Compare pricing mechanisms under pure monopoly and oligopoly conditions. How, in this case, is the problem of price maximization and control over their level solved?
In contrast to the actions of the firm in conditions of free competition, the monopolist firm does not depend on the prices prevailing in the market, it sets them itself. The monopolist does not need to be guided by the policies of other firms. Therefore, the demand curve for its products is relatively stable, and the prices of goods are limited only by the consumer’s assessment of their utility in relation to income and the general state of the market situation. For example, if a company that monopolizes the market for packaging materials sets an unacceptably high price on them, then consumers may switch to other materials, although they are not absolute substitutes for packaging materials. One and the same firm in one market can be a monopolist, and in another have a significant number of competitors. Thus, in order to assert that a particular firm is a monopolist, it is necessary to determine what part of the market for a particular product it controls.
Profit maximization is not a vital necessity for a monopolist, since it is not under pressure from competitors, at the same time, government restrictions can impede the increase in profits. Therefore, the monopolist has goals that are not directly related to profit maximization. This can be the establishment of greater control over the market, expanding the sphere of influence, stabilizing, as far as possible, market conditions, gaining political power, subsidizing charitable organizations, etc.
In the conditions of the oligopoly, where they operate, firms of the fourth type of market structures have the opportunity to use more freedom in setting prices than under perfect competition, but less than under market monopolization. These limitations are reflected in pricing strategies as well. One of the possible strategies is the policy of “price leadership”, when all firms in setting prices follow the example of one or more companies. If goods are absolutely interchangeable, then a single price level develops on the market. If the goods differ in some way, there may be some differences in prices if they approximate. So, in the automotive market, prices for models of the same class are very close to each other. However, their complete equality is observed in exceptional cases. Price leadership can be relative or absolute. The first occurs when one of the companies, which does not have any special advantages, pursues a more aggressive or simply more mobile pricing policy. Absolute price leadership is possible only when the firm has advantages over competitors (for example, in terms of costs and production volume). Such a firm can behave in the market almost like a monopolist (one of the modifications of this strategy is the “development curve” pricing discussed above).