Transportation Cost Management Flashcards
(25 cards)
4 Main market structure models
- Perfect competition (perfectly contestable markets)
- Monopoly
- Monopolistic competition
- Oligopoly
Perfect Competition (perfectly contestable markets)
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
Monopoly
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
Monopolistic competition
Differentiated products
Large number of buyers and sellers
Free entry and exit
Firms face an elastic demand curve
Oligopoly
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.
Contestable markets
- 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
The theory of contestable markets advances two main arguments in economic theory:
- 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.
- The theory was advanced as a generalisation of the theory of perfectly competitive markets and a generalisation that internally determines the industry structure
Cost-of-service pricing
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
Value-of-service pricing
-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
Commodities of higher value
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
The relationship between elasticities and prices is set by transportation firms.(prices based on vale of the product)
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
Third-degree price discrimination (AKA value-of service pricing/ differential pricing)
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.
For a firm to practice price discrimination what conditions does it require?
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)
Floor vs ceiling
cost-of-service pricing - serves as the floor of pricing.
value-of-service pricing can serve as the ceiling
Factors affecting pricing decisions
Customers (market)
Government
Other channel members
Competition
Major pricing decisions
Price elasticity and the cost of services
Changes in the market, operations and provision of services
The market in which the organisation operates
Establishing the pricing objective:
Survival-based pricing Unit-volume pricing Profit maximisation Penetration price Market-share pricing Social-responsibility pricing
Survival-based pricing
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
Unit-volume pricing
Makes full use of the existing capacity as sets the price to fill that capacity
Profit maximization
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
Penetration price
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
Market-share pricing
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
Social-responsibility pricing
An industry practicing social responsibility pricing compromises on sales and profits to promote the welfare of its customers and society.
Estimating demand
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.
