Sources of Pricing Power

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Retail prices are significantly influenced by factors other than costs of production. This seminar details some of the factors that limit competition and raise prices for consumers .

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Sources of Pricing Power

  1. 1. Sources of Pricing PowerRetail prices are significantly influenced by factors other than costs of productionThis seminar details some of the factors that limit competition and raise prices for consumers Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  2. 2. What determines the prices wepay for goods and services?classical economic theory states that basic marketstructures determine price: Perfect Competition Monopolistic Competition Oligopoly Monopoly Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  3. 3.  Why do prices fluctuate?  Pricing during natural and man made disasters  Price Gauging  The strict definition of price gauging  The broader definition of price gauging  Classical theory of price fluctuation  Examples of imperfect competition Is it fair and reasonable to expect to pay a fair and reasonable price? Free market, legal, regulatory and consumer options Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  4. 4. What is price gauging? Media coverage example:http://youtu.be/R6ojYtKazgQ
  5. 5. What is price gauging?Academic example: http://youtu.be/h9QEkw6_O6w
  6. 6. Perfect CompetitionPerfect Competition is a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absentThe market price of a commodity is beyond the control of individual buyers and sellers Characterized by a large number of small firms Identical products sold by all firms Freedom of entry into and exit out of the industry Perfect knowledge of prices and technology Perfect competition is a theoretical market structure primarily used as a benchmark against which other market structures are compared. Also called “perfect market” or “pure competition” It is said that perfect competition efficiently allocates resources Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  7. 7. Competition is basic and fundamental to the free enterprise systemCompetition is involved in all observable phenomena of a market including Prices at which products are exchanged Kinds of the products produced Quantities sold Methods of distribution Emphasis placed on promotion Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  8. 8. Competition Source: Sebastion09 at Slideshare.net
  9. 9. Value It is believed that having more than one business competing for the same consumers will cause the products and/or services to be provided at a better quality and a lower cost than if there were no competitors In other words, competition should provide the consumers with the best value for their hard-earned dollar Source: Sebastion09 at Slideshare.net
  10. 10. ASPECTS OF COMPETITION Awareness Competitive advantage Technology Competitive differentiation Source: Sebastion09 at Slideshare.net
  11. 11. Awareness To be successful in todays very competitive business world, it is important for businesses to be aware of what their competitors are doing and to find a way to compete by matching or improving on the competitors product or service For example, if Pepsi-Cola offers a new caffeine-free soda, Coca-Cola may offer a new caffeine-free soda with only one calorie By offering an improvement on the competitors product, Coca- Cola is trying to convince soft-drink consumers to buy the new coke product because it is an improvement on Pepsis product Source: Sebastion09 at Slideshare.net
  12. 12. Competitive Advantage While being aware of the competition and making a countermove is important, it is also very important to pay attention to changing consumer wants, needs, and values and to make the needed changes before the competition does Doing research and development and being the first to provide a new product or service can give a company a competitive advantage in the marketplace Having a competitive advantage means that a company does something better than the competition Source: Sebastion09 at Slideshare.net
  13. 13. Technology One way to remain competitive is through the use of technology TechnologyCan help speed up production processes through the use of robots or production linesCan move information more accurately and more quickly through the use of computer systems Can stimulate and assist in research and development Can facilitate transparency and accountability Source: Sebastion09 at Slideshare.net
  14. 14. Competitive Differentiation Competitive differentiation occurs when a firm somehow differentiates its product or service from that of competitors Common ways to differentiate a product or service include advertising, a better-quality product, better service, better taste, or just better brand image Source: Sebastion09 at Slideshare.net
  15. 15. Imperfect CompetitionImperfect competition implies an industry or market in which one or more of the following conditions exist: Suppliers can influence prices There are significant barriers to entry and exit Goods and services are unique Small number of suppliers and/or buyers Information on pricing and process is not readily available Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  16. 16. Forms of Imperfect Competition Market structures generally included in the category of imperfect competition: Monopoly Oligopoly Monopolistic Competition Every industry or market operates in some form of imperfect competition. For example, someindustries rely on heavy initial capital investment, such as industrial manufacturers and telecom providers. This makes the prospect of having many competitors practically impossible. Markets are evaluated by their relative closeness to perfect competition Are efforts made to approach Perfect Competition? Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  17. 17. Perfect Competition Large number of buyer and seller Single uniform Homogenous price product Source: Sebastion09 at Slideshare.net
