Introduction
One of the main goals of any business is profit maximization, and one of the principal means of reaching that goal is setting an optimal price for its goods or services. However, the considerations that go into determining this price depend in large part on the market structure. Different price strategies must be followed to achieve profit maximization under monopoly, oligopoly, monopolistic competition, or perfect competition.
Main body
To maximize profit, a company needs to find a price that would allow it to cover its costs without driving away its customers. Under perfect competition, many companies offer identical or nearly identical products to their buyers, and the price is determined by the standard laws of supply and demand (Pindyck & Rubinfeld, 2018). Since no company has a decisive advantage that would let it affect the market price, each company is forced to accept it. Monopolistic competition ensues when the product offered by the companies is sufficiently different to give each company limited monopoly power. In this case, each company can afford to differentiate its price from its competitors, but if this price is too high, its customers can switch to a different seller with relative ease. This means that the market price still tends to even out eventually. Oligopoly is defined by competition between a few companies that can either collude or compete. Therefore the price is determined in large part by their interactions. Finally, a pure monopoly can set its price freely, so long as it does not cause the consumers to stop buying the product entirely.
Conclusion
It can be seen that price determination depends on the number of competing companies on the market and the differentiation of their products. The more competitive the market, the less control any one company can have over the price. Nevertheless, no company can afford to ignore consumer price preferences completely, as even a monopoly can drive buyers away.
References
Pindyck, R. S. & Rubinfeld, D. L. (2018). Microeconomics (9th edition). Pearson Education.