The Pricing Paradox
September 1, 2013
The Pricing Paradox
Market is a place where buyers and sellers meet and exchange goods or services, and in extrapolation, there are certain conditions or variants with respect to these buyers and sellers that create the structure of a market. These variants include numbers of buyers and sellers, entry barriers to buyers and sellers, homogeneity or heterogeneity of product, size of the firm, competition, and pricing. Therefore, a market structure principally refers to the different type of market in which a firm operates. The imperfectly competitive structure is identical to the realistic market conditions where some perfect and monopolistic competitors, monopolists, and oligopolists exist and dominate the market conditions.
An economy is classified in the broader meaning of four basic market structures namely perfect competition, monopolistic competition, oligopoly, and monopoly (Amacher, 2012). Each structure differs from another as its characteristics rely upon the number of competitors they have and the type of product they are producing.
In the perfect or pure competition market, there are a large number of firms each producing the same product, also called a standardized or homogeneous product. Since the number of firms is very large, no one firm can influence the market price, thus each firm has no market power and each is a price taker (Campbell & Hopehayn, 2005). It is also assumed that there is perfect information, meaning everyone knows what price is being charged in all markets. The barriers to entry are low, so it is easy for other firms to get into or out of the market. In pure competition, there are a large number of firms such that no one firm can influence the price.
In monopolistic competition, there are a large number of firms with lower barriers to entry (Berry & Reiss, 2007). The products they produce are unique to the firm but very similar to those produced by other firms....