Pricing in different Types of Markets
The seller's pricing freedom varies along different types of markets. Economists identify four types of markets, each presenting a different type of pricing challenge.
Under pure competition, the market consists of various sellers and buyers trading in identical commodity like copper, wheat. No single seller or buyer has much effect on the going market price. Seller can't charge more than the going price because buyers may gain as much as they need at the going price. Nor will sellers charge less than the market price because they can sell all they want at this price. If profits and price rise, new sellers may easily enter the market. In a purely competitive market, product development, marketing research, pricing, advertising, and sales promotion play little or no role. Therefore, sellers in these markets don't spend much time on marketing approach.
Under monopolistic competition, the market consists of various sellers and buyers who trade over a range of prices instead than a single market price. A range of prices take place because sellers may differentiate their offers to buyers. Either the physical product may be varied in features, quality or style or the accompanying services can be varied. Buyers see differences in sellers' products and will pay different charges for them. Sellers try to develop differentiated offers for different customer segments and, additionally to price, freely use, advertising, branding and personal selling to set their offers apart. Because there are various competitors in such markets, each firm is less affected by competitors' marketing strategies than in oligopolistic markets.
Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other's pricing and marketing strategies. The product may be uniform (aluminium, steel) or differentiated (cars, computers). There are some sellers because it is hard for new sellers to enter the market. Each of the sellers is alert to competitors' strategies and moves. If steel company slashes its cost by 10 %, buyers will rapidly switch to this supplier. The other steelmakers have to respond by lowering their prices or enhancing their services. An oligopolist is never certain that it will gain anything permanent via a price cut. On the contritely, if an oligopolist raises its price, its competitors can not follow this specific lead. The oligopolist would have to retract its price increase or risk losing customers to competitors.
In a pure monopoly, the market consists of one seller. Pricing is handled differently in each of case. A government monopoly may pursue a variety of pricing objectives. It may set a price below cost because the product is significant to buyers who cannot afford to pay full cost. Or the price can be set either to cover costs or to produce good revenue. Even it can be set quite high to slow down consumption. In a synchronized monopoly, the government allow the company to set rates that will yield a "fair return," one that will allow the company maintain and expand its operations as required. Unregulated monopolies are free to price at what the market will tolerate. However, they do not always charge the total price for a number of reasons: a desire to not attract competition, a desire to penetrate the market with a low price, or a fear of government regulation.