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    Pricing Decisions Policies & Practices

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    Harty Robert
    1. Price is a major decision for firms that is impacted by factors like costs, demand, competition, and government policies. 2. There are various pricing methods used by firms, including cost-plus pricing, marginal cost pricing, and penetration pricing for new products. Multi-product firms also use specialized pricing approaches. 3. Governments may implement administered prices or price controls to achieve goals around social welfare, resource allocation, and preventing exploitation of consumers.

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    Pricing Decisions Policies & Practices

    Uploaded by

    Harty Robert
    2K views7 pages
    1. Price is a major decision for firms that is impacted by factors like costs, demand, competition, and government policies. 2. There are various pricing methods used by firms, including cost-plus pricing, marginal cost pricing, and penetration pricing for new products. Multi-product firms also use specialized pricing approaches. 3. Governments may implement administered prices or price controls to achieve goals around social welfare, resource allocation, and preventing exploitation of consumers.

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    1. Price is a major decision for firms that is impacted by factors like costs, demand, competition, and government policies. 2. There are various pricing methods used by firms, including cost-plus pricing, marginal cost pricing, and penetration pricing for new products. Multi-product firms also use specialized pricing approaches. 3. Governments may implement administered prices or price controls to achieve goals around social welfare, resource allocation, and preventing exploitation of consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2K views7 pages

    Pricing Decisions Policies & Practices

    Uploaded by

    Harty Robert
    1. Price is a major decision for firms that is impacted by factors like costs, demand, competition, and government policies. 2. There are various pricing methods used by firms, including cost-plus pricing, marginal cost pricing, and penetration pricing for new products. Multi-product firms also use specialized pricing approaches. 3. Governments may implement administered prices or price controls to achieve goals around social welfare, resource allocation, and preventing exploitation of consumers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 7

    Summary

    Chapter Thirteen
    Pricing Decisions, Policies and Practices
    Introduction :
    Price has direct impact on firms profits. Fixing
    appropriate price is a major decision making
    function of any enterprise. Price decisions,
    therefore, are reviewed by the top management from
    time to time.
    Determinants of price of a commodity.
    1. Cost
    of
    production.
    Normally
    prices
    are
    determined to cover the costs and allow profit
    to the enterprise.
    2. Demand for the product. Products
    always command high prices.

    in

    demand

    3. Elasticity of demand. Products with lesser


    elasticity of demand are sold at higher prices
    and vice versa.
    4. Objective or the goal of the producer. If the
    goal of the firm is sales maximization, or
    earning goodwill of consumers, lower prices are
    fixed.

    5. Nature of competition in the market. Fierce


    competition forces firms to fix prices most
    aggressively. Under perfect competition price

    is determined by the point of intersection of


    supply & demand.
    Producer is a price taker and not a price
    maker. Under monopoly producer fixes price
    through trial and error until his MR = MC. At
    that point his profit is maximum and he is in
    equilibrium.
    Producer practicing price discrimination fixes
    different price for each market depending on
    elasticity of demand for his product in each
    market.
    Under monopolistic competition producers do not
    have a price war, instead they
    differentiate
    their products to charge competitive prices.
    Under oligopoly producers will have a price
    war, or charge ( normally high ) prices by an
    agreement with each other. Prices are normally
    rigid in oligopoly.
    6. Government policy pertaining to the product.
    Firms need to comply with the pricing policies
    of the Government.
    Pricing Methods in Practice
    1. Full Cost Pricing :Is also known as Cost Plus Pricing.
    Price in this method is a sum of Average Variable
    Cost, Average Fixed Cost and Net Profit Margin.
    The method is attractive as price based on cost
    appears reasonable. Plus the method is simple and
    fair method of pricing.
    However, it suffers from the following limitations:
    It disregards demand.
    Seller is not forced to control costs.

    Method leads to over pricing in decreasing costs


    situation or under pricing in rising costs
    situation, as only historical costs considered in
    this method.
    Method is difficult to implement if variable
    costs of the firm fluctuate frequently.
    Forces of competition are totally ignored by the
    method and there is a chance that the firm may be
    wiped out of market.
    2. Marginal Cost Pricing :In this method only variable costs are considered
    and fixed costs are ignored. The method is very
    useful in a short period. But in the long period,
    fixed costs must be considered.
    The
    method
    has
    distinct
    advantages
    as
    it
    encourages aggressive pricing policy. The firm
    encouraged to keep marginal cost under control to
    offer low prices. Prices fixed under this method
    are very competitive. The method is very useful
    for a multi-product, multi-process or multimarket firm. Also is useful for pricing over the
    life cycle of a product.
    However the method cannot be used over a long
    period as fixed costs are ignored. It is possible
    that it may lead to frequent changes in price,
    which is not appreciated by consumers. The method
    leads to over pricing in decreasing costs or
    under pricing in rising costs, as only historical
    costs considered.
    3. Multi Product Pricing :Firms producing more than one product, whether
    variations, substitutes, complementary or of
    totally different nature have to resort to multi
    product pricing.

