2. BASIC DETERMINANTS OF PRICE
DEGREE OF COMPETITION
PRICING OF COMPETITORS PRODUCT
OBJECTIVE OF THE FIRM
COST OF PRODUCTION
DEMAND IN MARKET
SUPPLY OF PRODUCT IN MARKET
3. PRICING STRATEGY OF PRODUCT
COST BASED PRICING
Under cost based pricing price of the product is the
sum of cost plus a profit margin
It can be further classified as:-
cost plus pricing
marginal cost pricing
target return pricing
4. VALUE PRICING
• Price set in accordance with customer
perceptions about the value of the
product/service
• Examples include status
products/exclusive products
5. COST PLUS OR MARK UP PRICING
Under cost plus pricing price of the product is
the sum of cost plus a profit margin
• Price = A C+ m
• where m = percentage of mark up
6. MARGINAL COST PRICING
Under marginal cost pricing price is the sum of
variable cost plus a profit margin.
Here margin is either calculated on total cost or
variable cost.
Margin calculated on total cost > margin
calculated on variable cost
7. TARGET RETURN PRICING
Under target return pricing a producer rationally
decides the minimum rate of return that the
producer must earn.
8. GOING RATE (PRICE LEADERSHIP)
• In case of price leader, rivals have difficulty
in competing on price – too high and they
lose market share, too low and the price
leader would match price and force smaller
rival out of market
• May follow pricing leads of rivals especially
where those rivals have a clear dominance
of market share
• Where competition is limited, ‘going rate’
pricing may be applicable – banks, petrol,
supermarkets, electrical goods – find very
similar prices in all outlets
9. PRICING BASED ON FIRM’S OBJECTIVE
• PROFIT MAXIMISATION:
• The basic objective of a firm is to maximize profit and to attain it
they prefer to adopt COST PLUS PRICING
SALES MAXIMISATION:
• Some firm would like to maximize sale instead of profit
maximization therefore they adopt MARGINAL COSTING
method
10. TENDER PRICING
• Many contracts awarded on a tender basis
• Firm (or firms) submit their price for carrying
out the work
• Purchaser then chooses which represents
best value
• Mostly done in secret
11. COMPETITION BASED PRICING:
PENETRATION PRICING:
WHILE ENTERING A NEW MARKET WHICH IS ALREADY
DOMINATED BY EXISTING PLAYERS,THEY WILL CHARGE A LOWER
PRICE THAN THE ONGOING.
ENTRY DETERRING PRICING:
THE PRICE IS KEPT LOW, THUS MAKING THE MARKET
UNATTRACTIVE FOR THE OTHER PLAYERS.
GOING RATE PRICING:
THE PRICE OF ALL THE COMPANIES IN A COMPETATIVE
MARKET WILL BE SAME.
12. PRODUCT LIFE CYCLE BASED PRICING
• An intelligent firm will devise different pricing for a
product at different stages of its lifecycle.
• Pricing for a product is based on different stages like
introduction, growth, maturity, saturation, decline
13. PRICE SKIMMING:
A product pricing strategy by which a firm charges the highest initial price
that customers will pay. As the demand of the first customers is satisfied, the firm
lowers the price to attract another, more price-sensitive segment.
PRODUCT BUNDLING:
Under product bundling two or more products are bundled together for a
single price.
PERCEIVED VALUE PRICING:
The value of the goods for different consumers depends upon their
perception of utility of the goods.
VALUE PRICING:
Under value pricing sellers try to create a high value of the product and
charge a low price.
LOSS LEADER PRICING:
Multi product firms sell one product at a low price and compensate the loss
by other products.
14. MULTIPRODUCT PRICING
This strategy is used when a company produces
more than one product and the products can act as
substitutes or complements to each other.
15. MULTIPRODUCT PRICING CONT...
Demand Interdependence:
• Interdependence of two or more products’ demands on each
other’s prices. Products may be substitutes or complements.
Substitutes : Increase in price of one will
increase the substitute’s demand.
Compliments: Increase in demand of the
compliment will result in increase in price of
the main product which will impact demands
of both products.
16. DUMPING
• It’s a pricing strategy adopted by a country where
a product is exported in bulk to a foreign country at
a price which is either below the domestic market
price or below the marginal cost of production.
• Government has initiated antidumping measures
against imports of consumer good items
• e.g. dry cell batteries, sports shoes and toys from
China.
• India topped the list of countries initiating new
antidumping investigations.
17. RETAIL PRICING
• Marketing channel categorically consists of at
least two sections, wholesalers and retailers.
• Wholesaler normally deals with retailers & retailer
sells a product to the final consumer.
• Retailers constitute nearly 97% of all business
activities & organized retail is just 7-8% in India.
• Upper limit pricing (Maximum retail price) plus
commission.
18. PEAK LOAD PRICING
• Different prices are charged for the same facility
used at different points of time by the same
consumers.
• Consumers using the product at peak load time
pay higher price & users at off peak period pay a
lower price.
• Example:
• Phone tariff during night hours is low.
