How do firms price their goods?

Answer 1

The pricing of goods is largely determined by the presence or absence of competition. Though Cartels will diminish the competition.

In general producers can be grouped as price-takers or price-makers. De Beers for example, who essentially control the supply of diamonds to the market, use marketing to set a high value on the product, and thus enhance the value of their product. For gemstones have little real value, other than that given by vanity. So they are price-makers.

Industrial diamonds on the other hand are raw material essential to industrial manufacturing, but there are some competitors for these processes. Boron nitride (BN) for example may be of similar hardness to diamond, but has a higher working temperature limit. [Curiously, like carbon, BN can be formed at will as a soft lubricant similar to graphite, or as a hard material similar to diamond. One form may be harder than diamond.]

So for some uses, the price should not be set too high, for that would encourage the production of substitutes, for which economies of scale may eventually disadvantage diamond.

This is an exotic example of price setting, but illustrates the mechanisms.

Price-takers, are usually producers of commodity goods such as potatoes or rice, and there are plenty of competitive producers. In this case, the market price is set by the buyers who are only prepared to pay a certain price. And even that price is subject to competition from substitute products.

In any market, life is more pleasant when producing and selling high quality products, not commodity products.