Surveys indicate that managers at different companies weigh customers, competitors, and costs differently when making pricing decisions. At one extreme, companies operating in a perfectly competitive market sell very similar commodity products, such as wheat, rice, steel, and aluminum. The managers at these companies have no control over setting prices and must accept the price determined by a market consisting of many participants. Cost information helps managers decide the quantity of output to produce that will maximize operating income.
In less competitive markets, such as those for smartphones, laptops, and televisions, products are differentiated, and all three factors affect prices: The value customers place on a product and the prices charged for competing products affect demand, and the costs of producing and delivering the product affect supply. As competition lessens in a market, such as in microprocessors and operating software, the key factor affecting pricing decisions is the customer’s willingness to pay based on the value that customers place on the product or service, not costs or competitors. In the extreme, there are monopolies. A monopolist has no competitors and has much more leeway to set high prices. Nevertheless, there are limits. The higher the price a monopolist sets, the lower the demand for the monopolist’s product because customers will either seek substitute products or forgo buying the product.