• Airlines provide discounts on tickets purchased at different point
of time
19. EVERY DAY LOW PRICING STRATEGY
• As per EDLP, low price is charged throughout the
year and none or very few special discounts are
given on special occasions .
• Eg: Wal-Mart, Big Bazaar.
• High-Low Pricing:
• The price is higher on all days but lower on discount
days than EDLP.
• The firms attracts or snatches the customers from
rivals by using EDLP.
20. SEALED BID PRICING STRATEGY
• This is a separate market in which the buyer does
not prefer an open market price but demands that
the sellers provide their rates in sealed form,
commonly known as tenders.
• It may be considered as a case of limited
Monopsony.
• Example:
• All government departments including construction,
procurement of goods, vehicles, machinery are done through
tendering.
• Indian Railways.
21. EXPORT PRICING
• These are the prices which are determined based
on the characteristics of foreign market situations.
• On the basis of tariff and trade restrictions prices are
determined.
• Factors include:
• unknown demand,
• unpredictable attitude,
• medium of exchange,
• risk in exchange
• WTO insisting its members to provide level playing
field to all the players.
22. PRICE DISCRIMINATION
• It is the practice of
discriminating price
among buyers on the
basis of the price
charged for the same
good or service.
• A seller can earn
greater profit through
price discrimination
than through charging
one price from the
whole market.
• Eg: Indian Railways.
23. PRICE DISCRIMINATION CONT...
• Prerequisites to Price discrimination:
• Market Control
• The greater the imperfection in the market, the higher is the
possibility of price discrimination.
• Division of Market
• Eg: Doctor’s Fee,
• Petrol Price, Mobile Tariffs
• Different Price Elasticities of Demand in Different
Markets
24. 1.MARKET CONTROL
The greater the imperfection in the market, the
higher is the possibility of price discrimination.
monopoly is the most suited for price
discrimination .
oligopoly and monopolistic competition can also
discriminate on the basis of price but it is
restricted to the extent of their ability to control
the price of the product.
a firm in perfect competition cannot do this as it
has no control over market price.
25. 2.DIVISION OF MARKET
• -Price discrimination is possible only when the
market can be divided into various segments and
the product is identical.
-Absence of arbitrage: There should be no buying
of goods from the cheaper market and selling them
in the costlier market.
Example for arbitrate- selling of movie tickets in
black.
-Market can be divided the market on the basis of
the consumers’ paying capacity, their needs,
geography etc.,
26. 3.DIFFERENT PRICE ELASTICITY OF
DEMAND IN DIFFERENT MARKETS
Price elasticity of demand helps in determination
of appropriate price.
A seller charges
-higher price if elasticity is low.
-lower price if elasticity is high.
Price elasticity of demand should be different
for different market segments for the segregation
to result in an increased income.
27. BASE OF PRICE DISCRIMINATION
• Price discrimination can be done on the basis of:
-personal
-geography
-demographical
-time
-paying capacity
-purpose of use
-need
28. DEGREES OF PRICE DISCRIMINATION
• First Degree
When the seller is
able to charge
different prices for
different units of the
same product from
the same consumer.
First degree is the
worst case of
discrimination
29. • Second Degree
Price discrimination of
second degree is when
the seller divides
consumers in groups on
the basis of their paying
capacities and
discriminates on the basis
of consumer surplus.
-person with lower
capacity is charged less
-person with higher
capacity is charged
more.
30. • Third Degree
In this degree of discrimination, the seller
manages to take away only a small portion of
the consumer surplus.
-consumers are segregated such that each
group is a separate market
-different prices are charged for that group
based on its price elasticity
Eg- movie tickets
31. ADVANTAGES OF PRICE
DISCRIMINATION
• Firms will be able to increase revenue. This will
enable some firms to stay in business who otherwise
would have made a loss.
For example price discrimination is important for
train companies who offer different prices for peak
and off peak.
• Increased revenues can be used for research and
development which benefit consumers
• Some consumers will benefit from lower fares.
Ex-old people benefit from lower train companies.
32. DISADVANTAGES OF PRICE
DISCRIMINATION
• Some consumers will end up paying higher prices. These
higher prices are likely to be allocatively inefficient
because P > MC.
• Decline in consumer surplus.
• Those who pay higher prices may not be the poorest. Eg-
adults could be unemployed, OAPs well off.
• There may be administration costs in separating the
markets.
• Profits from price discrimination could be used to finance
predatory pricing.
33. PRICE AND OUTPUT DECISIONS OF
DISCRIMINATING MONOPOLIST
• Rule for determining profit maximizing output is
MC=MR when MC is increasing.
• Markets are divided into two parts
-One with lesser outputs with higher price (low price
elasticity of demand)
-One with higher outputs with lesser price (high price
elasticity of demand)
• Output at the point where MC=MR is taken, the
corresponding price for that output is decided in
both the markets.
• Without price discrimination, the firm would earn less
profit because the profit earned without price
discrimination in the total market would be lesser
than the sum of the profit earned in individual
markets.
