Question

Under a monopolistically competitive market there is a dynamic relationship between cost of production, revenues (the quantity of demand at a given price) and the survivability of the business in the market. While suppliers in such market have a level of monopoly (differentiation in their goods/services that only they can provide or can provide better than their competitors), they still have to remain within limited boundaries that dictate their survival. One of these boundaries is consumers’ income and their willingness to pay X price for Y good and/or service. Also, total production cost is a key factor since it MUST be covered by revenues for supplies to remain in business. For businesses in monopolistically competitive market to remain above water, their prices have to match the consumers’ perceived utility for those prices to be justified and for demand to remain sufficient (hence, price elasticity of demand). In addition, costs are the baseline for production. In other words, business cannot produce and sell their commodities at a price lower than the cost of production (marginal cost must = marginal revenue=demand=price).

So, the dilemma here is that, how could a business produce a quality good or service and sell it at a price that is below the consumers’ perceived (or expected) utility but within their budget line and still keep their (the producers) total costs below the price of that good and/or service?

Can you think of a company/supplier/store/manufacturer/producer that has used a unique/innovative approach to produce a quality commodity (high utility), sell it at a reasonable price, and kept their costs relatively low or under control? In other words, what have they done to differentiate their commodities (or themselves), reduce their costs, and/or differentiate their method of delivery?

Answer 1

One strategy adopted by most firms to sell quality commodity at reasonable price is Price Discrimination.

It is the practice of charging the different prices to different buyers fore the same quality and quantity of the product. In this way firms can sell products at low price to normal customers(who are willing to pay less) and at high prices to premium customers.

Example :

Airline industry uses several types of Price Discrimination

Airline Industry uses concept of Price Discrimination.Different prices are being charged according to type of class the customer has chosen.Prices also vary according to time of flight , destination countries, festival seasons, holiday seasons , early bird bookings, and also online bookings .

• Heavy discounts are given to wholesalers, travel agents , tour operators.
• Holiday season , festival season also affect discounts and prices.
• Location and distance also plays important role. The flight from India to US with lesser stoppages will be priced high as customers will reach earlier as compared to same flight with more stoppages.
• Business class people normally travel on weekdays and do instant bookings depending on their urgency of work. So they are charged at high price than normal customers who travel on weekends and plan their holiday trip in advance.
• Hotels may charge high price from their loyal and elite class customers as compared to people with less income.

Pharmaceutical Industry

Drug Manufacturers charge more from people of wealthier countries as compare to poor countries. USA has highest drug prices in the world.

Another strategy opted is Two Part Tariff:

In case of two part tariff a producer charges initial fee and again then additional fee for use of product.

Example : Toll taxes. A person first pay while crossing toll and if he is not able to return within specified time , he again has to pay tax while crossing the toll.

Other Examples:

• Coupons, Premium price for use of premium category of same product and retail incentives.
• Saloons may charge more price for the same type of hair and face treatment from ladies as compared to males.
• Hotels charge differential prices for different types of room on basis of normal, deluxe and super deluxe room. No, doubt some extra facilities are also offered.

In this way firms can make very high profits. In this way losses made by firms by charging less price from normal customers is offset by charging high prices from premium and elite customers.