Pricing and non price strategies that could be used to increase profitability Flashcards
(4 cards)
KAA1 - Pricing strategies
Limit Pricing - Set prices below the AVC of new entrants
New firms haven’t yet experiences E.O.S, so AVC is high
To compete with incumbent firms, the new firms will have to operate below their short run shutdown point, they would have to leave the market. So firms are deterred from entering the market
Increase barriers to entry-reduction in contestability
Predatory pricing - Setting prices below SRAC to make a short run economic loss
Drives out current competition who can’t afford to reduce prices by too much
Reduced competition-increased market share and power-increase inelasticity of PED-price making abilities-increase in SNP
Eval1 - Drawbacks of using limit and predatory pricing
ILLEGAL-Punishable by the CMA
Heavy fines-increase in costs due to paying fines-reduction in SNP
Risk of price wars-reduction in revenue
Costly to find out the AVC of other firms-imperfect information
KAA2 - Non pricing strategies
Increase advertising of product (APPLICATION):
Normal/Seasonal discounts
-compare to other similar stores (Siansb )
New loyalty schemes
This, together with an INCREASE IN OUTPUT can lead to marketing E.O.S-MOVEMENT ALONG THE LRAC CURVE-increase in SNP
Increase reinvestment into R&D (APPLICATION)-dynamic efficiency-improvement in quality-attracts consumers from other firms-Increase in AR-increased SNP
Eval2
Advertising and R&D spending are forms of sunk costs-as they’re unrecoverable in nature-firms are deterred from investing-less brand awareness-less demand-reduction in revenue and SNP
Sunk cost Risks:
Consumer preferences may change with new trends-reduction in AR
Consumers may not perceive an increase in quality/advertisements
Prices may increase to offset sunk costs
Application:
If firm sells high priced priced items (smartphones), quantity demanded will decrease due to relatively elastic PED-reduction in revenue and profits
