BASIC DETERMINANTS OF PRICEDEGREE OF COMPETITIONPRICING OF COMPETITORS PRODUCTOBJECTIVE OF THE FIRMCOST OF PRODUCTIONDEMAND IN MARKETSUPPLY OF PRODUCT IN MARKET
PRICING STRATEGY OF PRODUCTCOST BASED PRICING Under cost based pricing price of the product is the sum of cost plus a profit margin It can be further classified as:- cost plus pricing marginal cost pricing target return pricing
VALUE PRICING• Price set in accordance with customer perceptions about the value of the product/service• Examples include status products/exclusive products
COST PLUS OR MARK UP PRICINGUnder cost plus pricing price of the product is the sum of cost plus a profit margin• Price = A C+ m• where m = percentage of mark up
MARGINAL COST PRICINGUnder marginal cost pricing price is the sum of variable cost plus a profit margin.Here margin is either calculated on total cost or variable cost.Margin calculated on total cost > margin calculated on variable cost
TARGET RETURN PRICINGUnder target return pricing a producer rationally decides the minimum rate of return that the producer must earn.
GOING RATE (PRICE LEADERSHIP)• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
PRICING BASED ON FIRM’S OBJECTIVE• PROFIT MAXIMISATION: • The basic objective of a firm is to maximize profit and to attain it they prefer to adopt COST PLUS PRICING SALES MAXIMISATION: • Some firm would like to maximize sale instead of profit maximization therefore they adopt MARGINAL COSTING method
TENDER PRICING• Many contracts awarded on a tender basis• Firm (or firms) submit their price for carrying out the work• Purchaser then chooses which represents best value• Mostly done in secret
COMPETITION BASED PRICING: PENETRATION PRICING: WHILE ENTERING A NEW MARKET WHICH IS ALREADY DOMINATED BY EXISTING PLAYERS,THEY WILL CHARGE A LOWER PRICE THAN THE ONGOING. ENTRY DETERRING PRICING: THE PRICE IS KEPT LOW, THUS MAKING THE MARKET UNATTRACTIVE FOR THE OTHER PLAYERS. GOING RATE PRICING: THE PRICE OF ALL THE COMPANIES IN A COMPETATIVE MARKET WILL BE SAME.
PRODUCT LIFE CYCLE BASED PRICING• An intelligent firm will devise different pricing for a product at different stages of its lifecycle.• Pricing for a product is based on different stages like introduction, growth, maturity, saturation, decline
PRICE SKIMMING: A product pricing strategy by which a firm charges the highest initial pricethat customers will pay. As the demand of the first customers is satisfied, the firmlowers the price to attract another, more price-sensitive segment.PRODUCT BUNDLING: Under product bundling two or more products are bundled together for asingle price.PERCEIVED VALUE PRICING: The value of the goods for different consumers depends upon theirperception of utility of the goods.VALUE PRICING: Under value pricing sellers try to create a high value of the product andcharge a low price.LOSS LEADER PRICING: Multi product firms sell one product at a low price and compensate the lossby other products.
MULTIPRODUCT PRICINGThis strategy is used when a company producesmore than one product and the products can act assubstitutes or complements to each other.
MULTIPRODUCT PRICING CONT... Demand Interdependence: • Interdependence of two or more products’ demands on each other’s prices. Products may be substitutes or complements. Substitutes : Increase in price of one will increase the substitute’s demand. Compliments: Increase in demand of the compliment will result in increase in price of the main product which will impact demands of both products.
DUMPING• It’s a pricing strategy adopted by a country where a product is exported in bulk to a foreign country at a price which is either below the domestic market price or below the marginal cost of production.• Government has initiated antidumping measures against imports of consumer good items• e.g. dry cell batteries, sports shoes and toys from China.• India topped the list of countries initiating new antidumping investigations.
RETAIL PRICING• Marketing channel categorically consists of at least two sections, wholesalers and retailers.• Wholesaler normally deals with retailers & retailer sells a product to the final consumer.• Retailers constitute nearly 97% of all business activities & organized retail is just 7-8% in India.• Upper limit pricing (Maximum retail price) plus commission.
