Pricing – How a business approaches its pricing strategies depends on the market structure it operates in

Pricing can be a means of competing – not only to take customers of rivals but to prevent competition from rivals

Price takers – have little or no control over the price they charge

Perfect Competition – P = MR = AR = MC = AC Firms have to take the price set by the market Large number of sellers – each has small market

share and therefore no control over the market Examples may include agricultural products, some

types of financial product – stocks and shares Price Leadership – Dominant firm sets

price, rest have to take this price

Price leadership occurs where a dominant firm in an industry in which products are good substitutes is able to set price which others in the industry, on account of their smaller size, will follow

Examples include: Some commodity markets where there is a dominant seller, the computer software industry (Microsoft), petroleum, some forms of pharmaceutical products

May tend to exist in ‘micro-markets’ rather than the whole company market – e.g., no real price leadership in cereal market except for Weetabix?

Price Fixing – where firm/s fix prices at levels above equilibrium on account of their market power or through selling/distribution arrangements generally termed collusion. e.g. sports replica kits, children’s toys and games, steel, motor vehicles

Cartels – Organised price fixing – e.g. OPEC (Organisation of Petroleum Exporting Countries)

Price fixing is illegal – type in ‘price fixing’ into a search engine to get details of companies and organisations around the world accused of, and convicted of, price fixing!

Charging different prices for the same product or service.

Necessity of distinctive markets with different price elasticities

Necessity of being able to prevent movement between the markets

Examples: train travel – peak time and off peak, electricity charges – off peak metering, telephone calls

Price regime imposed on privatised utilities to help protect the public from monopoly exploitation of essential services (Remember RPI now replaced by the CPI)

RPI minus – price changes in line with the annual rate of inflation minus a set percentage, e.g. RPI – 4% - if RPI was 3% implies the firm would have to look at cutting prices to consumers by 1%

RPI plus – imposes maximum price increases, e.g. RPI +2%, if RPI was 2% firm only able to increase prices to customers by max 4%

Theory developed by William J. Baumol, John Panzar and Robert Willig (1982)

Helped to fill important gaps in market structure theory

Perfectly contestable market – the pure form – not common in reality but a benchmark to explain firms’ behaviours

Key characteristics: Firms’ behaviour influenced by the threat

of new entrants to the industry No barriers to entry or exit No sunk costs Firms may deliberately limit profits made

to discourage new entrants – entry limit pricing

Firms may attempt to erect artificial barriers to entry – e.g…

Over capacity – provides the opportunity to flood the market and drive down price in the event of a threat of entry

Aggressive marketing and branding strategies to ‘tighten’ up the market

Potential for predatory or destroyer pricing Find ways of reducing costs and increasing

efficiency to gain competitive advantage

‘Hit and Run’ tactics – enter the industry, take the profit and get out quickly (possible because of the freedom of entry and exit)

Cream-skimming – identifying parts of the market that are high in value added and exploiting those markets

Examples of markets exhibiting contestability characteristics: Financial services Airlines – especially flights

on domestic routes Computer industry – ISPs, software, web

development Energy supplies The postal service?