Abstract
In this paper, I will be analyzing the market structures of Supply and Demand as well as pricing strategies that are suitable for them. I will also compare their strategies with those of a monopoly, a perfect competition, a monopolistic competition, and an oligopoly. To analyze these structures, I will start with an overview of the context in which these structures occur. This can be done by identifying the types of firms in each structure and how they interact. Next, I will describe the characteristics of each structure itself, including its market structure (monopoly vs. perfect competition), products or services sold (perfect competition vs. monopolistic competition), and industry characteristics (oligopoly vs. monopsony). After explaining these characteristics fully, I will then determine whether there is any difference in pricing strategies between these structures based on their characteristics and market structures. Finally, I will evaluate whether their pricing strategies are more appropriate for one type of firm over another based on this analysis by comparing them with each other and contrasting them against those found in monopolies, perfect competitions, monopsonies, and oligopolies, respectively. Based on this analysis, it can be concluded that the pricing strategies are more suitable for one type of firm over another based on their characteristics and market structures.
1.0 Perfect Competition
Perfect competition is a market structure in which there are many sellers and many buyers, such that each supplier sells to only one buyer, and each buyer buys from only one supplier. Perfect competition exists when all firms face downward-sloping demand curves for their products, and the market price of each product is determined by marginal cost (Tremblay, 2012). The main characteristic of this market structure is that it does not allow any form of collusion between competitors.
Huawei is a telecommunication company known for manufacturing and selling mobile phones, smartphones, and other devices in China. Huawei has a strong presence in the Chinese market, competing with other global telecommunications companies such as Apple, Samsung, and Vivo (Tremblay, 2012). Huawei’s products are sold through its stores or online outlets, including Amazon and eBay.
The firm’s business model is based on making a profit by charging customers for services such as phone calls and data usage. The company also makes money through advertising sales on television networks such as CCTV News 24 or CCTV News 9.
1.1. Description
The structure of perfect competition can be described as follows: There are many producers and consumers in a market for a product. Firms are price takers—they do not have any control over what price they charge or how much they produce. There is no product differentiation among the products produced by a firm. Firms face downward-sloping demand curves because more people will buy at lower prices while fewer people will buy at higher prices (Tremblay, 2012). Supply is limited by cost—firms cannot produce more than they cost to produce; and 6. The market has no barriers to entry or exit—new firms can enter the market anytime, and existing firms can exit the market anytime without losing any significant share of the total sales volume from their existing customers (Tremblay, 2012). The above model assumes that a firm is a price taker and cannot influence the market price. However, in reality, firms can often influence their demand curve by increasing or decreasing prices at any given time. For example, if Nike decides to increase the price of its shoes, then fewer people will buy them.
The first step in determining if a company fits into this market structure is to determine the number of sellers and buyers in the industry. For Huawei Company, there are only two sellers: Huawei and T-Mobile. However, there are multiple buyers: consumers at large who are looking for a phone that will work on any network, carriers who need phones that can be used across multiple networks, and retailers who want to sell these phones to consumers at high volumes in order to make money off of them (Huawei) (Tremblay, 2012). Another way to determine if Huawei Company fits into this market structure is by looking at what would happen if one of its sellers changed its price or offered more products than other companies (Huawei). If this were possible, then Huawei Company would have different pricing strategies than the perfect competition does because it would be easier for one seller’s actions to affect prices for all other sellers (Huawei).
1.2. Pricing Strategies
The pricing strategy of Huawei Company is based on maximizing profits while keeping costs low enough so that they can still be profitable if they sell fewer units than expected (i.e., a “loss leader”). They also have been known to offer discounts on certain products to increase sales volume (i.e., an “exclusivity” strategy).
Perfect competition exists when several firms are offering identical products or services. Firms are price takers, meaning they are not price makers. This means they cannot set their prices; instead, they must charge whatever the market will bear (Greenhut, 1986). However, there are no barriers to entry (i.e., those who enter will be able to sell at the same price as the established firms), so any firm that can offer a product or service at a lower cost than its competitors will be able to enter their market and compete for customers’ dollars—even if another firm offers a similar product or service at a lower price!
