Question

Compare short- and long-run pricing decisions and provide examples of each. What are two alternative approaches to long-run pricing decisions?

Answer 1

Comparisons:

	Short-run	Long-run
1.	This is the pricing decision for less than 1 year.	This is the pricing decision for 1 year or more than 1 year.
2.	One-time pricing (such as pricing of special order) should come in this category.	Decision of pricing should be made for repeated market (such as pricing of regular products).
3.	Recovering fixed costs become a great challenge in this pricing strategy.	There is no fixed cost, because it is already recovered in the short-run. Pricing is set for future sustainability.

Examples:

Short-run pricing: Pricing of special order that has 1 time implication and no repetition.

Long-run pricing: Pricing of regular order that is repeated year after year.

Long-run pricing:

In the long-run firms get stability in the market and all factors of production or supply become variable (there would be no fixed cost).

Two alternative approaches are as below:

No.1) Market based: in this approach a price is set based on market reaction and sentiment – suppose how the reaction is of competitors if price increases or how the customers react.

No2) Cost based: in this approach a price is set based on the cost of making product – suppose what is the cost and what will be the price so that such cost could be recovered and a profit could be availed.