Pricing Strategy

Question 1

What are factors determining price?

Answer 1

• Degree of competition from other firms
• Information on costs + demand
• Aims of the firm (profit maximisation)
• Life cycle of the product
• Past Practices

Question 2

Which difficulties do firms face when determining their cost and revenue?

Answer 2

• Difficulties in predicting rivals’ behaviour
• Difficulties in identifying the profit maximising price and output

Question 3

What is cost-based pricing?

Answer 3

It uses the profit mark-up on average cost
- considers equilbrium price and output

Question 4

How do you choose the output and profit mark-up?

Answer 4

• It is dependent on price elasticity to determine what would better for the firm
• The lower the output, the higher profit-mark up per unit
• If the price is too high, more people would enter the market.
  If the price is too low, the firms risk making a loss

Question 5

What is price discrimmination?

Answer 5

It is charging a different price for each unit of the same un it based on consumber preferences

Question 6

What are the types of price discrimination?

Answer 6

• First Degree (perfect price discrimination)
• Second Degree
• Third degree

Question 7

What issues are faced with first degree price discrimination?

Answer 7

• Difficult to establish the maximum price people are willing to pay (so need to personalise + bargain with the customer)
• Asymmetric information (won’t know marginal utility)

Question 8

What is first-degree price discrimination?

Answer 8

It is charging customers the maximum they are willing to pay
- This can be plotted along the demand curve

Question 9

What is third degree price discrimination?

Answer 9

Firms discriminate based on consumer characteristics (age, profession, location)
e.g. 16-25 railcard
price of petrol in certain countries

Question 10

What are the requirements for consumer characteristic discrimination?

Answer 10

• Easy for a firm to observe
• Provide some information about consumers willingness to pay
• Not illegal
• Acceptable to the consumer
• Should be impossible or costly for consumer to change characteristics

Question 11

What are the conditions for price discrimination?

Answer 11

• Firm has to have a downwards sloping demand curve
• Harder to resell products
• Demand elacticity varies between consumers

Question 12

What is second-degree price discrimination?

Answer 12

Charging different prices for different quantities for the same good/service
- Through coupons/vouchers
- Quantity discounts
- Block declining tariffs
- Intertemporal pricing (e.g. travelling on the weekend is more expensive)
- Versioning - different versions of the core product (e.g. first class vs economy)

Question 13

What are other examples of discriminatory pricing?

Answer 13

• Peak-load pricing
  (more expensive @ peak hours)
• Two-part tariff
  (Fixed fee + price per unit) - used in mobile phones and energy

Question 14

What is multiple product pricing?

Answer 14

This is when firms produce a range of products and determine the pricing based on the demand of each product
Allows companys to make a loss with some items to attract sales of another items

Question 15

What are the advantages of multiple product pricing?

Answer 15

• Drawbacks of independent pricing (pricing of 1 item softens the pricing of another)
• Full range pricing (pricing goods with the most effective way, varies from each other)
• Loss leaders

Question 16

What are the stages of product life?

Answer 16

Launch
Growth
Maturity
Decline

Question 17

Describe the product life cycle graph

Answer 17

The graph