Pricing and Non-Pricing Strategies in Different Forms of Industrial Organization

Pricing and Non-Pricing Strategies in Different Forms of Industrial Organization

There are four basic models of market structure that exists today, namely, pure monopoly, oligopoly, monopolistic competition and pure competition. As such, within each structure is a unique set of characteristics that play a role in determination of pricing and non-pricing strategy for a particular organization. Over time different industries have evolved from a more primitive to a more competitive market structure to attain greater efficiency as dictated by the market forces as shown in the market structures simulation (University of Phoenix, 2008). This paper describes the pricing and non-pricing strategies being employed by different companies in their respective market structure, it also explains how Quasar Computers evolved through the market structures over time to take into account the changes in the aggregate number of suppliers as well as consumers.

Analysis of Pricing and Non-Pricing Strategies by Market Structure

Pricing and non-pricing strategies depend on the nature of the industry that a particular company operates in. This is mainly due to the characteristics that are associated with each market model such as number of firms competing, type of product (standardized, differentiated or unique), companies control over price, non-price competition if any, and based on conditions of entry in the industry.

Pure Monopoly

According to McConnell and Brue (2004), “monopoly is defined as a single firm producing one unique product in which there are no close substitutes” (ch.24, p.1, 2004). Pure monopoly markets are classified as a single seller, producer, or supplier of a product. Pure monopoly companies are also considered price makers. This is possible mainly because pure monopolist have total control over their output. In detail the company output or supply can be translated to a market supply, hence the corresponding demand curve is downward sloping indicating that each output can be associated with a unique price. Its rare to come across a pure monopoly, however, there are several near monopolies. The government owned public utilities, such as natural gas and electric companies can be considered as a monopoly. PNM is New Mexico’s sole provider and supplier in natural gas and electricity. It serves about 487,000 electricity customers and about 490,000 natural gas customers (PNM, 2008).

Pricing strategies used by PNM are based on the same rational as any other marketing structure and that is to use marginal analysis to determine the optimum output. After determining the optimum output by equating marginal revenue versus marginal cost, PNM can then base their price on the elastic region of their demand curve. The choices open to PNM is either to charge a socially optimal price (P=MC), a fair-return price (P=ATC) or a monopoly price which is greater than average total cost (P>ATC). On the other hand, if a monopoly price is charged then the company is faced with productive and allocation inefficiencies.

To counter, a non-pricing strategy would be the years of research and advancements in technology that has brought about economies of scale which PNM boasts, and strategically utilize to block any potential competition. In addition PNM currently engages in several public relation campaigns and encourage energy efficiency by providing rebates on energy efficient appliances and by offering energy efficiency assistance program to its customers.

Oligopoly

Defined, an oligopoly is a market dominated by few produces of a same or similar product (McConnell & Brue, 2004). A good example of an oligopoly in contemporary US business is the domestic airline industry. In 2007, there were 6 corporations that comprised approximately, 73.3% of the domestic airline industry market share (Domestic Airlines in the US, 2008). Of those 6 corporations, 3 controlled approximately 43.2% of the industry's market share, the largest of which is UAL Corporation, the carrier that controls United Airlines, with a 14.9% market share (Domestic Airlines in the US, 2008). Despite that such a significant portion of the market share for the industry rests with such a small number of corporations, thus creating an oligopoly competition is still an omnipresent factor, unlike in a monopoly.

Unlike perfect competition, each corporation within an oligopoly is a price-maker. With each corporation holding this status of price-maker, corporations, while not participating in illegal collusion, tailor their prices to their competitors. When this action continues vigorously (-20% in one year), the airline industry is said to be in a “fare war” (Morrison & Winston, 1996). These “fare wars” occur because a competitor