Pricing Decision in Market Structure

8/6/2019 Pricing Decision in Market Structure

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Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

Part 7: Pricing DecisionsPart 7: Pricing Decisions

18.Price Concepts and Approaches

19.Pricing Strategies


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Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

Chapter 18Chapter 18

Price ConceptsPrice Conceptsand Approachesand Approaches


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Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 18-3

Chapter ObjectivesChapter Objectives

1. Outline the legal constraints on pricing.

2. Identify the major categories of pricing objectives.

3. Explain price elasticity and its determinants.

4. List the practical problems involved in applying price

theory concepts to actual pricing decisions.

5. Explain the major cost-plus approaches to price setting.

6. List the chief advantages and shortcomings of using

breakeven analysis in pricing decisions.

7. Explain the superiority of modified breakeven analysis

over the basic breakeven model and the role of yieldmanagement in pricing decisions.

8. Identify the major pricing challenges facing online and

international marketers.


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Pricing and the LawPricing and the Law

PricePrice: the exchange value of a good or service

RobinsonRobinson--Patman ActPatman Act

Federal legislation prohibiting price

discrimination that is not based on a cost

differential

Also prohibits selling at unreasonably low

prices to eliminate competition


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Unfair Trade LawsUnfair Trade Laws

Require sellers to maintain minimum prices

for comparable merchandise. These lawswere intended to protect small specialtyshops.

Designed to protect small stores and

businesses from the predatory pricingpractices of larger chain stores

Fair Trade LawsFair Trade Laws

Allow manufacturers to stipulate minimum

prices for their products and force retailers toadhere to them

Enable companies to establish and maintainproduct images


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Pricing Objectives and thePricing Objectives and the

Marketing MixMarketing Mix

Prices, and the resulting sales, determine how

much revenue a company receives

Prices thus influence a firms profits

Prices also influence the firms employment of

the factors of production:

Natural resources

Capital

Human Resources

Entrepreneurship


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Objective Purpose Example

Profitability

Objectives

Profit Maximization

Target Return

Low introductory interest rates

on credit cards with high

standard rates after 6 months.

Volume Objectives Sales Maximization

Market Share

Dells low-priced PCs increase

market share and sales of

services

Meeting Competition

Objectives

Value Pricing Per-song charges for music

downloads

Prestige Objectives Lifestyle

Image

High-priced luxury autos such

as BMW and watches by Piaget

Not-for-Profit

Objectives

Profit Maximization

Cost Recovery

Market Incentives

Market Suppression

High prices for tobacco and

alcohol to reduce consumption


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Profitability ObjectivesProfitability Objectives

For-profit firms must set prices withprofitability in mind

Profit Maximization: point at which the

additional revenue gained by increasing

the price of a product equals the increasein total costs

Target-Return Objectives: Short-run or

long-run pricing objectives of achieving a

specified return on either sales orinvestment


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Volume ObjectivesVolume Objectives

Sales maximization

:A minimum profitlevel is set and firms seek to maximizes

sales

Market-share objectives: the goal set for

controlling a portion of the market for afirms good or service

The Product Impact of Market Strategies

(PIMS) Project: Research that discovered

a strong positive relationship between afirms market share and product quality and

its return on investment


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Meeting Competition:Meeting Competition: Seeks simply tomeet competitors prices

Value PricingValue Pricing: Pricing strategy that

emphasizes the benefits derived from aproduct in comparison to the price and

quality levels of competing offerings


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Prestige ObjectivesPrestige Objectives: Prices are set at

a relatively high level in order to develop

and maintain an image of quality and

exclusiveness that appeals to status-conscious consumers


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Pricing Objectives of NotPricing Objectives of Not--forfor--ProfitProfit

OrganizationsOrganizations

Profit maximization

Cost recovery

Market incentives

Market suppression


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Methods for Determining PricesMethods for Determining Prices

Customary Prices: traditional prices that

consumers expect to pay for a good or

service


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Price Determination inPrice Determination in

Economic TheoryEconomic Theory

Demand: schedule of the amounts of a firms

good or service that consumers purchase at

different prices during a specified period

Supply: schedule of the amounts of a good

or service that firms will offer for sale at

different prices during a specified time period


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Four Market Structures

Pure Competition: Market structure

characterized by homogeneous productsin which there are so many buyers and

sellers that none has a significant

influence on price

Monopolistic Competition: Marketstructure involving a heterogeneous

product and product differentiation among

competing suppliers, allowing the

marketer some degree of control over

prices


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OligopolyOligopoly: Market structure involvingrelatively few sellers and barriers to new

competitors due to high start-up costs

MonopolyMonopoly: Market structure involving onlyone seller of a good or service for which noclose substitutes exist


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Distinguishing features of the Four Market Structures