  18. 18. Equilibrium Point Source: Sebastion09 at Slideshare.net
  19. 19. Video: exploring a supply and demand price charthttp://youtu.be/MykJi8QVUWU?t=59s
  20. 20. MonopolyMonopoly is a market in which a single firm is the only supplier of the goods or service.Anyone seeking to buy these goods and services must buy from the monopoly seller. Thissingle-seller status gives the monopoly extensive market control. It is a price maker. Themarket demand for the good sold by a monopoly is the demand facing the monopoly.Market control means that monopoly does not equate price with marginal cost and thusdoes not efficiently allocate resources.Examples include utilities.The four key characteristics of monopoly are:(1) A single firm selling all output in a market(2) A unique product(3) Restrictions on entry into the industry, and(4) Specialized information about production techniques unavailable to other potentialproducers. Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  21. 21. Single SupplierMonopolies achieve their single-seller status for three interrelated reasons:(a) Economies of scale(b) Government decree, and(c) Resource ownershipWhile a monopoly can emerge and persist for any one of these reasons, mostmonopolies rely on two or all three Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  22. 22. Unique ProductA monopoly achieves single-seller status because the good suppliedis unique. There are no close substitutes available for the goodproduced by a monopoly Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  23. 23. Barriers to EntryA monopoly often acquires and generally maintains single seller status due to restrictionson the entry of other firms into the market. Key barriers to entry are:(a) Government license or franchise(b) Resource ownership(c) Patents and copyrights(d) High start-up cost, and(e) Decreasing average total cost.These restrictions might be imposed for efficiency reasons or simply for the benefit of the monopoly.Since barriers to entry are a general deterrent to competition, If entry barriers increase, thencompetition will decrease. Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  24. 24. Specialized InformationA monopoly often possesses information not available to others. This specializedinformation generally comes in the form of legally-established patents, copyrights,or trademarks Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  25. 25. Advantages of monopoly : Source: Sebastion09 at Slideshare.net
  26. 26. Disadvantages of monopoly Lack of consumer choice No pressure to keep costs down Misallocation of resources Monopoly in strategic sectors Source: Sebastion09 at Slideshare.net
  27. 27. Oligopoly This market structure is characterized by a small number of relatively large competitors, each with substantial market control. Oligopoly sellers exhibit interdependent decision making which can lead tointense competition among the few and the motivation to cooperate through mergers and collusion Examples include automobile manufacturing Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  28. 28. Monopolistic CompetitionThis market structure is characterized by a large number of relatively small competitors, each with a modest degree of market control on the supply side. A key feature of monopolistic competition is product differentiation.The output of each producer is a close but not identical substitute to that of every other firm, which helps satisfy diverse consumer wants and needs Examples include toothpaste and toilet paper manufacturers Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  29. 29. Video: market structure overview (youtube.com, mjmfoodies channel) http://youtu.be/9Hxy-TuX9fs?t=12s
  30. 30. The Four Types of Market Structure Number of Firms? Many firms One Type of Products? firm Few firms Differentiated Identical products products Monopoly Oligopoly Monopolistic Perfect Competition Competition• Tap water • Tennis balls • Novels • Wheat• Cable TV • Crude oil • Movies • Milk Source: Sebastion09 at slideshare.net
  31. 31. Kinds of Numbers of Part of Degree of control overcompetition product and Economy price degree of where differentiation prevalent 1 2 3 41. Perfect Many producer Few Nonecompetition identical Agricultural products commodities2. ImperfectCompetitiona) Monopolistic Many Producers Retail Trade, SomeCompetition Many Real Or Toothpaste, Imaginary Soap etc Difference in Productb) Oligopoly 1. Few producer Steel Some Little or no Aluminum difference in product
  32. 32. Kinds of Numbers of Part of Economy Degree of controlcompetition product and where prevalent over price degree of differentiation 1 2 3 4b) Oligopoly 2. Few Producers, Autos, Machinery Some Some Differentiation of productc) Monopoly Single Producer Few Public Considerable Single Product Utilities Without Close Substitutesd) Monopsony Single buyer Indian wagon Considerable Single Outlet Industry With Remote Local labor Substitute Outlets markets Dominated by single firm
  33. 33. Kinds of Numbers of Part of Degree of controlcompetition product and Economy where over price degree of prevalent differentiation 1 2 3 4e) Oligopsony Few Buyers 1. Milk Diaries Some 1. Little or no 2. Local Some difference in Agricultural buyers Market Dominated by a few processors 2. Difference in 3. Market for Some buyers Certain Components such as auto parts
  34. 34. Example: Honda Care extended warranty Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  35. 35. Presented by Marcello M. Ritondo at the Henry George School ofSocial Science in New York City on September 28, 2012.
