Pricing in information technology markets is unique. For example, for the last few years, the functionality and speed of personal computers increased while prices remained constant or fell. This unique pricing structure stems from the industry cost structure; which is characterized by high fixed production costs, but relatively low variable production costs. PC manufacturers must recover their research and development costs, as well as the costs to build the PC fabrication plants.
When a revolutionary new product such as an optical notebook computer is introduced, manufacturers are able to charge a high price during the introductory phase and the growth phase of the product life cycle because demand is often high while supply is low at launch, and because some consumers will demand a PC with the highest speed available irrespective of its price. Aggregate demand will for a certain amount of time be price inelastic, meaning that some customers will want the notebook irrespective of the price. Quasar might resort to using high introductory prices to defer demand.
At first, Quasar will have a monopoly on this technology and it will be in a strong position to demand a large premium over the price of other notebook PCs. Over time, companies including Dell and HP will try to develop comparable products. As these products get introduced, the marketplace becomes an oligopoly. At this point, Quasar's customers become more price sensitive. As more competitors enter this market, pure competition develops. Quasar must cut prices or risk losing market share. During the phases leading to pure competition, Quasar should lower prices in the weeks before a new product introduction to make room at the top of its pricing structure for the new product.
Firms that operate in an oligopoly must take into consideration how competitors will react to their price and output decisions. Quasar could drop its price in response to a price change by a com...