Pricing Strategies

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Pricing Strategies

• A few more things left to learn!

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Cost plus pricing

• aka mark up pricing.
• PAFC AVC profit margin.
• In a competitive market the profit margin may be
  small eg 5, while in non-competitive the mark up
  might be over 100!

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Price parallel

• Where there are IDENTICAL prices and price
  movements in the market.
• Usually happens under perfect competition (lots
  of sellers and homogenous goods) and in very
  competitive markets.
• It can also occur with oligopolies with price
  collusion tactics!

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Limit pricing

• Price is set to discourage rivals entering the
  market.
• The company sacrifices short run profits for long
  term profit maximisation objectives.

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Predatory pricing

• Setting a low price to drive out competitors
  usually when a new rival enters the market, the
  monopolist or oligopolist will set an
  uncompetitive low price.
• Is this in the consumer interest????
• Once the rivals leave the market the price will
  return to previous levels!

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Price leadership

• Dominant price leadership on large firm in the
  market, which sets a price to satisfy its own
  needs, seen as the market price
• Collusive price leadership several firms
  together dominate the market and one firm sets a
  price which the others will follow. Look at John
  Lewis who will refund any price found cheaper
  than themselves! Is this collusion or
  competitive?
• Barometric price leadership where a price
  leader may not be followed if the other firms in
  the market feel that the leader has read the
  market signals wrongly! To maintain its market
  share, it will need to react and change its
  prices!

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Price discrimination

• This is charging different prices to different
  customers based on the differences in customers
  and their ability to pay.
• The cost of providing the good or service is the
  same for all customers but the company
  discriminates in their pricing strategy

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Price discrimination
Nightclubs before 10, after 10, free for
ladies! Different prices for different
nights/events
Transport peak/off peak Child, pensioner,
student, adult
Where does price discrimination take place?
Cinema
BULK purchasing
Hotels peak, off peak
Gyms membership, peak, off peak, pensioners,
students.
Flights 1st, business, economy, budget
Geographical issues car prices across Europe!
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CONSUMER SURPLUS

• This is the measure of consumer welfare enjoyed
  by consumers.
• Its the difference between what a consumer is
  prepared to pay and actually does pay
• consider different elasticity curves. Elastic
  and inelastic
• There is a loss of consumer welfare the opp cost
  is also a gain in producer welfare! (and vice
  versa)

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CONSUMER SURPLUS DIAGRAMS!
The more elastic the diagram the greater the
consumer surplusi.e. greater opportunity for
price discrimination
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Cross subsidy

• This is where a company charges the same price
  for its good or service despite the different
  costs of providing the good or service.
• Main example is ROYAL MAIL to send a letter 1st
  class costs more the further you send it but the
  price of a stamp is the same! So local deliveries
  PMC to subsidise long distance postings where
  P

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Off peak pricing

• Setting prices dependent on levels of demand
  just look at summer holiday flight prices.!
• Peak and off-peak pricing and is common in the
  telecommunications industry, leisure retailing
  and in the travel sector.

• Telephone and electricity companies separate
  markets by time
• There are three rates for telephone calls
• a daytime peak rate,
• and an off peak evening rate
• and a cheaper weekend rate.
• Electricity suppliers also offer cheaper off-peak
  electricity during the night.

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Off peak pricing strategy

• Customers booking early with carriers such as
  EasyJet will normally find much lower prices if
  they are prepared to commit themselves to a
  flight by booking early.
• Closer to the date and time of the scheduled
  service, the price often rises, on the
  justification that consumers demand for a
  particular flight becomes more inelastic the
  nearer to the time of the service.

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Off peak/Peak pricing

• In the diagram there are two distinct demand
  curves - one corresponding to peak time demand
  for a product, and another for off-peak.
• At off-peak times, there is plenty of spare
  capacity and marginal costs of production are low
  (the supply curve is drawn as elastic) whereas at
  peak times, we might expect that short run supply
  becomes relatively inelastic as the supplier
  reaches capacity constraints.
• A combination of higher demand and rising costs
  forces up the profit maximising price.

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Next slide a mini exercise Decide a pricing
strategy used for each product
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