PEAK LOAD PRICING• Different prices are charged for the same facility used at different points of time by the same consumers.• Consumers using the product at peak load time pay higher price & users at off peak period pay a lower price.• Example: • Phone tariff during night hours is low. • Airlines provide discounts on tickets purchased at different point of time
EVERY DAY LOW PRICING STRATEGY• As per EDLP, low price is charged throughout the year and none or very few special discounts are given on special occasions .• Eg: Wal-Mart, Big Bazaar.• High-Low Pricing:• The price is higher on all days but lower on discount days than EDLP.• The firms attracts or snatches the customers from rivals by using EDLP.
SEALED BID PRICING STRATEGY• This is a separate market in which the buyer does not prefer an open market price but demands that the sellers provide their rates in sealed form, commonly known as tenders.• It may be considered as a case of limited Monopsony.• Example: • All government departments including construction, procurement of goods, vehicles, machinery are done through tendering. • Indian Railways.
EXPORT PRICING• These are the prices which are determined based on the characteristics of foreign market situations.• On the basis of tariff and trade restrictions prices are determined.• Factors include: • unknown demand, • unpredictable attitude, • medium of exchange, • risk in exchange• WTO insisting its members to provide level playing field to all the players.
PRICE DISCRIMINATION• It is the practice of discriminating price among buyers on the basis of the price charged for the same good or service.• A seller can earn greater profit through price discrimination than through charging one price from the whole market.• Eg: Indian Railways.
PRICE DISCRIMINATION CONT...• Prerequisites to Price discrimination:• Market Control • The greater the imperfection in the market, the higher is the possibility of price discrimination.• Division of Market • Eg: Doctor’s Fee, • Petrol Price, Mobile Tariffs• Different Price Elasticities of Demand in Different Markets
1.MARKET CONTROL The greater the imperfection in the market, the higher is the possibility of price discrimination. monopoly is the most suited for price discrimination . oligopoly and monopolistic competition can also discriminate on the basis of price but it is restricted to the extent of their ability to control the price of the product. a firm in perfect competition cannot do this as it has no control over market price.
2.DIVISION OF MARKET• -Price discrimination is possible only when the market can be divided into various segments and the product is identical. -Absence of arbitrage: There should be no buying of goods from the cheaper market and selling them in the costlier market. Example for arbitrate- selling of movie tickets in black. -Market can be divided the market on the basis of the consumers’ paying capacity, their needs, geography etc.,
3.DIFFERENT PRICE ELASTICITY OFDEMAND IN DIFFERENT MARKETS Price elasticity of demand helps in determination of appropriate price. A seller charges -higher price if elasticity is low. -lower price if elasticity is high. Price elasticity of demand should be different for different market segments for the segregation to result in an increased income.
BASE OF PRICE DISCRIMINATION• Price discrimination can be done on the basis of: -personal -geography -demographical -time -paying capacity -purpose of use -need
DEGREES OF PRICE DISCRIMINATION• First Degree When the seller is able to charge different prices for different units of the same product from the same consumer. First degree is the worst case of discrimination
• Second Degree Price discrimination of second degree is when the seller divides consumers in groups on the basis of their paying capacities and discriminates on the basis of consumer surplus. -person with lower capacity is charged less -person with higher capacity is charged more.
• Third Degree In this degree of discrimination, the seller manages to take away only a small portion of the consumer surplus. -consumers are segregated such that each group is a separate market -different prices are charged for that group based on its price elasticity Eg- movie tickets
ADVANTAGES OF PRICE DISCRIMINATION• Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak.• Increased revenues can be used for research and development which benefit consumers• Some consumers will benefit from lower fares. Ex-old people benefit from lower train companies.
DISADVANTAGES OF PRICE DISCRIMINATION• Some consumers will end up paying higher prices. These higher prices are likely to be allocatively inefficient because P > MC.• Decline in consumer surplus.• Those who pay higher prices may not be the poorest. Eg- adults could be unemployed, OAPs well off.• There may be administration costs in separating the markets.• Profits from price discrimination could be used to finance predatory pricing.
PRICE AND OUTPUT DECISIONS OF DISCRIMINATING MONOPOLIST• Rule for determining profit maximizing output is MC=MR when MC is increasing.• Markets are divided into two parts -One with lesser outputs with higher price (low price elasticity of demand) -One with higher outputs with lesser price (high price elasticity of demand)• Output at the point where MC=MR is taken, the corresponding price for that output is decided in both the markets.• Without price discrimination, the firm would earn less profit because the profit earned without price discrimination in the total market would be lesser than the sum of the profit earned in individual markets.