13. pricing strategy

Pricing Strategy

Pricing in Practice

� Is there a unique equilibrium price?

� in most cases, no

� Factors determining price

� the life cycle of a product

� the aims of the firm

� the degree of competition

� information on costs and demand

� past practices

Pricing and Market Structure

� The firm’s market power

� the greater the power, the greater the discretion over price

� the importance of strategy

� reactions of rivals

� Limit pricing

� where potential entrants have higher AC

AC new entrant

AC monopolist

£

O Q

PL

Limit pricing

Pricing and Market Structure

� Alternative aims

� alternative single aims

� multiple aims

Alternative Pricing Strategies

� Do firms know their costs and revenues?

� difficulties in identifying the profit-maximising price and output

� difficulties in predicting rivals’ behaviour

� Cost-based pricing

� the use of a profit mark-up on AC

� choosing the level of output

AVC

A firm’s short-run average cost curve

O

a b

Cos

ts (

£)

Output (Q)

AVC

O

a b

AC

c

AFC

Cos

ts (

£)

Output (Q)

A firm’s short-run average cost curve


� Do firms know their costs and revenues?

� difficulties in identifying the profit-maximising price and output


� Cost-based pricing

� the use of a profit mark-up on AC


� choosing the mark-up

Choosing the output and profit mark-up

O

AC

£

Q

D

P1

Q1

f

gP2

Q2

j

h


� Do firms know their costs and revenues?� difficulties in identifying the profit-

maximising price and output


� Cost-based pricing� the use of a profit mark-up on AC


� choosing the mark-up

� equilibrium price and output?

A firm’s supply curve based on average cost

O

AC

£

Q

SProfit-per-unitmark-up

A firm’s supply curve based on average cost

O

AC

£

Q

S

Total profitmark-up


� Do firms know their costs and revenues?� difficulties in identifying the profit-

maximising price and output� difficulties in predicting rivals’ behaviour

� Cost-based pricing� the use of a profit mark-up on AC

� choosing the level of output� choosing the mark-up� equilibrium price and output?

� variations in the mark-up

How are prices determined?

Factors leading to a rise or fall in price

Price Discrimination

� Meaning of price discrimination

� Types of price discrimination

� first degree

First-degree price discrimination

O

P1

D

200

P

Q

O

P1

D

200

P

Q

First-degree price discrimination




� first degree

� second degree




� first degree

� second degree

� third degree

Third-degree price discrimination

P

QO

P1

D

200

O

P1

D

P2

150 200

P

Q

Third-degree price discrimination


� Conditions for price discrimination

� firm must be able to set its price

� markets must be separate

� demand elasticity must differ between markets

� Advantages to the firm

� Profit-maximising prices and output

� first-degree price discrimination

� third-degree price discrimination

O O OMRX

(a) Market X

DX

Profit-maximising output underthird degree price discrimination

O O O

DY

MRX

MRY

(a) Market X (b) Market Y

DX


O O OMRX

MRY MRT

(a) Market X (b) Market Y (c) Total

(markets X + Y)

DX

DY


O O OMRX

MRY MRT

MC


(markets X + Y)

DX

DY


O O OMRX

MRY MRT

MC


(markets X + Y)

DX

3000

DY


O O O

DX

MRX

MRY MRT

MC

5


(markets X + Y)

3000

DY


O O OMRX

MRY MRT

MC

5

1000


(markets X + Y)

DX

3000

DY


O O OMRX

MRY MRT

MC

5

1000 2000


(markets X + Y)

DX

3000

DY


O O OMRX

MRY MRT

MC

5

9

1000 2000


(markets X + Y)

DX

3000

DY


O O OMRX

MRY MRT

MC

DY

5

7

1000 2000 3000


(markets X + Y)

9

DX



� The non-profit maximising firm

� the firm can still make higher profits

� Price discrimination and the consumer

� distribution

� competition

� profits

Multiple Product Pricing

� Firms producing a range of products

� Interrelated demand

� drawbacks of independent pricing

� full-range pricing

� loss leaders

� Interrelated production

� shared inputs

� by-products

Transfer Pricing

� Decentralised pricing in large organisations

� problems of decentralised pricing

� Selling intermediate products by one part of a firm to another

� use of monopoly power within companies

� meaning of transfer prices

� setting of transfer prices

� Use of marginal-cost pricing to overcome problems of internal monopoly power

Pricing and the Product Life Cycle

� The nature of product life cycles

� the four stages

� launch

� growth

� maturity

� decline

O

Sa

les

per

per

iod

Time

The stages in a product’s life cycle

The stages in a product’s life cycle

O (1)Launch

(2)Growth

(3)Maturity

(4)Decline

Sa

les

per

per

iod

Time

Product notbecomingobsolete

Productbecomingobsolete


� The nature of product life cycles� the four stages

� launch� growth� maturity� decline

� The launch stage




� The launch stage� The growth stage




� The launch stage� The growth stage� The maturity stage




� The launch stage� The growth stage� The maturity stage� The decline stage

Education

13. pricing strategy