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