Abstract
Market structures play an integral role in society due to the determination of how people will create, offer or exchange products and services of value. Hence, the structures describe the competitive landscape for the commodity or service. The market comprises the firms and customers willing to sell and buy the actual product or services. Engagement in transactions entails assessment of the seller or buyer contribution, product differentiation, and conditions that define the market entry. Monopoly, oligopoly, perfect competition, and monopolistic competition are the defining market structures that influence the outcomes in pricing and access to products or services. Examining the unique features of the market structures plays an integral role in determining pricing decisions and customer response. An in-depth assessment of the structures and case studies of the soft drinks sector should highlight their influence on society.
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Perfect Competition
1.1. Description
Faith (2018) contends that perfect competition denotes a market structure whereby rivalry among buyers and sellers prevails perfectly. Within the market, a single market price for the commodity is evident. Forces of total demand and supply influence the operational paradigm. Therefore, the market is defined by many buyers and sellers. Consequently, the heightened number translates into low levels of influence of a single seller over the market price (Liang et al., 2018).
Additionally, a homogeneous product shapes the market setting, with the product being undifferentiated from the rivals. The promotion of free entry and exit of the sector is evident, making the setting flexible for businesses. Equally, the businesses have perfect knowledge of their commodity and initiatives undertaken by the rivals. Upholding open communication redefines the marketplace shaped by indifference to operations (Hovenkamp & Shapiro, 2018). A single buyer cannot exude preference to purchase from a particular seller and vice versa.
Consequently, structural features that define the marketplace make it flexible in promoting an enabling platform for rivalry. Therefore, perfect mobility of the factors of production shapes the market structure. Kyle (2019) asserts that the factors of production should be structurally placed to move freely within and outside the industry. Therefore, the market is shaped by no single buyer exuding control or strategic position over the others.
1.2. Pricing Strategies
In perfect competition, the firms are price takers. Arguably, the companies operate within a homogenous environment whereby quantity is within the organizational decision-making. Solving the profit maximization problem centers on market assessment and determination of the demand and supply dynamics. Kyle (2019) acknowledges that market supply is a crucial component of price-takers economic efficiency. Production taking place will play a direct part in shaping the aggregate costs at the output level. Therefore, the number of firms in the industry will affect the total costs of production. In turn, the immediate influence on the pricing pressures that the organizations face is a result of the interplay of the demand and supply dynamics. Situational awareness of the environment entails assessing the marginal costs of production. The decline in the number of firms leads to a reduction in aggregate supply within the sector hence inducing a price increase.
Consequently, high prices induce an increase in supply from some of the active firms that grapple with diseconomies of scale. The small firms will find it profitable to supply additional output despite the high unit costs (Hovenkamp & Shapiro, 2018). The possibility for diseconomies of scale lowers the number of firms which translates into high prices necessary to sustain aggregate output. Thus, assuming that price-sensitive demand prevails and firm-level diseconomies of scale, the need to analyze the equilibrium involving the reduction in firms should comprise low quantities and heightened prices.
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Monopolistic competition
2.1. Description
Monopolistic competition comprises the existence of a large number of sellers providing differentiated products. Therefore, monopolistic competition denotes the differentiation of services and products as an outstanding feature. There are many firms within the competitive landscape as opposed to the monopoly (Hovenkamp & Shapiro, 2018). The sector comprises a large pool of sellers who do not depend on each other. Independent decision-making is apparent without examining the reaction of the rivals. An individual firm has a relatively meager share of the holistic market. Therefore, product differentiation is a vital aspect that shapes decision-making. The commodities are close substitutes for each other. However, Liang et al. (2018) emphasize that the products are not perfect substitutes. Customers exude definite preferences for specific brands of products or services. Focus on trademarks and brand names assists in the differentiation of the products despite being physically identical. Nonetheless, the large number of buyers makes the setting lucrative for the companies. Focus on customer loyalty is apparent due to the buyers exuding their brand preferences. Sellers can exercise a level of monopoly over loyal clientele. Incentive schemes for customer retention are within the decision-making. Therefore, the industry is shaped by businesses’ free entry and exit (Hovenkamp & Shapiro, 2018). The barriers to entry are not considerable, which makes the setting viable for diverse investors. Equally, the firms must focus on selling costs as the decision-making foundation. Extensive investment in advertisement and promotional activities shapes the industry with the non-price-centric competition.
