Market Structures and Pricing Strategies
In Economics, market structures are broken down into four main structure types, Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. This paper will elaborate on how they are broken down by variables, such as how many buyers and sellers, cost and direct competition. The price for the consumer is affected under these structure types and this paper will explain the four different types and how the consumer price is affected. After each of the four structures is broken down, I will use Apple as an example and explain its complex market structure. Perfect Competition has a large number of buyers and sellers in a market where the good or service is identical. This requires the seller to accept the going price on their product. The seller is not able to control the market price. The good or service is very common and the information of the good or service is well known by the consumer. Due to the large number of sellers the consumer is able to choose, this can be dependent on price and overall product quality.
The price of the good or service is not controlled by market price, but only by supply and demand. An example of perfect competition is a farmers market where sellers are selling the same tomatoes. Monopolistic Competition has a large number of buyers and sellers, but the good or service is similar, not identical. The seller has some choice of in the asking price of the good or service, but not drastic change in price over the market price. The consumer typically does not have all the information about the good or service. An example to think of, as a monopolistic competition is shoe manufactures. Oligopoly has a large number of buyers, however there is a handful of sellers. The good or service is very similar, and the consumer does have information about the item. With only a handful of sellers the price is typically influenced to maximize profits. This has been done and is called market sharing, or collusion, as used by OPEC (Organization of the Petroleum Exporting Countries). Monopoly can have a small or large number of buyers, but only have one seller of a good or service. There is no competition for the good or service so the seller has complete control of the market, and the seller will use this power to maximize profits. The seller has the opportunity to decide the amount of goods and service to provide, which can be used to alter supply and demand to their benefit.
An example of a monopoly would be pre 1911 Standard Oil that had a control of the oil business in the world, but was broken up into smaller companies. The United States Supreme Court ruled this to be an illegal monopoly. The pricing strategies differ for the four main market structures. Perfect competition is primarily set by market value. The reason for this is the large amount of buyers and sellers. If a seller was to raise the price, the buyer would have many other choices found at the market price. Monopolistic competition has many buyers and sellers, just as perfect competition does, but the seller’s good or service is not identical. This allows for the seller to adjust the price over the market price, but the same rules apply if the seller raises the price to drastic as perfect competition. Oligopoly is most commonly thought of the larger companies who have primary control of the market and can influence the price to maximize profit. They are able to do this by making it difficult for smaller companies to enter the industry. The price that they can manipulate out of consumers is normally because these larger companies have a similar business plan.
Monopolies control a 100% of their competing market, which allows them to demand much higher prices. They can manipulate the supply and demand of their product driving the price up within means of what can be considered illegal. The example I will be using is Apple’s market structure on the technology industry. Apples market structure varies, depending on the market. The three main markets they specialize in are smartphone, computer operating systems and digital music players. Their smartphone market is an oligophy market because there are a few large manufactures such as HTC, Samsung, Nokia and RIM. When it comes to their computer operating system the market system is a lot like oligopoly, because there are two large competitors, Windows and Apple, making it a duopoly structure. The market where it can be argued that Apple is in complete control, a monopoly, is the digital music market. In the digital music market there is a very limited amount of competitors that measure up to Apple’s IPod. Apple can be considered a monopoly in the technology industry because they are highly competitive in these markets and their profits show this. The pricing strategy used by Apple for their products is considered by facts related to the market history. Here is a good description why:
Differentiation – You can recognize Apple computer in the middle of hundred others from a mile away. With their distinctive aluminum casing and signature logo Apple computers are in class of their own. There is no apple-to-apple comparison between them and those from competitors. When all other computer makers are fighting for sales with low price Apple holds its ground and commands premium. And still when you ask any college bound kid what computer he wants without a doubt the answer will be Apple. No wonder Apple enjoys double-digit margin on their products when other PC makers are happy to achieve even 5%. (“How Does Apple,” 2012, para 3)
Quality – All Apple products are known for their workmanship and quality. They last for a long time, although most people do not want to hold onto them for too long because they are always itching to get their hands on the next interesting thing. When you do run into problems with Apple products their customer service takes care of them quickly. Anyone who has visited their “Genius Bar” in Apple Store understands this. (“How Does Apple,” 2012, para 4)
Must-have Products – Show me someone who doesn’t desire Apple products and I will show you someone who has been living in a different planet for the last 10 years. Apple products are objects of desire for 3-year old kid as well as 90-year Grandmas and everyone in between. According to CNBC All-American Economic survey half of U.S. households own at least one Apple product, while 9% own more than 5 products! Any company would die for this type of customer lust for their products. (“How Does Apple,” 2012, para 5)
Guarantee – When most PC users are afraid of their computers getting infected by virus and losing data, Apple products have been relatively virus free. With their iTunes program they control which applications are allowed to get into Apple products. This gives users peace of mind that the applications downloaded on their computers, iPhones or iPads will be safe to use. (“How Does Apple,” 2012, para 6)
Show and Tell – Steve Jobs was a master of introducing new products. It is said that he could pick up a stone from the sidewalk and sell you for the hundred dollars! Months before they introduce new products rumor mills swirl with excitement and journalists flock to their grandiose product introduction to see what Steve Jobs has to show. (“How Does Apple,” 2012, para 7)
Hold Ground – Even in the face dire financial situation in 90’s Apple never compromised on quality and price. They always maintained that their products are superior to anything else in the market and hence command premium price. It finally paid off when it became the most valuable company in the world few months ago. (“How Does Apple,” 2012, para 8)
Once you have accomplished such accolades as Apple has, your pricing strategy is premium. They do still have to consider the markets where there are more competitors for pricing. However, they are still able to charge a little higher because of their different markets that interlink. A survey I found states: More than 51 percent of the public owns an Apple product, with one in three owning more than one. The median American household has 1.6 Apple products. (Liesman, 2012)
Enough said Apple is awesome!
In conclusion, this paper has provided a glimpse of the four main market structures and their pricing strategies. As noticed perfect competition is not as common as the other three. Oligopy and monopoly are very similar because of their way to drive the market price up and that is because they both control the majority of the market respectively. My real world example of Apple shows how a company can have a complex market structure by having oligopoly markets that encourage a monopoly on the industry.
How does Apple do it? Case study on Premium Pricing. (31 March 2012). Retrieved November 14, 2013, from http://www.smallbizviewpoints.com/2012/03/31/how-does-apple-do-it-case-study-