under different market structures

The determination of optimal price can be considered under the following market structures:

(a) Perfect competition: Under pure competition a firm has no pricing policy of its own as it has to accept the prevalent market price and at this price, it can sell all of its production if it so desires. But at any higher price it can sell nothing. There is no control over market price which will equate the quantities available with the quantities which the buyers are willing to buy. The firm has to take a decision in favour of the quantity to sell. The firm can continue to produce so long as its marginal cost is less than or equal to its selling price, Upto the point at which the marginal cost is equal to price, increase in output will add to revenue and thereafter the
increase will add to cost.

(b) Monopoly: It is a business situation which is characterised by:
(i) one seller of a particular good or service
(ii) competition from the producers of substitutes is almost insignificant.

(c) Monopolistic competition: We saw that substitute firms who sell similar products enter the market and because of differentiation of products by sellers, monopolistic competition arises. Since there is limit to the growth of competitors the excess profits earned by monopolistic situation attracts new competition. This will have a long-run effect on the excess profits which will tend to diminish because of the price competition with close substitutes. The company will, however, have to compare marginal cost and marginal revenue in maximising its profits.

(d) Oligopoly: If in a market there are a few large sellers occupying a major share of the market, the situation is called oligopoly. If the oligopolistic seller finds that his competitors also increase their prices with his decision to increase or decrease their prices with his decision to reduce, his revenue curve will have the same shape as that of the market as a whole. If the competitors, however, do not follow suit, the shift in the sales will be sensitive. If one seller increases his price while the others do not, the consumers will start buying from the competitors and the sales of the seller who increased his price will start buying from the competitors and the sales of the seller who increased his price will start falling off. Thus each firm will study the potential reaction before increasing or decreasing the selling price.
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