Factors influencing the pricing decisionRandika Lalith Abeysinghe
June 19, 2009
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Markets
The
price that an organization can charge for its products will be
determined to a greater or lesser degree by the market in which it
operates. Here are some familiar terms that might feature as background
for a question or that you might want to use in a written answer.
• Perfect competition-Many
buyers and many sellers all dealing in an identical product. Neither
producer nor user has any market power and both must accept the
prevailing market price.
• Monopoly-One seller who dominates many buyers. The monopolists can use his market power to set a profit-maximizing price.
• Monopolistic competition-A
large number of suppliers offer similar, but not identical products.
The similarities ensure elastic demand whereas the slight differences
give some monopolistic power to the supplier.
• Oligopoly-Where
are relatively few competitive companies dominate the market whilst
each large firm has the ability to influence market prices the
unpredictable reaction from the other giants makes the final industry
price in determinate. Cartels are often formed.
Other Factors
1. Prices Sensitivity. 2. Price Perception. 3. Compatibility with other Products. 4. Competitors. 5. Competition from substitute products. 6. Suppliers.
EXPLANATION/EXAMPLE. Inflation-
in
periods of inflation the organization may need to change prices to
reflect increases in the prices of supplies and so on. Such changes may
be needed to keep relative (real) prices unchanged.
Quality -
in
the absence of other information, customers tend to judge quality by
price. Thus a price change may send signals to customers concerning the
quality of the product. A price rise may indicate improvements in
quality, a price reduction may signal reduced quality, for example
through the use of inferior components.
Incomes-
in
times of rising incomes, price may become a less important marketing
variable compared with product quality and convenience of access
(distribution). When income levels are falling and /or unemployment
levels rising, price will become a much more important marketing
variable.
Ethics -
Ethical considerations are a further factor, for example whether or not to exploit short-term shortages through higher prices.
Competition If a rival cuts its prices in the expectation of increasing its market share, a firm has several options.
- It
will maintain its existing prices if the expectation is that only a
small market share would be lost, so that it is more profitable to keep
prices at their existing level. Eventually, the rival firm may drop out
of the market or be forced to raise its prices.
- It
may maintain its prices but respond with a non-price counter-attack.
This is a more-positive response, because the firms will besecuringor
justifying its current prices with a product change, advertising, or
better back-up services.
- It
may reduce its prices. This should protect the firm’s market share so
that the main beneficiary from the price reduction will be the
consumer.
- It
may raise its prices and respond with a non-price counter-attack.the
extra revenue from the higher prices might be used to finance an
advertising campaign or product design changes. A price increase would
be based on a campaign to emphasize the quality difference between the
firm’s own product and the rival’s product.
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