Sunday, March 28, 2010

Monopoly Price-Setting Strategies

Monopolies face tradeoffs between price and the quantity that is traded or sold. There are two price setting potentials that generate different tradeoffs, which are single price and price discrimination.

Single price monopoly is a firm that has to sell each unit of its output for the same price to all of its customers. Price discriminating monopoly is when a firm that vends different units for different prices that are not related to cost differences. Airlines, for instance have different prices for the same flights. If a firm price discriminates it makes the impression that it is doing so in the favor of their customer(s) when in fact it is charging each group of customers the greatest price they can get them to pay in order to increase their profit.

Market Types

There are four market types: Perfect competition, monopoly, monopolistic competition, and oligopoly.

Perfect competition exists when: many firms sell the same product to a number of buyers, there are no barriers to entry or exit from the market, established firms do not have any advantage over new firms, and sellers and buyers are informed of the prices. These circumstances occur at the time that the market demand for the particular product is large relative to the productivity of a single producer.
Monopoly is a market for a good or service which has no close replacements and in which there is one provider that is protected from competition by an obstacle preventing the entry of new firms. The phone, gas, electricity and water supplies are considered as local monopolies in some places.

Monopolistic competition is a market in which a great number of firms compete against each other by creating similar but faintly different products. For instance, different companies such as Nike, Asics and other brands that sell running shoes all compete with each other but they have a monopoly on their particular show brand.

Oligopoly is markets in which there are a small number of firms which are interdependent that compete with each other. Oligopolies may produce nearly identical products such as batteries or differentiated products such as soda products.