Question

1. a. Define and describe a price discovery system in general.

b. Explain the two major types of price discovery systems. Provide at least 1 benefit and 1 disadvantage for each.

c. Define and describe a price-setting system in general.

d. Explain the three major types of price setting systems. Provide at least 1 benefit and 1 disadvantage of each.

e. Are these two systems independent of each other? Explain.

Answer 1

a) The term price discovery is defined as being the process of determining the actual price of a security or asset.

Price discovery refers to the act of determining the proper price of a security, commodity or good or service by studying market supply and demand and other factors associated with transactions.

b) The price discovery process is the process of determining the price of an asset in the market place through the interactions of buyers and sellers. The futures and options market serve all important functions of price discovery.

It involves,

Buyers and sellers (number ,size, location and valuation perception)

Market mechanism (bidding and settlement processes, liquidity)

c) Price is the amount of money charged for a product /service or total sum value of exchange the consumer offers for using a product /service.

The process of price setting are,

* Identify pricing objective of the firm

* Demand analysis

* Estimate production cost

* Compare competition cost and prices

* Fix pricing method

* Finalize the price

d) Types of pricing methods ,

* Cost oriented pricing

A method of setting prices that takes into account the company's profit objectives and that covers it's cost of production.

Advantages :

* It is easy to understand and calculate the price.

* Can be useful when setting the price of new and innovative products .

Disadvantages :

* These methods ignore demand and the price elasticity of demand .

* Ignores the competitive situation.

* Competitor oriented pricing

It is a strategy where businesses take competitor prices into account while setting their own prices.

Advantage :

* Total control over your positioning.

Disadvantage :

* Competing solely on price might grant you a competitive edge for a while ,but you must also compete on quality and work on adding value to customers if you want long term success.

e) Price setting and price discovery are interrelated .Price setting finds the market price level and the general level of prices. However ,when price discovery is the process of buyers and sellers discovering at transaction prices.