Pricing decisions are influenced by several external factors.
Firstly, the market structure, which categorizes industries based on the level and type of competition, affects pricing.
For instance, in a perfect competition like agriculture, where many sellers offer identical products, prices are dictated by demand and supply.
In contrast, monopolistic markets like the highly competitive smartphone industry allow firms to control prices due to product differentiation. Meanwhile, oligopolistic markets like the airline industry see a few key players driving pricing strategies.
Secondly, the price elasticity of demand impacts pricing. Products with elastic demand, such as non-essentials like TVs, are sensitive to price changes, while those with inelastic demand, like food and medicine, allow companies to control prices without drastically impacting sales.
Thirdly, economic conditions like inflation and interest rates influence pricing.
Businesses reduce prices during downturns to sustain sales and increase them during growth phases.
Next, government policies, including import tariffs and regulations, influence prices.
Lastly, changing social preferences, like environmental sustainability, affect pricing decisions.