This document discusses different pricing strategies that firms can use, including cost-plus pricing, multiple product pricing, and peak load pricing. Cost-plus pricing involves adding a markup percentage to average variable costs. Multiple product pricing is needed when a firm has multiple differentiated products that have separate demand curves but shared costs. Peak load pricing addresses how to set electricity prices given fluctuating demand levels between peak and off-peak times.

1. Pricing Strategies and practices
We have seen that the firms’ objective is profit maximization. The pricing theory
under this hypothesis suggest that, given the demand and cost curves, price and
output are so determined that profit ids maximized, i.e. at the level of output
where MR=MC. But there are firms that follow a pricing rule other than the one
suggested by the marginality rules. Besides, in a complex business world, business
firms follow a variety of pricing rules and methods depending on the conditions
faced by them.
Cost-plus Pricing
Cost-plus pricing is also known as mark-up pricing, average cost pricing and full-cost
pricing. The cost-plus pricing is the most common method of pricing used by
manufacturing firms. The general practice under this method is to add a ‘fair’
percentage of profit margin to the average variable cost (AVC). The formula for
setting the price is given as
P= AVC + AVC (m)
P= AVC (1+m)
Where AVC= average variable cost, and m= mark-up percentage.
It applies only for market structures where companies have some market power
and are, therefore, able to set prices for their products.
Advantages of Cost plus Pricing
1. This method is appropriate when it is difficult to forecast the future
demand.
2. This method guarantees recovery of cost. Hence it is the safest method.
3. It helps to set the price easily.
4. Both single product and multi product firms can apply this method for
pricing.
5. It ensures stability in pricing.

2. 6. If this method is adopted by all firms within the industry, the problem of
price war can be avoided.
7. It is economical for decision making.
Disadvantages of Cost plus Pricing
1. This method ignores the effect of demand.
2. It does not consider the forces of market and competition.
3. This method uses average costs, ignoring marginal or incremental costs.
4. This method gives too much importance for the precision of allocation of
costs.
Multiple Product Pricing
Almost all the firms have more than one product in their line of production. Even
the most specialized firms produce a commodity in multiple models, styles and
size, each so much differentiated from the other that each model or size of the
product may be considered a different products e.g. the various models of
television, refrigerators etc produced by the same company may be treated as
different product for at least pricing purpose. The various models are so
differentiated that consumers view them as different products. Hence each model
or product has different average revenue (AR) and Marginal Revenue curves and
that one product of the firm concepts against the other product. The pricing
under this condition is known as multi-product pricing or product line pricing. In
multi-product pricing, each product has a separate demand curve. But, since all of
them are produced under one organization by interchangeable production
facilities, they have only one inseparable marginal cost curve. That is, while
revenue curves, AR and MR, are separate for each product, cost curves AC and
MC are inseparable. Therefore, the marginal rule of pricing cannot be applied
straightaway to fix the price of each product separately. The problem, however,
has been provided with a solution by E.W. Clemens. The solution is similar to the
technique employed to illustrate third degree price discrimination under profit
maximization assumption. As a discriminating monopoly tries to maximize its
revenue in all its market, so does a multi-product firm in respect of each of its
products.

3. A B C D
Dc
Dd
Da Db
Pd
Pc
Pb
Pa
EMR
MR MRd MRb c
MRa
MC
Cost and Revenue
O Qa Qb
Qc Qd
Quantity demanded per time unit
C
To illustrate the multiple product pricing, let us suppose that a firm has four
different products- A, B, C, and D in its production. The AR and MR curves for the
four branded product are shown in four segments of the figure. The marginal cost
for all the products taken together is shown by the curve MC, which is the factory
marginal cost curve. Let us suppose that when the MRs for the individual products
are horizontally summed up, the aggregate MR (not given in the figure) passes
through point C on the MC curve. I f a line parallel to the X-axis, is drawn from
point C to the Y-axis through the MRs, the intersecting points where MC and MRs
are equal for each product, as shown by the line EMR, the Equal Marginal
Revenue line. The points of intersection between EMR and MRs determine the
output level and price for each product. The outputs of the four products are
given as OQa of product A; QaQb of B; QbQc of C; and QcQd of D. The perspective
prices for the four products are: PaQa for product A; PbQb for B; PcQc for C and
PdQd for D. these price and output combinations maximizes the profit from each
product and hence the overall profit of the firm.

4. Peak Load Pricing
There are certain non storable commodities like electricity, telephone, transport
and security services, etc which are demanded in varying measures during the day
as well as night. For example, consumption of electricity reaches its peak in day
time. It is called ‘peak-load’ time. It reaches its bottom in the night. This is called
‘off-peak’ time. Similarly, consumption of telephone services is at its peak at day
time and at its bottom at night. Another example of ‘peak’ and ‘off-peak’ demand
is of railways and air services. During festivals, summer holidays, ‘Pooja’
vacations, etc the demand for railway and air travel services rises to its peak.
A technical feature of such products is that they cannot be stored. Therefore their
production has to be increased in order to meet the ‘peak-load’ demand and
reduced to ‘off-peak’ level when demand decreases. Had they been storable, the
excess production in ‘off-peak’ could be stored and supplied during the ‘peak-load’
period. But this cannot be done. Besides, given the installed capacity, their
production can be increased but at an increasing marginal cost (MC).
Pricing of products like electricity is problematic. The nature of the problem in a
short-run setting is depicted in the figure. The peak-load and off-load demand
curves are shown by DP and DL curves respectively. The short-run supply curve is
given by the short-run marginal cost curve, SMC. The problem is ‘how to price
electricity’.
If electricity price is fixed in accordance with peak-load demand, OP3 will be the
price and if it is fixed according to off-load demand, price will be OP1. The
problem is: what price should be fixed? If a peak-load price OP3 is charged
uniformly in all seasons, it will be unfair because consumers will be charged for
what they do not consume. Besides, it may affect business activities adversely. If
electricity production is a public monopoly, the government may not find it
advisable to charge a uniform peak-load price.

5. A
D
B
E
C
DP
DL
P3
P2
P1
O Q1 Q2 Q3 Q4
Price
Quantity
SMC