2.2. Pricing Strategies
Monopolistic competition is defined by prices not being a significant issue in decision-making. Within the model, the market plays an integral role in determining the pricing mechanisms. Driving the price levels are the external factors that lead to the prices being identical among the competitors. Additionally, organizations need to examine the demand features of the sector in the pricing mechanisms (Eckhardt et al., 2019). Companies setting the prices of the products depend on the market characteristic, which may render the operational dynamics unprofitable when it does not conform to the consumer features. Since each company sells similar products, examining the market features should shape decision-making. Pricing dynamics are not within the scope of control for the organization (Faith, 2018). Assessment of the quantity the forms desire to produce is within the paradigm of assessment since it directly affects the overall price. The need to invest in branding, advertising, and packaging leads to a transformation in decision-making on the pricing mechanisms (Hovenkamp & Shapiro, 2018). Without the influence of the rival’s strategy, in monopolistic competition, the assessment of the non-price-centric measures should be within the scope of operations.
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Oligopoly
3.1. Description
Liang et al. (2018) recognize that barriers shape the oligopoly market to entry and a few organizations that control the sector. Arguably, fascination with the market structure emanates from the interaction and interdependence among the oligopolistic firms. Consequently, one firm affects other firms, especially with a controlling stake. Therefore, a heightened level of competition renders the setting defined by the interplay of the market leaders and influenced by the dynamism in the decision-making. Each firm is involved in pricing, quantity, and advertisement initiatives to maximize profits (Hovenkamp & Shapiro, 2018). Due to the small number of firms, the profit level depends on the firm and the competition’s decisions. Therefore, firms sometimes engage in strategic interactions to navigate the competitive landscape. It is noteworthy to re-assess the progressive measures that should lead to mutually beneficial outcomes.
Companies should consider the other firm’s reaction to their decision-making and the influence on quantity demanded or supplied. Acceptance of the continuous evaluation and reactions to the decisions play an integral role in the emergence of tacit collusion as the basis for decision-making. Reviewing the benefits of collaboration in pricing to maintain profitability is within the scope of the oligopolistic market structure. For example, in the automotive sector, the market share depends on the pricing and quantity the firms are willing to sell. When Ford decreases its prices relative to other manufacturers, it will heighten its market share at the expense of its close rivals (Kyle, 2019). In decision-making, the competition managers are rational and extensively assess the operational dynamics. Therefore, the Nash equilibrium is characteristically attributed to the oligopoly market whereby there is no tendency for disruption based on each firm selecting a strategy given the tactic deployed by the rivals. The promotion of rational decision-making should be within the scope of decision-making with the acceptance that the behavior of the rivals is constant. Acceptance of the strategic interaction among the firms is crucial for the competitors, which translates into an enabling platform in profit management (Hovenkamp & Shapiro, 2018). Therefore, within the market, collusion is a characteristic that renders the setting influenced by a few large firms being the price makers and others the price takers. Making joint decisions is an essential feature of the oligopolistic setting, which leads to them behaving like a single firm. Collusion happens due to explicit or implicit agreements (Eckhardt et al., 2019). The firms’ cooperation in restricting output is apparent within the setting, which can lead to a monopoly price.
3.2. Pricing Strategies
The oligopolistic market structure is shaped by the quest for rigid prices and conformity to the kinked demand curve model. Hence, few firms desire price stability as the foundation for decision-making. Engagement in price wars is rare in the market due to the engagement in tacit collusion as the foundation for strategic profitability. (Eckhardt et al., 2019) When a single firm reduces its prices, it translates into the Bertrand equilibrium, whereby the prices are equal to the marginal costs (Hovenkamp & Shapiro, 2018). Consequently, the economic profits are equal to zero, which is a facet of concern in promoting strategic dominance within the industry. The kinked demand curve plays an integral role in explaining the desire for price rigidity as the framework for operational success. Asymmetric reactions to price shifts characterize firms. Rivals firms within the sector react diversely to the price change, which leads to diversity in elasticity for the price rise or decline (Liang et al., 2018). Therefore, price signaling or leadership is the model that can explain the operational dynamics within the oligopoly. Signaling denotes implicit collusion whereby a firm communicates a price increase hoping that the competition will follow its approach. As per Kyle (2019), price signaling is standard in gas stations and grocery shops, promoting prices publicly. Price leadership denotes a setting that establishes a single firm as the leader, occasionally announcing the price shift that the other firms should follow. Price leadership is common in the automobile sector, steel, and leading banks, influencing local banks in decision-making.
