Price discrimination and monopolistic competition

Price discrimination and monopolistic competition Introduction Consumers engage in a comprehensive decision making process in their consumption processes. Some of the elements that consumers are concerned with relate to product quality and price. Consumers have limited income, and thus they select what to purchase and at what price. Boyes (2011) posits, â€Å"Consumers are heterogeneous in their preferences between price and quality† (p.29).Advertising We will write a custom essay sample on Price discrimination and monopolistic competition specifically for you for only $16.05 $11/page Learn More The consumers’ decision to purchase a particular product is motivated by the desire to attain a certain desired level of utility. On the other hand, firms provide consumers with a wide range of products and services, which are offered at different prices. Product pricing is subject to different factors; for example, the cost of production, product quality, and the firm’s profit maximisation obje ctive. According to Hirschey (2009), businesses have an obligation to set optimal product prices failure to which they will not be in a position to achieve their profit maximisation objectives. Despite this aspect, the ability of an organisation to set optimal price is subject to the prevailing level of competition. According to Varian (2010), the competitive market is characterised by a large number of firms that deal identical products and this aspect limits a firm’s ability to exploit the consumers by selling the product at a high price. Varian (2010) asserts, â€Å"Any attempt by one of the firms to sell its products at a higher price than the market price leads consumers to desert the high of third-degree discrimination occurs in learning institutions whereby students are offered products and services at a discount at the University Union shops. The shops command a certain degree of monopoly. Moreover, it is possible for the union shops to identify the students as the t argeted consumer group. Consequently, they are in a position to offer products at discounted prices. Publishing companies such as The Wall Street Journal, Barrons, the Economist, and Forbes offer students huge price discount. Other areas in which third degree price discrimination is applied includes movie theatres whereby the price of movie tickets for adults and children differ. Third-degree price discrimination is also applied in drugstores that provide senior citizens with drugs. Rationale for the third-degree price discrimination; student discounts Most publishing companies are committed in attracting and retaining a large number of students to purchase their academic journals and other publications. Consequently, such companies are forced to adopt effective marketing strategies in order to penetrate the learning institutions. One of the strategies adopted relates to price discrimination. The publishing houses are forced to offer students the publication at a relatively low pric e. The firms are motivated by the view that offering their publications at a discounted price to students will lead to the creation of future loyal customers. Students and senior citizens are considered as very sensitive to price. Therefore, in order to attract a large number of students to consume their products, the firms are forced to price-discriminate by integrating a price discount. Therefore, the publishing firms are in a position to maximise their level of profit by marketing to students as one of their essential sub-markets (Varian 2010).Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Thirds of the competing firms include the Wall Street Journal, Barrons, the Economist, Harvard Business Review, and Forbes amongst others. Most of these companies target students in different learning institutions as their potential customers. Moreover, there is no law that bars the publishing companies from offering students their products through the union shops. Consequently, the degree of rivalry in such as submarket is likely to be high (Sexton 2008). In order to attract students, the firms are required to adopt effective market penetration strategies such as providing students with different academic publications through their libraries. However, a large number of sellers limit the firms’ ability to control the market. Despite this aspect, the firms are committed towards improving their competitiveness. Therefore, the firms are forced to adopt effective competitive strategies, for example by incorporating a price discount or improving their service delivery. For instanc e, the firms may provide students with an opportunity to subscribe for library services at a reduced price (Sexton 2008). If a particular firm in such a market increases the price of its products, customers have an option to purchase from its competitors. Another major characteristic of a monopolistically competitive market is that entry to the market is free. Therefore, competing firms can freely enter the market and provide consumers with substitute products. The threat of new entrants tends to reduce the level of economic profit. However, considering the view that the publishing firms are profit-oriented, they are forced to formulate effective strategies in order to survive. According to Hall and Lieberman (2013), monopolistic competitors are motivated by the need to maximise profit. Therefore, they tend to move along the demand curve up to a point that will lead to profit maximisation. Furthermore, monopolistic competitors have the option of shifting their demand curves rightwar ds. This goal is achievable via developing products that are more appealing and adopting strategic locations hence attracting consumers. Other forms of non-price competition include offering product guarantees, better services, advertising to inform the consumers, and free home deliveries. Adopting non-price competition improves an organisation’s ability to maximise profit. Despite their effectiveness in influencing the consumers’ purchase decision, monopolistic competitors do not have extensive market powers due to the existence of a large number of rival firms, which offer close substitutes. Most plausible explanation for the pricing strategy This analysis shows that the aforementioned behaviour by publishing companies such as the Economist and the Financial Times can be explained based on two main frameworks, which include price discrimination and monopolistic competition. However, a number of conditions must be satisfied in order for a firm to adopt any of the two strategies. For price discrimination to occur, the market must be characterised by some degree of imperfection. Secondly, a firm must be in a position to split the total market into a number of submarkets. Thirdly, the consumers must be characterised by different price elasticity of demand. These conditions provide the suppliers with an opportunity to set different prices for the same product. Therefore, the firm is in a position to maximise its profit by attracting a large number of customers. In most cases, price discrimination is incorporated with the objective of creating welfare effect on the part of the consumer. The publishing companies are established with the objective of maximising profit. Consequently, they have an obligation to adopt effective pricing strategies. Moreover, the publishing companies operate in an industry that is characterised by intense competition sue to the many firms in the industry. In order to survive in such an industry, the publishing companies are forced to offer their products to students at highly discounted prices. This aspect leads to the development of a high level of customer loyalty. The firms are in a position to attract and retain a large number of customers. Therefore, the monopolistic competition framework can best explain the behaviour of the publishing companies. Conclusion Price is a critical component in the survival of businesses. Moreover, most markets are experiencing an increment in the intensity of competition. Therefore, in order to survive in the long term, it is imperative for businesses to adopt effective pricing strategies in order to maximise their profit, which can be achieved by adopting the concepts of price discrimination. Furthermore, firms can also adopt strategies that will set them as effective monopolistic competitors. Reference List Boyes, W 2011, Managerial economics, Houghton Mifflin, Boston. Cowan, S 2007, ‘The welfare effect of the third degree price discrimination with non-linea r demand functions’, Journal of Economics, vol. 38 no. 2, pp. 419-428. Hall, R Lieberman, M 2013, Economics; principles and applications, Cengage Learning, Mason. Hirschey, M 2009, Managerial economics, Cengage Learning, Mason. Muller-Langer, F 2008, Creating RD incentives for medicines for neglected diseases: An economic analysis of parallel imports, patents and alternative mechanisms to stimulate pharmaceutical research, Gabler, Wiesbaden. Sexton, R 2008, Exploring economics, Thomson, Mason. Varian, H 2010, Intermediate microeconomics, University of California, Berkeley.