The most important feature of this market structure is that it creates an environment where competition benefits all participants: consumers get more choices and lower prices, while producers make more money. In a perfectly competitive market, a firm’s ability to earn profits is directly related to its ability to satisfy consumers (Greenhut, 1986). If a company can lower the price of an item below that offered by competitors, it will be able to sell more units and increase revenue. Nevertheless, if it cannot offer better value than other companies, it will not make any money—it will just break even! This is a great system for consumers (Greenhut, 1986). It means that any time you go shopping, you have many options and can always find something that meets your needs at the lowest price. For example, when you buy groceries at a supermarket, you have many choices among different food brands and types.
2.0 Monopolistic competition
Monopolistic competition is a market structure under which there are only two or more firms that compete with each other by offering similar products or services at comparable prices. There are many examples of such markets in real life (Riordan, 1986). For example, Burger King and McDonald’s are both restaurants that sell burgers at different prices depending on location. The company that sells the burger for less than the other company is said to be operating in a monopolistic environment.
2.1. Description
Burger King and McDonald’s are two of the most successful restaurant chains in the United States. Both companies have a very similar history, founded in 1954. The two companies have also had similar trajectories—Burger King has been more successful than McDonald’s over the last few years, but both are still relatively successful brands (Riordan, 1986). Both companies are in a monopolistic competition structure. Monopolistic competition occurs when one seller can influence prices and market shares via advertising or changes to product quality or distribution channels.
2.2. Pricing Strategies
Burger King’s pricing strategy assumes that it can command a high price for any product they sell due to its brand recognition and status as a national brand. In order to command such high prices, Burger King must be able to differentiate itself from its competitors by offering unique products or services. In addition, they must use advertising campaigns that emphasize their unique offerings, such as “Whopper or Nothing” ads or “I am king” campaigns (Riordan, 1986). These efforts have helped Burger King maintain its position in the fast food industry, where competitors such as McDonald’s and Wendy’s have struggled to earn a profit in recent years. Burger King’s success has been attributed to its ability to respond quickly and effectively to consumer trends and preferences. For example, their focus on healthier food options such as salads and wraps helped the company appeal to a broader demographic in recent years (Riordan, 1986). In addition, Burger King has shown an ability to use new technologies, such as mobile ordering apps and social media, to its advantage. This has helped the company appeal to younger customers, who are more likely to use these technologies (Riordan, 1986). McDonald’s has several pricing strategies that it uses in order to increase its profits. These include raising prices when consumers demand more of its product and lowering prices when demand decreases (Greenhut, 1986). As consumers become more familiar with the brand, they may ask for discounts or other incentives, such as free meals or snacks, in exchange for loyalty rewards points.
3.0 Oligopoly
An oligopoly is a market structure where a few firms control the supply of a good or service. The structure is characterized by having only a few producers, with concentrated pricing power and market share (Caves, 1978). In addition, it can be characterized by using price discrimination to increase profits, leading to higher prices for high-volume buyers (such as consumers) and lower prices for low-volume users.
3.1. Description
The company has three different oligopolies: soft drinks (such as Coca-Cola Classic), soda water and juice drinks (such as Powerade), and sports drinks (such as Gatorade). These three oligopolies comprise different types of consumers with different preferences for their products (Caves, 1978). Coke dominates the soft drink market; however, the other two oligopolies have more competition than Coke does within its oligopoly.
For example, consumers might prefer Coke’s price point over Pepsi’s because they believe it provides a better value for money or because they want to be seen drinking something from one of the big three companies instead of one of the smaller brands like Snapple or Dr. Pepper (Caves, 1978). The Coca-Cola Company provides a good example of an oligopoly in the beverage industry. It has been operating since 1886 and initially sold water fountain syrup to local retailers. By the early 1900s, it was distributing its product nationally through bottlers and distributors (Caves, 1978). By the 1980s, products such as Coca-Cola Classic and Diet Coke had become mainstream beverages available in supermarkets across America.
3.2. Pricing Strategies
Coca-Cola uses several strategies to maintain its current market share and pricing power: It uses product differentiation to attract customers. It maintains a high level of brand loyalty (Caves, 1978). It uses advertising to maintain consumer awareness of its products. It makes sure that consumers receive value for the price they pay. It uses vertical and horizontal integration to control the supply chain. Coca-Cola is one of the most valuable brands in the world (Greenhut, 1986). It has a market capitalization of over $181 billion, making it larger than many companies that produce goods and services (Caves, 1978). Increase demand for Coca-Cola products by marketing them as traditional soda brands or health drinks. Use advertising campaigns that target specific demographics, such as children or teens. Reduce prices on products such as Coca-Cola Zero.