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Monopoly
4.1. Description
Kyle (2019) recognizes that monopoly is shaped by imperfect competition. Dependent on the number of buyers and sellers, variation in the market prevails. Monopoly, therefore, denotes a single seller who dominates the market operations. The form of market organization whereby one seller defines the industry is evident. Products or services sold do not have close substitutes. A pure monopoly is an instance whereby a single firm sells a commodity devoid of substitutes. Therefore, the monopoly is shaped by a single firm that controls the holistic supply of a commodity (Faith, 2018). Competition for the monopoly firm is non-existent, which leads to it doubling up as the industry. The feature of no substitutes makes the setting lucrative since competition is low. The consumers will not opt for close substitutes because of the price increase. Central to the monopoly structure’s success is numerous buyers’ existence. The pool of buyers is attributed to the essential commodity, which translates to buyers competing for the product (Faith, 2018). Therefore, the monopoly firm is the price maker. Control of the whole supply in the industry makes the business strategically placed to alter the prices. Thus, the interplay of price and supply is apparent in daily decision-making. Monopolists can fix either the supply or cost of the product. Hence the firm ought to conform to the laws of supply and demand. For example, when charging high prices, the firm reduces supply. Therefore, the firm is shaped by the downward-sloping demand curve, also known as the average revenue that transitions from left to right (Hovenkamp & Shapiro, 2018). Selling more for the organization is by the decrease in prices.
4.2. Pricing Strategies
The objective of monopolies is the developing a pricing strategy that maximizes profit. Therefore, the market price is influenced by the demand for products or services. When the monopoly wants to create the highest price possible and sell manufactured goods, it is prudent to examine the current market features (Faith, 2018). The need to determine the accurate output level to maximize profitability is within the scope of operations. The advantageous position of the monopoly over other structures in determining prices emanates from the customers being held hostage regarding product variety. Hence, production efficiency is not within the scope of the pricing process (Liang et al., 2018). monopolies adopt linear pricing, price discrimination, and two-part tariff within the operational mandate. Linear pricing denotes a single price for the units sold. Adjustment to the quantity of output supplied till finding a point whereby marginal revenue is equal to the marginal cost is within the scope of operations (Eckhardt et al., 2019). Price discrimination entails different prices for diverse consumers. The tactic denotes alignment with the diversity in the willingness of the consumers to pay for the commodity or service (Hovenkamp & Shapiro, 2018). For example, an electricity supply company will charge unique prices for consumers at diverse locations. From organizations to households, the pricing mechanism for the electricity company may be unique (Faith, 2018). A two-part pricing technique denotes establishing a group that will charge a single price for the units. The establishment of the flat fee gives the consumers the right to purchase as many units of the commodity as evident at the given price.
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Case Study
Fizzy Drinks Sector
As examined, market structures are essential for describing the competitive landscapes of business operations. The features of the market structure will exude a significant influence on the marketing strategies and tactics deployed. The fizzy drink sector is characterized by an oligopolistic style in the competitive process (Nawaz & Akram, 2021). Arguably, the market has numerous implications for buyers and competing organizations. Coca-Cola and Pepsi companies are the premier globally recognized brands within the sector. With over a century of operations between the two firms, the dominance has constantly been expanding. Presently, the two companies have more than 800 sparkling drink brands, and they are sold in over 180 nations globally (Nawaz & Akram, 2021). The competitive rivalry between the two firms is a facet of concern that often leads to the assumption of the small firms that operate within the sector. Nawaz & Akram (2021) emphasize that the oligopoly feature of the setting is highlighted by the two firms controlling a considerable market share. Coca-Cola and Pepsi control over 60% of the market, especially in the US, which makes the market share of small firms minuscule (Nawaz & Akram, 2021). Therefore, the financial capital for small firms to launch a product or service is a barrier to entry.