  36. 36. Presented by Marcello M. Ritondo at the Henry George School ofSocial Science in New York City on September 28, 2012.
  37. 37. 9/12/12 G mail - Hy annis Honda C are Information Marcello Ritondo <mritondo123@gmail.com> Hy annis Honda Care Inform ation 1 message Request Form <questions@hyannishondacare.com> Tue, Aug 7, 2012 at 1:38 PM Reply-To: Request Form <questions@hyannishondacare.com> To: mritondo123@gmail.com This email has been sent to mritondo123@gmail.com. The following chart includes all the Honda Care coverage plans that are available for a 2009 Honda Accord 4cyl with 35700 miles. Coverage Level $0 Deductible $100 Deductible 3 years/80000 miles $655.00 $555.00 3 years/100000 miles $810.00 $710.00 3 years/120000 miles $940.00 $840.00 4 years/80000 miles $705.00 $605.00 4 years/100000 miles $920.00 $820.00 4 years/120000 miles $1,050.00 $950.00 5 years/80000 miles $745.00 $645.00 5 years/100000 miles $960.00 $860.00 5 years/120000 miles $1,090.00 $990.00 Do you have a non-Honda or a Honda that no longer qualifies for Hondacare? Visit our new website www.hyannishondaservicecontracts.com for more information. Please contact Bob Leab at (508) 778-7878 for more information. You may also reply to this email. The following comment has been sent to Hyannis Honda. You will receive a seperate response shortly. Im interested in 1 YR interest free financing. Marcello Ritondo 373 Grand Ave Apt 4 Brooklyn, NY 11238 347-768-4290 Presented by Marcello M. Ritondo at the Henry George School ofhttps://mail.google.com/mail/u/0/?ui=2&ik=58f408c03f&v iew =pt&cat=H onda&search=cat&th=139022a3… Social Science in New York City on September 28, 2012.
  38. 38. Presented by Marcello M. Ritondo at the Henry George School ofSocial Science in New York City on September 28, 2012.
  39. 39. Presented by Marcello M. Ritondo at the Henry George School ofSocial Science in New York City on September 28, 2012.
  40. 40. Presented by Marcello M. Ritondo at the Henry George School ofSocial Science in New York City on September 28, 2012.
  41. 41. After initial startup costs including research and development, design andtesting of the lenses, development of the manufacturing process and highlyspecialized equipment, what is the current production cost per lens?What is the marginal profit per contact lens?Is or should this information be available as public record?What are the barriers of entry for this market?Should medical devices be treated differently? Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  42. 42. Additional Examples Prescription costs College textbooks Health care and Insurance premiums Emergency room visits Airline prices for last minute flights$ 2.79+ per min for long distance calls! Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  43. 43. video: a closer look at healthcare insurance premiums http://youtu.be/C4mJR3GCtDw Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  44. 44. Conclusion Open Questions Is it fair and reasonable to expect to pay a fair and reasonable price? Free Market, legal, regulatory and consumer options Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.
  45. 45. additional references www.amosweb.com www.investopedia.com businessdictionary.com oxforddictionaries.com slideshare.com Presented by Marcello M. Ritondo at the Henry George School of Social Science in New York City on September 28, 2012.

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