4.0 Monopoly
The Monopoly game is a competitive strategy game in which players compete to become the sole seller of a good. It is played on a board with five properties, two red and three black, arranged in shape similar to a pie chart or parallelogram (Bresnahan, 1990). The game’s object is to become the sole player who owns all five properties by acquiring them from other players who have already acquired four. The first player to do so is the winner.
4.1. Description
The factors that led to the company’s success in maintaining its monopoly status included: A highly efficient production system that allowed them to produce crude oil at low cost and refine it into refined petroleum products at high efficiency; A highly effective marketing strategy that allowed the company to expand its product offerings across a variety of industries; and A highly effective lobbying strategy that allowed them to maintain political ties with legislators in order to prevent any potential laws from being passed that would decrease their market share and profits (Bresnahan, 1990). The company also had a highly effective advertising campaign to reach millions of consumers and convince them of the benefits of using petroleum products.
4.2. Pricing Strategies
Rockefeller’s Standard Oil Company’s pricing strategies were used to maintain its oil market monopoly. The company was able to maintain a monopoly because of its ability to manipulate prices through supply and demand, which allowed them to set prices at levels that were not sustainable for other companies (Bresnahan, 1990). The company could do this because it controlled a large portion of the oil supply in the United States, and it could therefore control how much oil was available for sale at any given time. In addition to controlling oil supplies, Rockefeller’s Standard Oil Company also controlled all transportation methods used by refineries so that they could buy their raw materials from other companies and sell them on a near-exhaustive scale (Bresnahan, 1990). This gave them enough control over the market for them to be able to charge high prices for their products without losing money.
For other companies to compete with Rockefeller’s Standard Oil Company, they would have had to either come up with an alternative product or develop price controls that would allow them to set lower prices than Rockefeller’s Standard Oil Company (Bresnahan, 1990). This would have been an extremely difficult task, especially since Rockefeller’s Standard Oil Company was so well-established that it had a hold on most of the market.
Case Study
John D. Rockefeller founded Rockefeller’s Standard Oil Company in 1870. At its peak in 1880, it controlled 90% of all oil refining capacity in the United States (Bresnahan, 1990). It was also one of the first companies to have an extensive network of pipelines across the country (Bresnahan, 1990). It had significant power over prices charged at various points along its network. This power gave Rockefeller’s Standard Oil Company considerable control over other companies’ supply chains and their ability to compete with each other (Bresnahan, 1990). Thus, while many other companies compete against each other at various points along their supply chain, one company still holds significant power over a long period.
Conclusion
The optimal competition structure can be outlined as follows: A market for a product has a large number of producers and customers. Companies are price takers; they do not influence the prices they charge or the number of products they create. The products that a company produces do not differ from one another. When numerous businesses sell the same goods or services, perfect competition exists. Businesses are price takers, not price makers. They must therefore charge whatever the market will bear and cannot determine their prices. In a market system known as monopolistic competition, only two or more enterprises compete with one another by providing comparable goods or services at comparable costs. Such markets are prevalent in everyday life. A market structure known as an oligopoly occurs when a small number of businesses dominate the supply of an item or service. The structure is defined by having a small number of producers with a concentrated distribution of pricing power and market share. For instance, customers may prefer Coke’s price point over Pepsi’s because they think it offers greater value or because they prefer to drink one of the three major brands rather than a lesser-known one like Snapple or Dr. Pepper. Other businesses would have needed to either create an alternative product or create price controls that would allow them to set prices lower than Rockefeller’s Standard Oil Company to compete with it in the Monopoly framework.
References
Bresnahan, T. F., & Reiss, P. C. (1990). Entry in monopoly market. The Review of Economic Studies, 57(4), 531-553.
Caves, R. E., & Porter, M. E. (1978). Market structure, oligopoly, and stability of market shares. The Journal of Industrial Economics, 289-313.
Greenhut, M. L., Mai, C. C., & Norman, G. (1986). Impacts on optimum location of different pricing strategies, market structures, and customer distributions over space. Regional Science and Urban Economics, 16(3), 329-351.
Riordan, M. H. (1986). Monopolistic competition with experience goods. The Quarterly Journal of Economics, 101(2), 265-279.
Tremblay, V. J., & Tremblay, C. H. (2012). Perfect Competition and Market Imperfections. In New Perspectives on Industrial Organization (pp. 123-143). Springer, New York, NY.
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