Pricing Strategies Flashcards
Define equilibrium price
The price where the quantity demanded equals the quantity supplied. The price where there is no shortage or surplus
What are factors to be considered in pricing
Supply and demand Life cycle of a product Aim of the firm Competition Information on coasts and demands
How does market structure affect pricing
The firms market power influences their power over price
The greater the power the greater the discretion over price - what choice they have
Incumbent advantages mean that potential entrants have a higher average cost
Explain limit pricing
Incumbency advantage - to retain the monopoly market structure means that keeping price lower means no one else will enter the market.
Why? because You choose to enter the market if you can make money.
This happens when average cost curve dips below the price that you can charge. If this cannot be achieved due to low price I do not enter. Discourages entry
Explain cost based pricing
Mark-up pricing - a pricing strategy adopted by a business in which a profit markup is added to average costs
Having a specific profit margin onto the price.
Average costs include the profit you expect to make - average costs +mark up
Explain the pricing quanitity view
The lower the output the higher profit mark-up per unit must be (second graph)
If I want to reach a certain profit level, the average markup needed to be applied will be reduced the more quantity you produce
What are the challenges to setting pricing?
Does a firm really know its marginal costs and revenues
Can a firm identify the profit maximising price/output
Can a firm predict rivals behaviours
Define first degree price discrimination
Where a firm charges each customer for each unit the maximum price that the consumer is willing to pay for that unit. (Maximum price they would pay and get them to pay that amount. Consumers pay different prices) ex: auction, flights
Define second degree price discrimination
A firm charges a consumer so much for the first so many units purchases, a different price for the next so many unit purchases and so on (Volume discount)
The more goods I buy the lower the price I pay
Define third degree price discrimination
Where a firm divides consumers into different groups and charges a different price to consumers in different groups, but the same price to all consumers within a group ex: public transport student, adult
What is essential to remember for the third degree price discimination model - conditions of it
There is No overlap between the two markets. No ambiguity over what market you’re in
Demand curves in markets are distinct
In one market the demand is steeper (willing to pay higher prices).
The cost of providing a good or service is independent of the differentiation of the market.
Where does a firm produce for third degree price discrimination
where MC and total MR curves intersect. Profit maximisation happens here. Note quantity and pricing will be different in the different markets
What are the conditions for price discrimination
The firm can set price.
Markets must be separate - no overlap of markets ex: Students and OAPs
Markets must have different demand elasticity
What are the four main stages of the product life cycle and why is it important in pricing
Pricing tends to differ through the cycle
- Launch
- Growth
- Maturity
- Decline
Explain interrelated demand
a situation where you are trying to sell multiple suites of products rather than one single product
If you have demand for one and I want to maximise demand for all my range
