Kana Other Price

8/8/2019 Kana Other Price

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OLIGOPOLY

Other Methods of Pricing( Price Strategies )

Kana Maniwa


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PRICING STRATEGIES.....

We learned that ...

- Stable pricescan be achieved in oligopolistic

market (despite quite considerable changes in

MC)BUT

- Those oligopolistic firmsDO NOThave perfect

knowledge!!

SO...

HOW DO THEY DECIDE

/KEE

P A PRICE

STAB

LE??


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PRICING STRATEGIES.....

Cost-plus pricing

Limit pricing

Predatory pricing Price leadership

Price parallelism

Pricediscrimination


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A)COST-PLUS PRICING

Aka Mark-up pricing / Full-cost pricing

The most common way of pricedecision-making

( MR=MC rule is less likely to be used in the real

world)

Price=Average FixedCost Average Variable

Cost Profit margin

Another wayP= (AFC AVC) x ( 1markup)

e.g. Price ofProductA= {AFC ( 5 )AVC ( 25) } x (10.2)= 36


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A)COST-PLUS PRICING

When can the profit mark up be

high?

- when customers are able and

willing to pay high prices (e.g.fashionable brand goods)

Conversely, markets being more

competitive, firms tend to find it

difficult to charge a make-up

( Limited pricing in a very

competitive market)


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A)COST-PLUS PRICING

Advantages

- easy to calculate

- no need of perfect knowledge

- tends to stabilise markets because it isinsulated from demandvariations andcompetitive factors

- insure producers against unpredictable costs

etc......

Disadvantages

- provide no incentive for efficiency

- tends to ignore the role of consumers

etc......


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B)LIMIT PRICING

Limit pricing......

-when there are low or no barriers to entry,

incumbent firms generally set low prices(possibly the price where littlesupernormal profit

is obtainable)

IMPORTANT:

Those incumbent firmssacrifice profit

maximisation in theshort-run so as to maximise

long-term profit.


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C)PREDATORY PRICING

Same idea as limit pricing......

In order to get rid of new marketsentrants,incumbent firmsdeliberately set pricesBELOW

costs.

And thus, they set the price back to their

previous level after theentrants leave the market.

An examplenewspapers and predatory pricing

(ref.A2 Economics by Ray Powell)


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D)PRICE LEADERSHIP

Definition:

Price leadership refers to a situation where prices and price

changes established by a dominant firm, or a firm are usually

accepted by others and which other firms in the industry adopt

and follow. (ref. Geoff Riley)

- An example ofCOVERT collusion

(overt collusive agreement (e.g.Cartel) is illegal)- Under imperfectly competitive markets, this

informal and tacit coordination of price is often

used.


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PRICE PARALLELISM

Price parallelism occurs when there are identical

prices and price movements within an industry

or market. (ref.Ray Powell)

Difficult to decide whether the market is

competitive or collusive

In a highly competitive market: - similar way to

perfect competitionIn overt or tacit price collusive market : - price

parallelism is likely to result from price

leadership


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E)PRICE DISCRIMINATION

Changing prices depending on customers,

which is based on consumers ability and

willingness to pay

(e.g.)Perfect pricediscrimination The main form....

Prices are not based on differences in cost of

production or supply

One form...B

ulk-buying- buying products in large quantities at a lower

price per item (e.g. retail dealer)


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PRICING STRATEGIES

Any Questions???


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TO BE CONTINUED......

Kana Other Price

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