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Market structure and pricingcheaper. Exhibit 6.2 shows how orchestras are hoping to exploit this system to maximize revenue at concerts.
can exert some influence on price. Such firms are called price shapers. The two main market types which will be examined are:
l oligopoly pricing
l monopolistic competition.
Oligopoly pricing
An oligopoly is a market dominated by a few large firms. An example of this is the cross-channel (UK to France) travel market.
Exhibit 6.2 Orchestras conduct research into pricing
Managers from an airline and a Premier League football club offered advice to help Britain’s symphony and chamber orchestras increase their profits from selling concert tickets. A marketing manager for the airline easyJet and the marketing manager for Everton Football Club offered advice at an annual conference of the Association of British Orchestras, which represents 60 orchestras across the country.
The idea is to exploit ‘yield management’ techniques (Plate 6). This is a favourite device of no-frills airlines whose tickets become more expensive as departure dates approach. Transferring the idea to concerts could mean that concert-goers who book their tickets in advance might pay £10 for the best seat while those who buy nearer the day of the concert could pay up to £30.
The director of communications at the City of Birmingham Symphony Orchestra said: ‘At present we do not have the ability to track demand and make prices elastic as it peaks and falls. I know the Chicago Symphony has a marketing director who comes from the airline industry and they have been experimenting with this. I think it is a really interesting concept.’
Source: Adapted from The Guardian Newspaper by the author.
Plate 6 Virgin Blue: ticket prices determined by yield management system.
Source: The author.
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Market structure and pricingAguiló et al. (2003) examined the prices of package holidays to the Balearic Islands, Spain, one of the Mediterranean’s leading tour- ist destinations, offered by a sample of 24 German and 20 UK tour operators studied in 2000. They concluded that tour operators’
strategies and price structures are characteristic of an oligopolistic market. Oligopoly makes pricing policy more difficult to analyse since firms are interdependent, but not to the extent as in the per- fectly competitive model. The actions of firm A may cause reaction by firms B and C, leading firm A to reassess its pricing policy and thus perpetuating a chain of action and reaction. For these reasons firms operating in oligopolistic markets often face a kinked demand curve. This is illustrated in Figure 6.4.
Consider the demand curve D, which might illustrate the demand curve for a cross-channel car ferry firm. The prevailing price is P0.
Notice that the demand curve is elastic in the range X to Y. This is because, if a firm decides to increase its price, for example from P0 to P1, it will lose customers to its competitors and demand will fall sharply from Q0 to Q1 and the firm will suffer a fall in total revenue.
On the other hand, if it should decide to reduce its price from P0 to P2, it is likely that its competitors will match the reduction in price to protect their market share, and there will be only a small increase in demand from Q0 to Q2, resulting in a fall in the firm’s revenue. Thus the demand curve is inelastic in the range Y to Z, and the demand curve is kinked at point Y. In this situation it is clearly not in the interests of individual firms to cut prices, and thus such markets tend to be characterized by price rigidities. Marketing and competition under oligopoly conditions are often based around:
l advertising
l free gifts and offers
l quality of service or value added
0
Quantity demanded Q1
P1 X
Y
ZD P0
P2
Q0Q2
Price
Figure 6.4 The kinked demand curve.
l follow-the-leader pricing – pricing is based on the decisions of the largest firm
l informal price agreements
l price wars occasionally break out if one firm thinks it can effectively undercut the opposition.
Braun and Soskin (1999) investigated the transformation of the Florida (USA) theme park industry during the 1990s. Here Anheuser Busch carried out a series of acquisitions to complete a successful hor- izontal merger of the three major competitors to the market leader Walt Disney World. Busch then mobilized its financial resources to match Disney’s $10 billion investment programme. Next the entry of Universal Studios with its considerable financial investment deterred other entrants to the market. Finally, aggressive pricing strategies con- solidated the market share and drove out smaller competitors. In the 1980s, Walt Disney World operated like a dominant firm. The other firms matched Walt Disney World with a lag. However, the authors concluded that the late 1990s illustrate behaviour characteristic of an interdependent oligopoly. Price increases have been tempered, relative prices have converged and prices have become more stable.
Monopolistic competition
This is a common type of market structure, exhibiting some fea- tures of perfect competition and some features of monopoly. The competitive features are freedom of entry and exit and the existence of a large number of firms. However, firms which are operating in essentially competitive environments may attempt to create market imperfections in order to have more control over pricing, market share and profits.
