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Market Structure & Pricing Strategies

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Select a new, realistic good or service for an existing industry, preferably an industry you current work in or one in which you are interested in working.
Develop a 1,400-word evaluation of pricing strategies available producers of your selected product. This will include statements about the market structure and the elasticity of demand for the product, based on text book principles and real world products under development.
Identify the market structure of the industry (monopoly, oligopoly, competitive monopoly).
Determine elasticity of demand for various quality ranges of the product based on textbook theory and judgments about the degree of luxury vs. necessity represented by various brands (e.g. a luxury car vs an economy car).
Determine how pricing relates to elasticity of demand for competing models.
Explain how changes in the quantity supplied as a result of pricing decisions might affect the company's marginal cost, marginal revenue, and market share as production volume rises. What reaction might be expected by other producers if one producer changes its pricing strategy?
Determine strategies that a company might use to develop product differentiation and market segmentation. What alternative non-pricing strategies are available? What alternative non-pricing strategies can be used to increase barriers to entry?
Discuss how producers might alter the mix of fixed and variable costs to support their pricing strategy.

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The answer to this problem explains market structure and pricing strategy in the auto industry. The references related to the answer are also included.

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In compliance with BrainMass rules this is not a hand in assignment but is only guidance.

The industry selected by you is the automobile industry (luxury car/economy car). The auto industry is an oligopoly in which firms try to minimize the effects of price-based competition. The auto makers have realized that price-based competition does not lead to increases in the size of the marketplace. In the past car makers have tried to avoid price based competition but recently, the competition has intensified. Price completion takes place in the form of rebates, preferred financing, and long term warranties (1). The impact is that the profit margins of auto companies have suffered.

The elasticity of demand for the economy cars is high. The customers are likely to switch brands if the prices are higher than those of the competitors. In contrast the elasticity of demand for the luxury cars are low. The elasticity of demand can be seen from the prices of cars. Chevrolet Spark LS is $12,890, Nissan Versa is $12,800, Mitsubishi Mirage DE is $13,790, Kia Rio LX is $14,700, Ford Fiesta S $14,650, Chevrolet Sonic LS is $14,990, The low range in which economy cars are priced shows that in the economy car segment the elasticity of demand is high. Even in this range there is some differentiation by way of the miles per gallon the car runs on. In contrast to the economy car segment let us look at the prices of cars in the luxury segment. P1 made by McLaren is priced at $1,155,000, 918 Spyder made by Porche is priced $929,995, Wraith from Rolls-Royce has a price of $298,225, FF from Ferrari has a price of $302,450, Phantom from Rolls-Royce has a price of $485,275, and Aventador from Lamborghini has a price of $555,795.

The analysis of the prices in the two segments shows that in the luxury segment there are large differences in prices. This indicates that the elasticity of demand in this segment is very low. It can be estimated to be 0.2. In this segment there are limited number of cars produced and they have such features that the customers are attracted to the features and want to buy them at any cost. In this segment to most buyers price does not matter what matters is the exclusive features of car. For example, 918 Spyder in the year 2015 only 918 were ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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