    Availability of unutilized capacity has a major


    impact in pricing multi- products.
    If products are totally independent, pricing is
    similar to single product pricing. But in case of
    joint products, total cost must be recovered by
    the pricing of both products together. In case of
    substitutes, the degree of elasticity of demand
    separates the markets. The multi product firm is
    more like a discriminating monopolist fixing
    prices of products based on elasticity of their
    demand.
    4. Pricing of a New Product :If the new product has many substitutes in the
    market, competitive prices need to be fixed. If
    the
    product
    is
    entirely
    new,
    Skimming
    or
    Penetration pricing are alternatives available to
    the producer.
    In Skimming Price method, the firm charges
    highest possible price that the consumer can
    bear.
    This
    is
    fortified
    with
    heavy
    sales
    promotion and advertising efforts. In penetration
    price, lowest possible price is initially charged
    to get into the market as early as possible.
    Prices are raised as the firm establishes its
    market share.
    5. Pricing of Exports :Pricing of exports is complex when compared to
    pricing in the local market. The nature of demand
    in the foreign market can be very different.
    Degrees of competition based on quality of the
    product vary from country to country. Different
    technologies employed by competing firms in other
    countries have their effects on costs.

    Pricing
    has
    to
    consider
    availability
    of
    substitutes in each overseas market. Governments
    incentives have favourable effect on prices. On
    the other hand, export regulations can restrict
    pricing decisions. Regularity of demand is
    another factor that has to be considered as it is
    quite likely that current demand could be only
    for a short period. Conditions for delivering
    goods overseas have to be studied as they add to
    the cost of product.
    After considering above factors, firms adopt
    these pricing strategies. Penetration pricing of
    low prices is undertaken by firms to capture
    foreign market. Firms also resort to Skimming
    price for maximization of profit. It is common
    practice to arrange Dumping - charging lower
    export price, to enter exports. Competitive
    pricing is required when there are many players.
    Standard worldwide price that is based on average
    cost of production can be fixed if producing
    firms can work together. Dual pricing based on
    cost plus or marginal costing is another useful
    strategy. Some firms follow the leader in the
    market and fix price which equals that charged by
    a major market share holder. Probe pricing by
    firms uses trial & error method.
    A variety of approaches in setting prices.

    1. Intuitive Pricing :
    a psychological method.
    Price is based on the feel of the market.
    2. Experimental : or trial & error pricing.
    3. Initiative Pricing: Firms follow price fixing
    policy of the market leader.

    4. Backward Cost Pricing: Price decided first,


    then product designed to arrive at a suitable
    cost that provides reasonable profit margin.
    5. Odd number & Critical Number Pricing: Price is
    always an odd or other number fancied by
    consumers.
    6. Double pricing: Two prices appear on the price
    tag. The higher one is scored out making the
    second price attractive to customers..

    7. Prestige Pricing: Some sort of social scaling


    exerts a powerful influence on the pricing
    behaviour, as result higher prices are expected
    to reflect higher quality.
    8.
    Multiple
    Pricing
    /
    Collective
    Pricing:
    Offering more units for a ( higher ) price. This
    replaces common method of indicating price per
    single unit.
    9. Peak Load Pricing : Changing prices to suit
    Peak and off peak demand. Higher prices are
    charged when demand is at a peak and they are
    lowered once peak season is over.
    Administered prices and Price control.
    Administered prices
    Prices were first administered by a monopolist
    who fixed them irrespective of costs. In India,
    administered prices are those prices which are
    fixed and enforced by the Government. Prices are
    fixed to prevent exploitation of consumers by
    firms charging high prices to maximize their
    profit. Providing stable and assured income to

    farmers or other weaker sections of the Society


    is another objective of price control. It is used
    for discouraging or encouraging the consumption
    of products by increasing prices of harmful
    products or lowering prices of essentials.
    Price Control
    Price Control refers to a direct measure on the
    part of the Government in fixing the prices for
    achieving certain macro economic goals like
    social welfare, efficient resource allocation,
    prevention of exploitation of the consumers etc.
    Informal price control results in producers
    voluntarily agreeing to maintain prices at levels
    suggested by the Government. Formal price control
    enforces prices fixed by the Government on the
    producers.
    Total price control covers entire output of the
    product e.g. drug prices. It is also known as
    Mono Pricing. Partial price control covers a part
    of the output that has to be sold at regulated
    prices, usually through approved agencies to
    selected group of customers. It is also known as
    Dual Pricing
    Price control for agricultural products, drugs,
    cotton
    and
    other
    essential
    products,
    is
    administered by the Government, through various
    Commissions, Boards, Bureaus appointed by it.

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