Economics

Market Structure and Pricing Power

Victor J. Ayala

University of Phoenix

ECO/561

David Faiella

Running Head: MARKET STRUCTURE AND PRICING POWER

Sep 19, 2016

BP Corporation Pricing Strategy

Introduction

The pricing strategy employed by a given firm is influenced by the level of competition prevailing in the market. Indeed, the various market competitions an organization is likely to face include pure competition, oligopoly, monopoly, and the monopolistic competition. The kind of the competition a firm faces is essential in determining the pricing strategy it employs since it influences the market penetration capability. The extent of a business organization to penetrate the market is influenced by the market forces it has to counter. Thus, the pricing strategy employed by the British Petroleum (BP) Corporation has been evaluated. The BP Corporation operates under the petroleum industry. The firm is ranked among the largest oil and gas companies due to its asset holding and revenue generation. Similarly, the firm has established its operation in various countries globally. Accordingly, the analysis of the firm’s pricing strategy is critical in demonstrating the general strategy applied by the industry.

Discussion

The market structure under which the BP Corporation operates is the oligopoly market structure. The oligopoly market structure is an industry that has few firms and the entrants into the market faces stiff barriers. The pricing strategy used by the firms operating under the oligopoly market structure is sensitive due to the less competing firms (Hall & Lieberman, 2010). Similarly, the products sold by the firms operating under the oligopoly market structure are differentiated. Thus, advertising under this market structure is valued since it influences the decision of the consumers to purchase the product offered by the various organizations. Equally, the interdependence of the firms under the oligopoly competition is high since the actions of one firm are copied by the industry players. The players in the industry apply close strategies to ensure their customers are not captured by the competitors (Hall & Lieberman, 2010). Consequently, the characteristics of the oligopoly competition depict the BP organization operates under this market structure. Indeed, the price of the oil and gas products that BP organization provides in the market is close to that of the rivals.

The pricing strategy of the BP organization is influenced by the market supply of the oil and gas products. If the supply of the oil and gas products is high in the market, the price of product declines. In contrast, the price of the oil and gas products increases as the supply of the oil and gas decreases. This trend is witnessed in the entire industry that demonstrates the oil and gas industry is an oligopoly market structure (Ferrell & Hartline, 2011). Another essential characteristic of the industry is the demand elasticity of the products. The demand elasticity entails the reaction of the consumers as the price of the product changes. The price elasticity of demand depicts the relationship between the demand quantity and the price (Hall & Lieberman, 2010). Thus, the response of the consumers as the price of the product changes determines the type of elasticity that a given industry faces. The different types of demand elasticity include the perfect elasticity and the perfect inelastic. An elastic demand implies that the change in demand of the product is high as the price of the product changes (Hall & Lieberman, 2010). The products that have the tendency of experiencing an elastic price demand are luxurious products, products of many substitutes, and highly bought goods.

These types of products fall under price elastic demand since they are highly sensitive to price change. In contrast, an inelastic demand has the effect of generating a small change in demand of the product as the price changes. Thus, an increase in price of the products has less impact on the demand change. The kind of products that give an inelastic demand include non-luxurious goods and services, necessity products, addictive products, infrequently bought products, and product without or of less substitutes (Hall & Lieberman, 2010). Consequently, the petroleum products offered by the BP organization have an inelastic demand. The products faces inelastic demand since the change of price is followed by big change of demand. Similarly, the petroleum product does not have substitute products for the consumers to decide switching their preference (Griffin, 2014). Furthermore, the petroleum product is not a luxurious product. A luxurious product is likely to experience marginal change of demand as the price changes since the consumers are likely to switch the preference of the product. In contrast, the oil and gas products are necessity goods, which their demand is not influenced by the change of price. The consumption of the oil and gas products does not change substantially due to price change since the households need the product on daily basis. Thus, the type of elasticity experienced by the BP Corporation in selling its products is the inelastic demand.

The quantity supplied due to the pricing decision arrived by the company has an effect on the marginal revenue, marginal cost, and the market share of the company. An increase in production volume has the effect of enhancing the marginal revenue. The marginal revenue means the additional revenue that is deduced by increasing the sales units (Griffin, 2014). Thus, the marginal revenue of the BP Corporation increases as the production volume increases. In contrast, an increase in production has the effect of reducing the marginal cost of the BP firm. The marginal cost implies the cost that is increased as the firm produces another extra item. The marginal cost of the BP Corporation reduces as the production volume increases since unit of resources applied in producing each unit of oil and gas reduces (Griffin, 2014). Indeed, the higher the units of oil and gas that are produced by the organization, the less the cost per unit that is incurred. Consequently, the profitability of the firm increases as the volume of production expands. Moreover, the market share of the BP organization has the effect of expanding as the production volume increase. The market share entails the extent of market dominance that a firm is able to win. Thus, the market share of BP Corporation has the tendency of increasing with the production volume due to the level of market penetration. A high production volume has the effect of enabling BP organization to reach a larger market population.

The product differentiation and market segmentation is another critical approach that the management of BP Corporation could apply to enhance the wealth creation. However, the strategies to employ in undertaking the product differentiation and market segmentation are the essential part. Accordingly, the strategy that BP can employ to differentiate its products from that of the competitors is packaging of its products (Ferrell & Hartline, 2011). Even though the packaging of the petroleum products does not add value, it has the effect of differentiating the product from the competitors’ products due to the attractive appearance. The appearance of BP products has the potential of persuading the consumers to consider its products due to the perceived comfort (Ferrell & Hartline, 2011). Indeed, the comfort of the package used by the firm has the impact of winning the attention of the consumers in buying BP products. Thus, management of BP Corporation may apply the packaging approach to differentiate its product from the competitor. Similarly, management of BP Corporation can segment the market it serves through geographic segmentation. The geographic demographic segmentation involves segmenting the market through physical location (Griffin, 2014). Thus, the geographic segmentation will involve employing different prices in diverse locations. The price difference will enable the company to target the consumers more accurately depending on their income levels.

Conclusion

The industry under which an organization operates is instrumental in determining the pricing strategy to apply. In an industry where the consumers are sensitive to the price changes, management of the firm should be cautious in altering the price due to the potential negative effect it might cause towards the consumption of its products. Accordingly, BP operates under the oligopoly market structure. The market structure of BP since it has few players while the new entrants to the industry face stiff resistance due to government regulations. The nature of the products that BP supplies in the market induces inelastic demand as the price changes. The inelastic demand is experienced in the market since the demand of its product is not impacted significantly by the change of price. The extent of the petroleum product been a necessity good implies the consumers do not change the consumption of the product even as the price changes. Consequently, BP is favored by the market structure and the price demand elasticity.

References

Ferrell, C., & Hartline, M. (2011). Marketing strategy. Mason, Ohio: South-Western Cengage Learning.

Griffin, R. (2014). Fundamentals of Management. New York: Cengage.

Hall, R. E., & Lieberman, M. (2010). Macroeconomics : principles & applications. Mason, OH: South-Western Cengage Learning.