It is competition from other sellers with homogeneous products that forces market prices down, and thus firms will often concentrate on these two issues in order to exert more market power. The more inelastic a firm is able to make its demand curve, the more influence it will have on price, and thus firms will attempt to minimize compe- tition by:
l product differentiation
l acquisitions and mergers
l cost and price leadership.
Product differentiation
This entails an organization in making its product different from those of its competitors and exploiting unique selling points (USPs).
The rationale for product differentiation is to make the demand for a good or service less elastic, giving the producer more scope
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Market structure and pricingto increase prices and/or sales and profits. There are a number of routes to product differentiation.
The first is by advertising. One of the aims of persuasive advertis- ing is to create and increase brand loyalty even if there are no major differences between a firm’s product and that of its competitors. The second route to product differentiation is through adding value to a good or service. This may include, for example, making improve- ments to a good or service or adding value somewhere along the value chain. The value chain can be thought of as all the intercon- necting activities that make up the whole consumer experience of a good or service. Table 6.2 demonstrates aspects of the value chain for Singapore Airlines’ business class where it is able to differentiate its product at all parts of its value chain.
Exhibit 6.3 shows how Accor Hospitality brings product differ- entiation to its hotels. The point of adding value and differentiating
Table 6.2 Value chain for Singapore Airlines’ business class
Pre-sales Pre-check-in Check-in Flight Arrival Post-flight
Advertising Valet parking Dedicated check-in Express security/
passport route Dedicated lounge
Dedicated cabin Luxury meal Seat size
Increased staff ratio
Rapid transit arranged to city centre
Frequent-flyer awards Complaints
procedure
Exhibit 6.3 Accor Hospitality
Accor Hospitality is a global hotel operator. It has over 40 years of experience, operates in over 100 countries with 4000 hotels and around 500,000 beds. It has developed a market strategy to cover all the key market segments. These include:
l Luxury: Sofitel
l Upscale: Pullman, MGallery
l Midscale: Novotel, Mercure, Suitehotel, Adagio
l Economy: Ibis, All seasons
l Budget: Etap, Hotel, Formule 1, hotelF1 and Motel 6.
The characteristics of each of these segments are as follows:
Luxury and upscale: These hotels have an emphasis on unique, non-standardized offers with a commitment to exceptional service.
Midscale and economy: These brands offer quality accommodation at competitive local value.
Budget: These hotels are functional and cheap. Low prices are possible from an offer of standardized offering in clean but basic accommodation in sub prime locations.
Source: The author.
product is that it enables firms to charge a premium price but still retain customers.
Acquisitions and mergers
These are discussed in detail in Chapter 5, but they are an important consideration in pricing strategy as they can:
l reduce competition (and thus reduce downward pressure on prices);
l lead to economies of scale (which can underpin price leadership strategies).
Cost and price leadership
Another key strategic move to increase market share and profitability is through cost and price leadership. Cost leadership involves cutting costs through the supply chain – squeezing margins from suppli- ers, and economizing where possible in the production of goods or provision of services by stripping out unnecessary frills. The aim of cost leadership may be to increase margins, but this is unlikely to be achieved since consumers are likely to resist lower quality of goods or services without any compensation in price.
Equally it is difficult to maintain cost leadership since other firms will attempt to achieve similar cost reductions. However, where cost leadership is translated into low prices, it may be pos- sible to increase market share. This can then lead to the creation of a virtuous circle where increased market share leads to econo- mies of scale which enable lower costs and thus lower prices to be maintained ahead of rival firms. The no-frills airlines again pro- vide good examples here. Virgin Blue (Australia), for example, has been competing strongly with the Australian flag carrier Qantas.
Similarly, the UK low-cost airline Ryanair now carries more pas- sengers than BA.
Figure 6.5 provides a summary of the main differences between different market types.
Type of market
Number of firms
Entry barriers
Product differentiation
Firm’s demand Control over price
Perfect Many None No Perfectly elastic None
competition
Monopolistic Many None Yes Elastic Limited
competition
Oligopoly Few Some Yes Kinked demand Some
Monopoly One Total Unnecessary Inelastic Considerable
Figure 6.5 Market structure
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