CharacteristicsPure

CompetitionMonopolisticCompetition Oligopoly Monopoly

Number of competitors Many Few to many Few No direct competitors

Ease of entry into

industry by new firms

Easy Somewhat

Difficult

Difficult Regulated by

government

Similarity of goods orservices offered by

competing firms

Similar Different Can be either similar or

different

No directly competinggoods or service

Control over prices by

individual firms

None Some Some Considerable

Demand curves facing

individual firms

Totally elastic Can be either

elastic or

inelastic

Kinked;

inelastic below

kink; more

elastic above

Can be either elastic or

inelastic

Examples 2000-acre

ranch

Banana

Republic

BP Commonwealth Edison


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Cost and Revenue CurvesCost and Revenue CurvesPrice is often determined by analyzing the cost

and revenue curvesAverage total cost is calculated by dividing the

total costs by the number of units produced

Marginal cost is the change in total cost that

results from producing an additional unit ofoutput

Average revenue is calculated by dividing totalrevenue by the quantity of goods or services

soldMarginal revenue is the change in total

revenue that results from selling an additionalunit of output


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Determining Price by Relating Marginal Revenue toMarginal Cost


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Price Determination using Marginal Analysis

Price

Number

Sold

Total

Revenue

Marginal

Revenue

Total

Costs

Marginal

Costs

Profits

(TotalRevenue

Total

Costs)

($50)

$34 1 $34 $34 57 $7 (23)

32 2 64 30 62 5 2

30 3 90 26 66 4 24

28 4 112 22 69 3 43

26 5 130 18 73 4 57

24 6 144 14 78 5 66

22 7 154 10 84 6 70

20 8 160 6 91 7 69

18 9 162 2 100 9 62

16 10 160 (2) 110 11 50


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The Concept Of Elasticity In Pricing StrategyThe Concept Of Elasticity In Pricing Strategy

Elasticity: measure of responsiveness ofpurchasers and suppliers to changes in price

Determinants Of ElasticityDeterminants Of ElasticityAvailability of Substitutes or

complements

Luxury or Necessity

Portion of Budget

Time Perspective


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Elasticity and RevenueElasticity and RevenueElasticity of demand exerts an important

influence on total revenue as a result in the

changes in the price of a good or service

For example, should a citys transitauthority raise or lower price for public

transportation?

The answer, of course, lies in the elasticity

of demand for public transportation


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Practical Problems of Price TheoryPractical Problems of Price Theory

Marketers may thoroughly understandprice theory concepts but still encounter

difficulty in applying them in practice.

Practical limitations interfering with price

setting include the facts that:

Many firms dont attempt to maximize

profits

Estimating demand curves is a difficultprocess


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Alternative Pricing ProceduresAlternative Pricing Procedures

Full-cost pricing uses all relevant

variable costs and allocates fixed coststhat cannot be directly attributed to the

production of the specific item in setting

a products price.

Incremental-cost pricing attempts to

overcome arbitrary allocation of fixed

costs by only considering costs directly

attributable to the product itself when

setting prices


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Breakeven analysisBreakeven analysis: pricing technique

used to determine the number of productsthat must be sold at a specified price in order

to generate sufficient revenue to cover total

cost

Target ReturnsA desired dollar return

A percentage of sales

Evaluation of Breakeven Analysis


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Toward Realistic PricingToward Realistic Pricing

In actual practice, most pricing

approaches are largely cost oriented

They thus violate the marketing concept

New approaches being developed areincorporating the element of consumer

demand


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The Modified Breakeven ConceptThe Modified Breakeven ConceptPricing technique used to evaluate

consumer demand by comparing the

number of products that must be sold at a

variety of prices in order to cover total costwith estimates of expected sales at the

various prices


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Modified Breakeven Chart


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Revenue and Cost data for Modified Breakeven Analysis

Revenues Costs

Price

Quantity

Demanded

Total

Revenue

Total

Fixed

Cost

Total

Variable

Cost

Total

Cost

Breakeven

Point -No.

of Sales

Required to

Break Even

Total Profit

(or Loss)

$15 2,500 $37,500 $40,000 $12,500 $52,500 4,000 $(15,000)

10 10,000 100,000 40,000 50,000 90,000 8,000 10,000

9 13,000 117,000 40,000 65,000 105,000 110,000 12,000

8 14,000 112,000 40,000 70,000 110,000 13,334 2,000

7 15,000 105,000 40,000 75,000 115,000 20,000 (10,000)


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Yield ManagementYield Management: pricing strategy that

allows marketers to vary prices based on

such factors as demand, even though the

cost of providing those goods or services

remains the same

Designed to maximize sales in situations

such as airfares, lodging, auto rentals,

and theater tickets where costs are fixed


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Global Issues in Price DeterminationGlobal Issues in Price Determination

Global Prices must support the firms

broader goals including:

Product development

Advertising and sales

Customer support

Competitive plans

Financial objectives


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In General, there are five pricing objectives

that firms can use to set prices in globalmarketing

Profitability, volume, meeting competition,

and prestige, are the same as those

discussed earlier

In addition international marketers work to

achieve price stability

Price stabilityis the ability to maintainconsistent prices during major economic

fluctuations and periods of political change

Documents

Pricing Decision in Market Structure