The money charged for a product or service
Everything that a customer has to give up in order
to acquire a product or service
A price is a charge made by a
producer to a consumer for the right
to be supplied with a good or service.
tariffs, charges, premiums and
interest rates are prices in the
buy at that
Dominant Firm Pricing & Consumer Surplus
A dominant firm acting as a monopolist, aiming to
maximize profits and using a single price will equate
marginal revenue to marginal cost and set the
appropriate price for that output.
Price discrimination involves exploiting demand characteristics
that allow the same product t o be sold at various prices
unrelated to the cost of supply. In practice a single consumer may
be charged different prices for different units of good bought or
different consumers may be charged different prices for the same
product or service.
Select the price objective
Steps in Setting Price
• Pricing such that you cover variable costs and
some fixed costs. Short-term objectiveSurvival
• Price your product to maximize current profit
• Set lowest price to maximize volume / market
share. Assumes market is price-sensitive
• Sell base product at low margin, locking
consumers into higher margin after-market
• Prices start high and slowly lowered over time.
Highly demanded product
• Product with high quality, taste, status – priced
just high enough not to be out of consumer’s
• Priced so only the wealthy can afford itPrestige Pricing
• Add a standard mark up to the
• Determine price that would deliver company’s
target rate of return on investmentTarget-return pricing
• Price based on the value to the customer (i.e. if
new product innovation saves money, then
should charge more)
• Pricing to win loyal customer by charging fairly
low price for high qualityValue pricing
• Price solely based on competitors
STATE OF THE
Two main methods of calculating price
based on average variable costs.
• The first, the full cost method, involves estimating the
average variable (or average direct) costs for a chosen or
normal output and then adding average fixed or (average
indirect) cost s and an average profit margin.
• The second method involves estimating the average
variable or (average direct) costs for a chosen or normal
output and then adding a costing margin to cover indirect
costs and deliver the desired profit margin.
Short-run increases in demand will
not influence price. If the firm
cannot increase output to meet an
increase in demand, then it will
adopt a rationing or queuing
system to allocate output.
Cost-plus pricing: responses to cost,
demand and tax changes
• Firms may attempt to position the price of
their product relative to a similar but
•A change in the price of one product may affect sales of
both its own and other firms’ products. Where products are
complements, firms may have to decide on a pricing
structure and whether to sell the goods separately or to
bundle them together.
Product line pricing
• Setting prices for new products presents greater
difficulties, as there is no previous experience of
the costs of production or of the likely level of