In: Economics
EXPLAIN ALL PRICNG STRATEGIS FOR FIRMS WITH MARKET POWER TYPES WITH EXAMPLS
•Strategies that yield even greater profits
-basic rule of profit maximization(monopoly and monopolistic
competition and Cournot oligopoly)
•Exacting surplus from consumers:
–Price discrimination 3 types
–Two-part pricing
–Block pricing
–Commodity bundling
•Pricing strategies for special cost and demand structures
–Peak-load pricing
–Cross-Subsidies
-Transfer Pricing
• Pricing strategies in markets with intense price
competition
-Price Matching
-Inducing Brand Loyalty
-Randomized Pricing
•Strategies that yield even greater profits:
- Basic rule of profit maximization:
Monopoly - In a monopoly, there is just one sole producer
of a commodity. And, hence there is absolute product
differentiation and the monopolists sets the price and demand of
the commodity in order to maximize its profits. The basic rule of
profit maximization is that, the monopolist will try to keeps its
marginal revenue equal to its marginal cost. And the firm can
decrease its quantity supplied so that it can increase its price
and thus earn more profit. For instance, there is just one
electricity board in the city, therefore it stands as a monopoly
being the sole producer of electricity. It can restrict its
quantity supplied so that, the firm can earn more profit by
increasing the price of the electricity supply. And, since there is
no other comeptition, he can easily execute this.
Monopolistic competition- It is a market situation when
there are atleast two producers of a differentiated good. Similar
to monopoly, it will also keep its marginal revenue equal to its
marginal cost. For instance, if the MC exceeds the MR, more unit
cost will be required, so the firm will reduce its production in
order to achieve the situation where MC = MR.
Oligopoly- It is a type of market structure where there
are small number of producers of a good, selling somewhat
differentiated goods. It will also have a profit maximization rule
same as Monopoly and monopolistic competition, where its marginal
revenue will be equivalent to its marginal cost.
•Exacting surplus from consumers:
- Price discrimination -
Price discrimination takes place when a firm charges different
prices for same commodities.
There are three degrees of price discrimination,
First, it occurs when the firm charges different prices
for every unit consumed. For example, in airways, prices are
alloted to the customers on the basis of seats they have selected,
if the seats have more leg room, they will charge more. This tells
the firms what the customers exactly demand for and thus charge
them accordingly.
Second, It occurs when firms charges different prices for
different quantities of the commodity. For example, hospitals and
school would require more quantity of electricity, therefore the
electricity producing firms would charge them less for per unit of
electricity consumption while charging comparatively more to
households or industries.
Third, it occurs when prices are charged differently for
different consumer groups. For example, in airways, business, first
and economy classes are charged differently on the basis of their
choice of selection.
-Two-part pricing
It is a form of pricing where consumers are charged twice for some
commodity. For example, a consumer having to pay for the entry of
an amusement park and also charged separetely for the rides.
- Block pricing
It is a pricing strategy where identical commodities are packed
together for sale and consumers are forced to buy all or none. For
example, three markers are sold for $8, whereas, four markers are
sold for $10.
- Commodity bundling
In this pricing strtegy, firms would sell a bundle of commodities
for lesser price than would have for each of the commodity
separetely. For example, a pack of 10 pens for $10 would sound more
economical than buying an individual pen for $2 each.
•Pricing strategies for special cost and demand structures
-Peak-load pricing
It is a pricing strategy, where high prices are charged for
commodities when their demands are at a peak. For example, during
summer months, the demand for air conditioners may peak, as a
result, the prices of AC will also increase substantially.
-Cross-Subsidies
It is a type of pricing where one group of consumers are charged
higher to compensate for the lower prices charged to another group.
For exapmle, the electricity boards charging more to the industries
as compared to the households.
-Transfer Pricing
It involves comissioning of costs within an enterprise. For
example, if Minute maid, a subsidiary of coca cola company sells
its products to coca cola, the cost incurred by the later would be
the transfer price.
• Pricing strategies in markets with intense price competition
-Price Matching
It is a strategy where the prices of commodities of competing firms
are matched. For example, a couple of local stores fixing their
prices at a same level for certain commodities.
-Inducing Brand Loyalty
A brand loyalty is induced when a consumer chooses a particular
product (brand) despite having other different choices. A brand
loyalty can be induced through different ways- For instance, by
engaging with the customers, constantly promoting the brand, make
efforts to mold according to the tastes of the consumers in
different geographical and demographical regions. For instance,
coca cola has maintained a good brand loyalty despite many other
competitors in the market sphere.
-Randomized Pricing
It is a strategy where the firms hide their actual price from the
market by changing its prices at regular interval. For instance,
due to incomplete information about the prices in the market, a
consumer may buy a commodity now than later when the prices of the
commodity might drop.