2.2.2 Competing on price

Question 1

Pricing strategies: ( there’s 6)

Answer 1

1. Cost plus (calculating mark up on unit cost)
2. Price skimming 3. Penetration
3. Predatory 5. Competitive
4. Psychological

Question 2

What is Cost plus (calculating mark up on unit cost)

Answer 2

When a retailer wants to know the gross profit margin of a sale in advance, they might use cost-plus pricing.

Question 3

Advantages and disadvantages of Cost plus (calculating mark up on unit cost)

Answer 3

1. A benefit of this is that the retailer reduces the uncertainty of profits, since they know costs will be covered if they can sell the good.
2. However, it could lead to a fall in the quantity sold, the revenues and profits and market share of the firm since the price is uncompetitive.

Question 4

What is Price skimming

Answer 4

This is when the product has little or no competition, so a high price is set temporarily before competitors enter the market.

Question 5

What is penetration

Answer 5

This involves setting a low price initially, which is below the intentional price, in order to attract customers.

Question 6

What is predatory

Answer 6

This involves firms setting low prices to drive out firms already in the industry. In the short run, it leads to them making losses. As firms leave, the remaining firms raise their prices slowly to regain their revenue.

Question 7

What is competitive

Answer 7

This is when prices are set based on the prices of competitors, and it is used when the products are similar.

Question 8

What is psychological

Answer 8

This is a pricing strategy which uses the emotional and not rational reactions to the price of a good.

E.g. a good might be priced at 99p rather than £1, since the 99p price tag seems a lot cheaper than the £1 price tag