Question

Case 1: “Pricing Chips

A Phoenix tortilla chip producer enjoyed a competitive advantage over a national brand. Its price was lower and its quality higher than the national brand’s chip. Nevertheless, the local chip maker watched the national company very carefully because of its huge size relative to the local firm. Thus, when the national company upgraded its chip, the Phoenix firm believed it had to respond. It chose to reduce the quality so that its costs would be lower. It believed that in this way it could maintain its price advantage. A specific size of the national brand’s potato chips was priced at $1.59 while a comparable size of the local brand was $1.29, a difference of 30 cents. Over time, the price of the national brand increased to $1.89. The local brand followed the lead of the national brand but maintained its 30 cents price differential by raising its price to $1.59. These changes caused the local company to go out of business.

How is it possible for a firm to have a lower price on its good relative to a competitive good and still lose out to the rival?

Why would equal price increases on two products lead consumers to purchase more of the higher-priced product and less of a relatively lower-priced product?”

Answer 1

1. Pricing decisions is one of the most crucial decisions made by any firm in any type of market. Our real world market type is monopolistic market where there are many sellers selling differential products. Differentiated products in the sense that each brand has a specific characteristic, it may be packaging, fragrance, design etc. though the composition is same. For exa, different brands of toothpaste or cosmetic items. Each brand is sold under different pricing strategy in the market. The position of each brand is created by continuous usage & heavy advertising. Under monopolistic competition the firm has certain freedom to fix the price, because due to differentiation of product a firm will not lose all its customers when it increases its price.

In order to increase market share & gain more market dominance, it's important for the firm to offer competitive prices. A firm can set a low price to establish itself and at the same time can make profits by selling other products. When it establish itself can raise its price. For exa, newly launched mobile company can sell its products at a lower rate but at the same time can earn profits by selling its spare parts.

But a good pricing would be to maintain a premium price because a premium price means a premium brand or a good quality product. If you are cutting price then it will be harmful for you as you lose your brand image.

In our case Phoenix tortilla maintains a lower price as compared to its competitor. But when it's competitor increases its price, phoenix tortilla thought it will increase its price by maintaing the same lower price. Previously, it had already tried to lower its quality so that its cost will be lower compared to that of competitor. But its competitor maintains its high quality and premium pricing strategy. Phoenix tortilla used the cheaper quality chips which is not the right way of marketing, so gradually its sales became down inspite of its lower price. In monopolistic market you should have to control your price & most necessarily maintain quality first and throw the dice of price competitively so that you will be able to maintain your customer list. Tortilla couldn't be able to maintain a premium price so it had to go out of business.

2. In our competitive market the products which carry a higher price indicates a good quality product. It's true that a good quality product has a good brand name and good brand name carries a premium price to maintain its image. As a consumer everybody knows it. So when price of whole wheat rises people will also go for it because they know the health benefits of whole wheat. Why should they go for lower priced wheat which is a mixture of wheat & refined flour. As a responsible consumer he/she knows that quality is the first priority. Similarly, in case of toothpaste, two brands making equal price don't make equal profits. One brand which is purely made of natural ingredients have more sales than other brand which is using purely chemical ingredients. So it can be concluded that equal price increase on two products lead consumers to buy more of the higher priced products and less of a relatively lower priced product.