Market Structure and Prices

Overview

One of the dominant factors affecting the ability of a firm to affect profits through pricing is the market structure that the firm is in. As an example, a firm which is a monopoly has much more ability to drive profits through pricing than a firm in a competitive market.

The economist Michael Porter outlined as set of factors that determine the profitability of a given industry, most of which are directly related to the firm's ability to raise prices. (see porter)

• Threat of new Entrants
• Threat of substitutes
• Bargaining Power of Customers
• Competitive Rivalry

For firms that face stiff competition and/or have customers with strong bargaining power, the ability to change prices may be limited. In this case, economists refer to the firm as a price taker, that is, it cant really change the price, it can only accept the going rate for its product.