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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.

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Pricing Strategy

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  1. Pricing Strategy

  2. 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

  3. 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

  4. ACnew entrant PL AC monopolist Limit pricing £ O Q

  5. Pricing and Market Structure • Alternative aims • alternative single aims • multiple aims

  6. 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

  7. AVC b a A firm’s short-run average cost curve Costs (£) O Output (Q)

  8. AC AVC c A firm’s short-run average cost curve Costs (£) b a AFC O Output (Q)

  9. 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 • choosing the mark-up

  10. f P1 AC h P2 g j D Q2 Q1 Choosing the output and profit mark-up £ O Q

  11. 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 • choosing the mark-up • equilibrium price and output?

  12. S AC A firm’s supply curve based on average cost £ Profit-per-unit mark-up O Q

  13. S AC A firm’s supply curve based on average cost £ Total profit mark-up O Q

  14. 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 • choosing the mark-up • equilibrium price and output? • variations in the mark-up

  15. How are prices determined?

  16. Factors leading to a rise or fall in price

  17. Price Discrimination • Meaning of price discrimination • Types of price discrimination • first degree

  18. First-degree price discrimination P P1 D Q O 200

  19. First-degree price discrimination P P1 D Q O 200

  20. Price Discrimination • Meaning of price discrimination • Types of price discrimination • first degree • second degree

  21. Price Discrimination • Meaning of price discrimination • Types of price discrimination • first degree • second degree • third degree

  22. Third-degree price discrimination P P1 D Q O 200

  23. Third-degree price discrimination P P2 P1 D Q O 150 200

  24. 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

  25. Profit-maximising output underthird degree price discrimination DX O O O MRX (a) Market X

  26. Profit-maximising output underthird degree price discrimination DY DX MRY O O O MRX (b) Market Y (a) Market X

  27. Profit-maximising output underthird degree price discrimination DY DX MRY MRT O O O MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  28. Profit-maximising output underthird degree price discrimination MC DY DX MRY MRT O O O MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  29. Profit-maximising output underthird degree price discrimination MC DY DX MRY MRT O O O 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  30. Profit-maximising output underthird degree price discrimination MC 5 DY DX MRY MRT O O O 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  31. Profit-maximising output underthird degree price discrimination MC 5 DY DX MRY MRT O O O 1000 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  32. Profit-maximising output underthird degree price discrimination MC 5 DY DX MRY MRT O O O 2000 1000 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  33. Profit-maximising output underthird degree price discrimination MC 9 5 DY DX MRY MRT O O O 2000 1000 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  34. Profit-maximising output underthird degree price discrimination MC 9 7 5 DY DX MRY MRT O O O 2000 1000 3000 MRX (c) Total (markets X + Y) (b) Market Y (a) Market X

  35. Price Discrimination • The non-profit maximising firm • the firm can still make higher profits • Price discrimination and the consumer • distribution • competition • profits

  36. 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

  37. 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

  38. Pricing and the Product Life Cycle • The nature of product life cycles • the four stages • launch • growth • maturity • decline

  39. The stages in a product’s life cycle Sales per period O Time

  40. Product not becoming obsolete Product becoming obsolete The stages in a product’s life cycle Sales per period O Time (1) Launch (4) Decline (2) Growth (3) Maturity

  41. Pricing and the Product Life Cycle • The nature of product life cycles • the four stages • launch • growth • maturity • decline • The launch stage

  42. Pricing and the Product Life Cycle • The nature of product life cycles • the four stages • launch • growth • maturity • decline • The launch stage • The growth stage

  43. Pricing and the Product Life Cycle • The nature of product life cycles • the four stages • launch • growth • maturity • decline • The launch stage • The growth stage • The maturity stage

  44. Pricing and the Product Life Cycle • The nature of product life cycles • the four stages • launch • growth • maturity • decline • The launch stage • The growth stage • The maturity stage • The decline stage

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