Transportation Cost Management

Question 1

4 Main market structure models

Answer 1

1. Perfect competition (perfectly contestable markets)
2. Monopoly
3. Monopolistic competition
4. Oligopoly

Question 2

Perfect Competition (perfectly contestable markets)

Answer 2

Homogenous Products
Large number of sellers and buyers, such that no single seller can determine the price.
Free entry and exit
Firms = price takers
Price is determined by market forces of demand and supply.
Market demand curve is perfectly elastic- but each firm faces a downward-sloping demand curve for its products.

Perfect information

No government intervention Efficient transportation

Profit maximises where -> MR=MC

Question 3

Monopoly

Answer 3

No substitutes for products

One seller, many buyers.

Seller -> no competition

Barriers to entry and exit

Firms = price makers

Firms’ demand curves equal market demand curves

Question 4

Monopolistic competition

Answer 4

Differentiated products

Large number of buyers and sellers

Free entry and exit

Firms face an elastic demand curve

Question 5

Oligopoly

Answer 5

Homogeneous products

Few large firms

Decisions on price and output (quantity) depend on how the other firms behave.

Indeterminate demand curves
• Interdependent firms
• Rarely exists in the real world
• Price rigidity, thus firms engage in non-price competition with possibilities of collusion.

Question 6

Contestable markets

Answer 6

• Free entry and exit are costless
• This is a practical model that explains a perfectly competitive market - a perfectly competitive market is necessarily perfectly contestable, but not vice versa
• A potential entrant need not neglect a transient profit opportunity. Rather, the person should enter before prices change, collect gains and then depart the market having not financially before the environment grows hostile.
• a deregulated industry can succeed if it resembles a perfectly con market

Question 7

The theory of contestable markets advances two main arguments in economic theory:

Answer 7

1. The theory of contestable markets was presented as suggesting an improved set of guidelines for determining when government intervention in the market is called for and for the conduct of such activity when it is undertaken.
2. The theory was advanced as a generalisation of the theory of perfectly competitive markets and a generalisation that internally determines the industry structure

Question 8

Cost-of-service pricing

Answer 8

The cost-of-service pricing can be viewed in terms of two alternative concepts, which are: basing prices on marginal cost or basing prices on average cost

Question 9

Value-of-service pricing

Answer 9

-sets price primarily but not exclusively, on the
value perceived by customers, rather than cost
-based on the utility factor of the service,
which is estimated by the customer

Question 10

Commodities of higher value

Answer 10

require higher prices to transport even when the approach is cost-based.

The commodity with high value is steep sloping, suggesting price inelasticity while the low-value commodity exhibits a gentle slope and implies price elasticity

Question 11

The relationship between elasticities and prices is set by transportation firms.(prices based on vale of the product)

Answer 11

Value of a commodity is a true barometer of the elasticity of demand. For instance, commodities with high value command a
high selling price because the cost of transportation forms just a small
percentage of the selling price

Question 12

Third-degree price discrimination (AKA value-of service pricing/ differential pricing)

Answer 12

pricing is based on the value of the product and the value of the product is a permissible measure of demand elasticity. The differences in elasticities of demand for different services will determine the actual level of prices.

Value-of-service pricing can also be viewed as differential pricing where buyers are
segregated into distinct groups based on demand elasticities.

Demand elasticities may be a crucial factor for organizations applying a value-of-service pricing
strategy.

Question 13

For a firm to practice price discrimination what conditions does it require?

Answer 13

Ability to set prices (e.g. the firm must possess some market power i.e. monopoly power)

Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)

Ability to prevent resale (e.g. stop adults using student tickets)

Question 14

Floor vs ceiling

Answer 14

cost-of-service pricing - serves as the floor of pricing.

value-of-service pricing can serve as the ceiling

Question 15

Factors affecting pricing decisions

Answer 15

Customers (market)
Government
Other channel members
Competition

Question 16

Major pricing decisions

Answer 16

Price elasticity and the cost of services

Changes in the market, operations and provision of services

The market in which the organisation operates

Question 17

Establishing the pricing objective:

Answer 17

Survival-based pricing
Unit-volume pricing
Profit maximisation
Penetration price
Market-share pricing
Social-responsibility pricing

Question 18

Survival-based pricing

Answer 18

Objective is aimed at utilising low prices to increase cash flow for an ailing transporter

Aim is to increase volume and stimulate the increasing utilisation of volume

Attempts to take advantage of the MC approac

Question 19

Unit-volume pricing

Answer 19

Makes full use of the existing capacity as sets the price to fill that capacity

Question 20

Profit maximization

Answer 20

This type of pricing strategy is used when transporters are more concerned with the efficiency of investment (return-on-investment) which is the ratio between the net profit and the cost of investment.

Price skimming is related to this objective:
A skimming price is a price that is set high with the intention of attracting consumers who desire quality, uniqueness or status, and who are unconcerned about the price

Question 21

Penetration price

Answer 21

Penetration pricing involves setting the price low with the goals of attracting customers and gaining market share. The price will be raised later once this market share is gained

Question 22

Market-share pricing

Answer 22

Common in industries facing declining revenues

Objectives to gain the market share of the competitors through price decreases

Feature of the passengers airline industry and the LTLindustry

Question 23

Social-responsibility pricing

Answer 23

An industry practicing social responsibility pricing compromises on sales and profits to promote the welfare of its customers and society.

Question 24

Estimating demand

Answer 24

Demand estimation is probably one of the most difficult tasks related to pricing.
The market in which the transporter operates also matters.

To estimate demand in a market where it is not perfectly competitive, certain concepts and procedures can be applied in the process.

One very important concept is price elasticity.

Question 25

Common errors in pricing

Answer 25

1. Heavy reliance on cost
2. Infrequent revision of prices
3. Setting the price independently of the marketing mix
4. Inadequate variation of prices