PRICING CONTEXT

1. PRICING CONTEXT • There are in fact several different notions of price e.g. farmgate price, wholesale and resale price, discounted price etc. • An appropriate pricing policy depends on the objectives of the firm e.g. short term or long term goals, profit v sales maximisation etc. • Pricing policy must be seen in the context of an overall marketing strategy where it represents just one of a number of interrelated elements • Special issues arise for example where many different products are produced by a firm and/or where there are several items in a product line • Dynamic considerations can also be very important e.g. uncertainty of environment, product life cycle, loss leaders etc.

2. PRICING POLICIES • Competitive Pricing • Marginalism - Monopolistic Competition - Natural Monopoly - Oligopoly • Mutual dependence recognised - kinked demand curve (price stickiness) - conscious parallelism - price leadership models barometric low-cost leader dominant firm leader

3. MARGINALISM • Based on rule MC = MR (applies for all market structures) • Pricing policy that must be adopted to maximise profits • Controversy once ruled due to fact that business people did not base pricing on marginalist principles • However it is now accepted that other pricing approaches will approximate the same results (where profit maximisation is the objective) • Can also be consistent with making losses (i.e. minimisation of losses)

4. PROBLEMS WITH MARGINAL PRICING • Business do not understand the approach • The necessary data to implement the policy are not available • The approach is not applicable where there is a high level of fixed costs • There may be a dislike of the frequent price changes which the adoption of this approach implies • There is no guarantee that fixed costs will be covered

5. PRICING POLICIES (con) • Competitive Pricing Marginalism (MC=MR) - used to maximise profits - will implicitly be used whenever competitive conditions pertain • Oligopoly Pricing - price stickiness - price leadership models (barometric, low-cost, dominant) - limit pricing - cartels

6. PRICING POLICIES (con) • Price Discrimination - conditions for price discrimination - 1st, 2nd and 3rd degrees • Transfer Pricing - transfer pricing with no external market - international transfer pricing - importance for multinationals in Ireland

7. PRICE DISCRIMINATION • Price discrimination represents an attempt by organisations (usually possessing significant market power) to capture consumer surplus from purchasers - examples, airlines, business and domestic consumers, home and export markets • Conditions for price discrimination - separate markets, differing elasticities of demand, no opportunities for resale in more profitable markets, lack of legal barriers • Types of price discrimination - 1st degree where each consumer is charged the maximum they are willing to pay for product e.g. certain professional services - 2nd degree where discrimination is based on a time or urgency basic e.g. more expensive express service - 3rd degree when firms differentiate between consumers in two or more ways for a given product at a given point in time e.g. electricity by day or night

8. TRANSFER PRICING • Transfer prices are used in selling from division to division within an organisation • Where no external market exists optimal transfer pricing within an organisation entails the marginal rule MC = MR (for what is produced and sold from one division to another) • Optimal international transfer pricing can be complicated by - tax and import savings - rules governing repartriatin of dividends - finacing of new subsidiaries - labour and public relations • Artificial transfer pricing is exceptionally important in understanding the activity of multinational companies in Ireland

9. MARKUP (COST PLUS) PRICING • Mark-up pricing is based on a calculation of total cost (variable costs + overhead with a percentage added as profit margin) • Is calculated to recover total costs of production which is not guaranteed with marginal approach • Though not directly based on demand conditions, these can be implicitly incorporated through frequent changes of the mark-up so that it can approximate to the marginalist approach • Can be more appropropiate when a business is pursuing objectives other than profit maxmisation • Probably the most widely used pricing policy in practice

10. PRICING FOR PUBLIC SECTOR • Pricing rule for maximising welfare MC = P • Problems with this rule • possible confusion as to whether short or long run marginal cost involved • Distinction as between private and social marginal cost • Does not guarantee that costs will be covered • Information may be difficult to obtain

11. Markup pricing (cost-plus, full-cost) Pricing in existing markets - price positioning - prestige pricing - price lining - promotional pricing - product bundle pricing - predatory pricing - price fixing - price tendering New product pricing - price skimming - price penetration PRICING PRACTICES

12. PRICING STRATEGY • Overall Marketing context - Product - Promotion - Place - Price • Factors influencing decision - the life cycle of the product - aims of the firm - competition faced - information on costs and demand • Business Goals • Firm's power over prices

13. MARKETING ASPECTS • Need to balance the four components so that the marginal contribution of each item in the marketing mix be equal • Scope of product policy - features offered - quality level - brand name - styling - packaging • Place as a component of marketing mix e.g. research, promotion, contact, matching, negotiation, financing. risk-taking • Impact of location on costs • Technology development