Pricing
What is the relationship between price and demand? Why is it important for a firm to price at the point at which marginal revenue is equal to marginal cost?
Price
- Inverse relationship between price and quantity.
- As a product price decreases/ decreases, demand will increase/ decrease.
Substitute Offerings/ Prices
- Both the types of substitute goods and their prices affect the product demand curve.
- If there are close substitutes, the product has limited maneuverability in terms of pricing.
Complementary Offerings/ Prices
- The prices of complementary goods affect a product’s demand curve.
- If the price of the complementary good decreases/ increases, then demand for the product will increase/ decrease.
Income
- Income is positively correlated with demand. As income rise, so does product demand.
Market Size
- As market size increases, so does product demand.
Taste
- Regardless of market size, price, income, substitute and complementary products, consumers must have the desire to purchase the product.
- The latitude that a firm has to price its product is dependent on the slope of its demand curve. The steeper the curve, the more power firms have in pricing.
Marginal Revenue
- Is the additional (or negative) revenue reaped from lowering or increasing the product price by increments.
Marginal Cost
- Is the cost associated with producing an additional good.
- Marginal cost curve is often U-shaped – as more goods are produced, firms often experience increasing returns to scale.
Why should a firm consider fairness when pricing its goods?
As a general rule, firms should avoid competitive price cutting that could lead to a price war.
Fairness in Pricing
- Consumer often think about pricing in terms of how fair the price is.
- Three factors are taken into consideration:
1.Past prices
2.Close-substitute prices
3.Context (purchase environment)
How has the Internet enhanced opportunities for dynamic pricing strategies?
Interactivity – The Internet makes it easy and much less costly for buyers and sellers around the world to interact and negotiate.
Menu costs are the costs associated with changing the price of a good.
In a store or a mail order catalog, there are costs associated with changing costs, but on the Internet, this is easy and virtually costless.
Why would a firm want to implement a price-discrimination strategy?
First-degree Price Discrimination
- Involves getting consumers to pay exactly what they are willing to pay for an item.
- Implies that in order to charge each consumer exactly what they are willing to pay, firms must know what each consumer’s demand curve is – which is unrealistic.
- What is more realistic is for the merchant to ascertain more information from consumers to gauge what they are willing to pay.
Second-degree Price Discrimination
- Firm is trying to ascertain how much consumers are willing to pay not only for the first unit of a good, but for each additional good.
Third-degree Price Discrimination
- Most common type of price discrimination.
- Involves classifying consumers by category according to their willingness to pay.
- E.g. price discrimination by age at theatres and airline pricing.