[4.2 Market Power] [4.3 Pricing with Market Power]
[4.4 Pricing Strategies] [4.5 Pricing in Competitive Markets]
Given demand and supply conditions in a mass market, what price should a firm set for its product? This depends critically on the nature of competition in the market. If there is very little competition, the firm is said to have market power. In this case, the price charged has a great impact on the quantity sold in the market. Firms with market power need to price carefully to maximise their profits. They need to be sensitive to price elasticity of demand, as well as their short-run costs. With imagination, however, firms can employ more complex pricing strategies to enhance both profits and sales.
When there are many competing firms in a mass market, a firm is constrained as to the price it can set. Its main decision, therefore, concerns that amount of its product it will actually produce. In the short run, a careful decision can give the firm some economic profits. However, in these markets where there are low barriers to entry and exit, economic profits may be dissipated as new firms enter and drive prices down.
· Topic 4.2 considers the definition of market power and the factors that generate it.
· Topic 4.3 explains how a monopolist sets a price.
· Topic 4.4 then considers the various options for price discrimination and their role in generating profits and economic efficiency.
· Topic 4.5 then considers perfect competition and how this drives competitive pricing, allows us to use the tools of supply and demand and also the efficiency aspects of competitive markets.
· Topic 4.6 considers entry and exit decisions into markets with a view to understanding the long-run effects of competition on pricing.
· This segment concludes with a segment assignment in which you consider the dilemmas facing pharmaceutical firms when pricing medical drugs in developing countries.
Upon completing this segment, you should be able to
· evaluate when a firm has a greater or lesser degree of market power
· determine how a firm with market power will go about setting its price to maximise its profits
· evaluate the effectiveness of alternative pricing strategies including group pricing, two-part tariffs and bundling
· use the tools of demand and supply to forecast changes in equilibrium prices and quantities in a competitive market
Portions
of this segment draw upon course materials prepared by Geoffrey Heal (
You
may now proceed to topic 4.2, "Market Power".