What is transfer pricing? Explain the various forms of price discrimination. What is price leadership? Define loss-leader pricing method. And mention any two conditions Under the loss leader pricing which is justified. What do you mean by common production cost? 7marks: Explain the kinked demand hypothesis of oligopoly market. Explain the significance of time element in competitive market. 10mrks: What are economies of scale? Discuss the various forms of economies of scale and its implications of costs of project. A firm under monopolistic competition is a price maker. Explain how price is determined under monopolistic competition. The hypothetical data of a firm are as under i) P = 10-0.3Q and TC = 6 + 4Q + 0.7Q 2 Determine price, profit maximising output level, total revenue and profit at this optimum level. How price and output are determined under monopoly in the short run? Define monopolistic competition. Explain its features.
Determination of equilibrium price and quantity. Sums based on that. What is economic profit?3 What are the features of perfect competition. Explain. 7 What is price discrimination?3 Discuss price skimming and penetration pricing strategies. Differentiate between dominant firm price leadership and barometric price leadership.7 Monopolistic competition is a blend of perfect competition and monopoly. Discuss. How is price-output determined in the shortrun in monopolistic competition?10 Why do oligopolist face a kink in their demand curve? Explain.10 What is price discrimination? Mention some forms of price Discrimination.3 Pricing strategies for a new product.7 What are the abuses of monopoly power? Examine various measures to control and regulate this monopoly power.
What do you mean by common production cost? A characteristic of industry is the prevalence of production processes which yield multiple products. When the costs of producing multiple products are separable, they are readily identified with individual products. So no particular problem arises in assigning a per unit Charge, or cost for producing each product. Common costs, or joint costs are costs which cannot be readily identified with individual products. They are especially prominent in extractive, agricultural and chemical industries, as well as in industries where different grades of the same product are obtained. Furthermore, if the notion of a production process is taken to a more abstract level, it can be argued that common costs are also prevalent in service industries. (e.g. postal delivery costs of delivering multiple types of mail).
What are the guidelines for price fixation? <ul><li>Bates and Parkinson have given the following guidelines: </li></ul><ul><li>Find out what your costs are over the range of output that is relevant, distinguishing between prime costs which vary with output and overhead costs that are comparatively insensitive to change in output. </li></ul><ul><li>Take prime costs as your starting point and consider what the price would be if you add to this an allowance for ovrhead costs sufficient to keep you in business and the amount of profit necessary to keep your shareholders happy. </li></ul><ul><li>Find out how your costs compare with those of your competitors. If they are much the same as yours, your competitors are likely to be thinking along the same lines, but if they are thought to be markedly higher or lower, there may be reason to increase or decrease your estimated price. </li></ul><ul><li>Keep an eye on the market: if orders are hard to get, the chances are that the price will have to drop a bit and competitors are likely to find themselves in much the same position. If orders come easily, there is very likely to be an opportunity to raise prices a bit without running much risk of losing your market. </li></ul>
<ul><li>5. If the costs of your raw materials and labour increase, this may present you with an opportunity to raise your prices because your competitors may be expected to follow suit. </li></ul><ul><li>6. If, on the other hand, costs are rising at a time when sales are hard to get, you may be able to refrain from raising your prices without setting off a price war. In any case, your rivals may do the same. </li></ul><ul><li>7. Keep an eye on how you are using your factory. Production should be concentrated on the profitable lines or the prices of the less profitable lines increased. </li></ul><ul><li>8. The goodwill of customers is probably better developed by an advertising campaign than by keeping prices below costs. </li></ul><ul><li>9. If your prices seem to be higher than your competitors’ although they scarcely cover costs, this may indicate that your costs re too high and your production method or factory organization is defective. </li></ul><ul><li>10. If you can sell all your output at prices that give you a substantial profit, consider expansion. </li></ul><ul><li>11. If you find hat your sles vary seasonally, consider whether demand can be smoothed and profits increased by charging higher prices when demand is high and low prices when demand is low. If is likely to be more profitable to do this when prime costs are smaller in relation to total costs. </li></ul><ul><li>12. If you are one of a limited number of producers in an industry, what your competitotrs are likely to do may well be a more important consideration in fixing prices than any question of costs. </li></ul><ul><li>13. Finally, if you are a monopolist and you pursue a price policy construed as against public interest, you may find yourself subject to control evn though profit made on capital employed is no more than twice as high as would satisfy you under other conditions. If your profits are unusually high, beware also of new entrants to your industry or the development of unexpected substitutes. </li></ul>
<ul><li>Premium Pricing. </li></ul><ul><li>Use a high price where there is a uniqueness about the product or service. This approach is used where a a substantial competitive advantage exists. Such high prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights. </li></ul>
<ul><li>Penetration Pricing. </li></ul><ul><li>The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. </li></ul>
<ul><li>Economy Pricing. </li></ul><ul><li>This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc. </li></ul>
<ul><li>Price Skimming. </li></ul><ul><li>Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented. </li></ul>
<ul><li>Psychological Pricing. </li></ul><ul><li>This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example 'price point perspective' 99 cents not one dollar. </li></ul><ul><li>Product Line Pricing. </li></ul><ul><li>Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6. </li></ul>
<ul><li>Optional Product Pricing. </li></ul><ul><li>Companies will attempt to increase the amount customers spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other. </li></ul>
<ul><li>Captive Product Pricing </li></ul><ul><li>Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor. </li></ul><ul><li>Product Bundle Pricing. </li></ul><ul><li>Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach. </li></ul>
<ul><li>Promotional Pricing. </li></ul><ul><li>Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free). </li></ul><ul><li>Geographical Pricing. </li></ul><ul><li>Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price. </li></ul><ul><li>Value Pricing. </li></ul><ul><li>This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. value meals at McDonalds. </li></ul>