Market price, regardless of the kind of competition present, is a price determined by balancing the forces of demand and supply. The kind of competition will exert its influence as it affects demand and/or supply and the relative weight of each of these components in the pricing equation. The balancing may reflect the relative power of one, few, or many sellers. The possible combinations are many, and the resulting prices will reflect them.
Although there are certain pricing characteristics in each kind of competitive market, we start with the basic assumption that each seller is seeking to maximize his net revenue. In markets of pure or perfect competition, there is little that a given producer can do by way of setting market prices since, by definition, he has no price jurisdiction. The market price will be determined by the interaction of market demand and market supply, of which the given firm under question constitutes only an insignificant force. His problem then is this: in face of a given market price, what should be his output? Since the firm can sell any amount, either in large or small outputs, at the same per unit price, how much should be offered will rest on production costs. The important price-determining decisions under these circumstances are industry-wide, as reflected in the industry supply conditions.
Circumstances are quite different in monopoly markets. Here the firm has more or less complete power to set its supply price and needs only to be concerned with market demand. The firm may then vary both its price and output to maximize net revenue. The monopolist must consider both of these at all times, since he is not able to sell any amount of his goods at a predetermined market price. Since his supply curve interacts with the market demand curve, he finds that he can sell more only at lower prices.
This means there has to be a balancing of increased revenue from additional sales against the loss in revenue from lower prices charged those customers who would have been willing to pay the former higher price. To the degree that the monopolist is protected against freedom of entry into the industry, his price picture is improved. In a purely competitive market, with freedom of entry enjoyed by new producers, a lucrative net return would induce more sellers to engage in this field. This leveling force is not so prevalent under monopoly conditions where there is little, if any, freedom of entry.
Under conditions of imperfect competition, market prices tend to be unstable, fluctuating in response to varying authority over price possessed by any given firm. In view of the size and position of each firm in an oligopolistic market, each producer could be expected to consider carefully how his rival or rivals will react to changes in his price or output. If these changes exert a significant effect on his rivals' revenue, he can expect them to counter in a like manner. The result may be some sort of price or output war with ultimately no gain to any of the producers; it would be merely a shifting of their revenue to a lower level. In recognition of this potential, probably none of the producers will initiate any actions that will push others to retaliate. The first type of pricing is more akin to the results of pure competition. That there must be mutual interdependence approximates monopoly solutions as far as the industry picture is concerned. Under circumstances of product differentiation, the individual producer must watch for substitute products on the market when he sets his price policies. The fewer products there are, the more price jurisdiction he will possess. Technically, as the cross-elasticity of demand lessens, the more favorable will be his position.
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