Question

Is the Right Price a Fair Price? Prices are often set to satisfy demand or to reflect the premium consumers are willing to pay for a product or service. Take a position: “Prices should reflect the value consumers are willing to pay versus Prices should reflect only the cost of making a product or delivering a service.” - Principles of Marketing. Please use the concepts of the subject and pricing menu of it to create my answer.

Answer 1

I'll be taking a position in favor of the argument that "Prices should reflect the value consumer are willing to pay". Here are a few reasons why I support value-based pricing over the cost of goods or cost of production based pricing

• The cost of goods or production isn't constant: That's because the cost of goods sold primarily depends on the economies of scale. The cost of goods sold reduces over time as the number of units produced increases. This dramatically brings down the cost of a product or a service. This is why I do not support a cost-based approach to pricing and why I support value-based pricing based on consumer demand.

• Theory of efficient market hypothesis: It's a theory that suggests that publicly traded stocks reflect investor sentiment based on publicly available information such as the company's financials, fair value, growth and churn forecasts, it's product or service and the overall goodwill value of the firm. This applies to how products and services are priced. Free markets are the best determinants of pricing

• Most of the products and services available are sold in perfect competition: One argument against value based pricing or one argument in favour of cost of goods based pricing has been that It gives an unfair advantage to monopolies, duopolies and oligopolies. However a vast majority of the products and services that are available in the market are offered or sold by firms that operate under perfect competition with close substitutes. Perfect competition brings down the price of products and services since all of them have close substitutes. A good example of this is the generic drug industry, the reason why most generic drugs are so cheap and widely available is because many firms product them which brings in economies of scale and uses perfect competition to lower drug prices for patients.

• Demand and Supply have proven to be better judges of price : Econ 101 teaches us about the relationship between demand and supply and that's quite true for all products and services. One of the best determinants of price is demand and supply. Greater the demand and lower the supply, higher the price of a product or a services and lower the demand and lower higher the supply, lower the prices of a product are a service. This has proven to be the most efficient metric to determine what's a fair price than cost based pricing.