Question

A manager of a large chain of appliance stores is planning to conduct a pricing experiment to determine the price elasticity of the chain’s line of microwave ovens. He plans to measure sales for the month of February, raise prices by 12 percent on March 15, and then measure sales for the month of April. Each sales measurement would take into account the total monthly microwave oven sales for all of the stores in his chain.

He has asked you to evaluate his research procedure and suggest any improvements. What would you suggest?

Answer 1

Pricing policy have several associated factors that influence it. To determine the price elasticity of chain's line of microwave lines, it is important to note first what are main objectives behind such experience :-

a) Wheter the manager thinks that there is sufficient demand of ovens in market and customers will be comfortable in paying higher prices.

b) Wheter the manager wants to know the price sensitivity i.e. how much fluctuation in sales take place with change in prices of oven.

Whie taking up evaluation of research procedure, it is important to get clear idea of objective behind this research.

After the objective is clearly identified. Procedures are to be such that are directly targeted to meet the objectives. So, procedure need to be always taken up only after analysing consequences associated with experiment. If the business environment is such that is suitable for research only then it should be processed further.

Various instances tell that when Price Elasticity is high and with increase in price on experimental basis, it may be counterproductive. As there can be sudden downfall in sales curve with little increase in prices.

So, Manager when taking up experiment of increasing prices by 12 %, must be careful enough beforehand about market conditions , If the market is in recession phase , Then increasing price may lead to negative results.

If price elasticity is much high and people not demand the oven much then it is better to decrease the price on experimental basis instead of increasing it but if the manager is sure that there is sufficient demand of product and elasticity is also less then manager go for given research procedure. Non- Monetary factors are also important determinant of such decisions that need to be taken care.