Arguably, Coca-Cola and Pepsi invest considerable finances in their branding and marketing activities that the small firms cannot match. Financial competence is a facet of concern that puts the two firms continuously in a dominant position (Eckhardt et al., 2019). The high entry barriers for small firms translate into an enabling platform to maintain a strategic approach in influencing the trajectory of decision-making (Nawaz & Akram, 2021). Additionally, production obstacles are evident for small firms that face a daunting environment to match the operational dynamics of the dominant organization. Producing within the soft drink sector requires substantial investment into production infrastructure, branding material, and best marketers. The increased operation costs in the industry translate into the preventive outcomes for many companies to enter the area. Acceptance of the dominant position that Pepsi and Coca-Cola hold is often seen in their consistent engagement in non-price product differentiation. Nawaz & Akram (2021) affirm that it is rare for Pepsi or coca-cola to undercut each other in the pricing process. Focus on creative advertisement is within the scope of operations for the two companies, evident from their lucrative financial allocation to marketing. For example, the two companies often compete for space in Super Bowl marketing which is quite expensive for other organizations (Nawaz & Akram, 2021). Additionally, the companies engage in celebrity sponsorship deals in line with promoting consumer purchases based on the liking of a particular individual. The focus on the creative advertisement has made the two companies globally renowned for their operational success.
Thus, Nawaz & Akram (2021) contend that a duopoly exists, with Pepsi and Coca-Cola being the price makers and the other firms being the price takers. Arguably, the companies’ strategic position translates into domination, as evident from the engagement in acquisitions when a small firm starts taking up its market share (Nawaz & Akram, 2021). Therefore, within the oligopoly market structure, the two businesses have managed to maintain a significant share in the soft drinks setting. The few and weak competition is often held hostage by Pepsi and Coca-Cola in their determination of production and pricing mechanisms. Therefore, Nawaz & Akram (2021) emphasize that price signaling is often the strategic approach between the two companies in decision-making instead of collaboration. External factors such as taxation or an increase in prices of the raw materials lead to either company announcing the price increase, often followed by the following latter suit (Nawaz & Akram, 2021). Therefore, the two companies are a perfect example of oligopolistic features, especially in the US market, with their market share a critical factor in the decision-making process.
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Conclusion
Market structures play a substantial role in the contemporary setting, with their influence cutting across the operational mandate of companies. Recognition of the part that the market structures play is vital for decision-making and determination of the pathway to success. The above assessment clearly shows that the four market structures are shaped by unique features that determine the pricing strategy. Perfect competition is price takers which monopolists are the price makers. An oligopoly is shaped by a few firms which control the market and determine the prices for small organizations. On the other hand, monopolistic competition is shaped by differentiation as the basis of operation with a non-price-centric approach to competition. Hence, through the evaluation of the soft drinks sector, it is evident that oligopolistic features are apparent, with Coca-Cola and Pepsi asserting their dominance over their rivals.
References
Eckhardt, G. M., Houston, M. B., Jiang, B., Lamberton, C., Rindfleisch, A., & Zervas, G. (2019). Marketing in the sharing economy. Journal of Marketing, 83(5), 5-27.
Faith, D. O. (2018). A review of the effect of pricing strategies on the purchase of consumer goods. International Journal of Research in Management, Science & Technology (E-ISSN: 2321-3264) Vol, 2.
Hovenkamp, H., & Shapiro, C. (2018). Horizontal mergers, market structure, and burdens of proof. The Yale Law Journal, 1996-2025.
Kyle, A. S. (2019). Market structure, information, futures markets, and price formation. In International Agricultural Trade (pp. 45-64). CRC Press.
Liang, F., Yu, W., An, D., Yang, Q., Fu, X., & Zhao, W. (2018). A survey on big data market: Pricing, trading, and protection. Ieee Access, 6, 15132-15154.
Nawaz, H. S., & Akram, M. (2021). Oligopolistic competition among Malaysia’s wireless internet service providers using fuzzy soft graphs. Journal of Applied Mathematics and Computing, 67(1), 855-890.
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