Pricing Strategy in Different Market Structures
Consider the two firms described in the case study below. Both firms have an identical marginal cost of $10 to produce one unit of their product. Based on their respective market environments, which firm is likely to set a price with a larger markup over its cost? Explain your reasoning by relating the market conditions to the firm's pricing power.
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Pricing Strategy in Different Market Structures
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Comparative Pricing Strategy Analysis
Explaining the Link Between Competition and Pricing
A pharmaceutical company's patent on a popular drug expires, allowing several other companies to begin producing and selling generic versions. According to the principles of price setting, the original company should now increase its markup over marginal cost to compensate for the lost market share.
A firm operating in a market with very few competitors and selling a product with no close substitutes will likely set its price with a small markup over its marginal cost.