Price Quotes and Pricing Decisions Applied Problems

Chapters 9 & 10 New Products and Marketing Price

This week we will concentrate on 2 variables of the 4 P’s of marketing which is on New Product Development and Market Pricing. These two are the nuts and bolts of what all businesses do. These are two most important variables of a firm that require strategic consideration which economic theory becomes necessary. We will discuss both of these examples on how firms apply variables in our discussion and our Week 5 assignments so you have a clearer picture as to how these principles work. In Chapters 7 and 8 during Week 4, we studied the 4 types of Markets Structures and Pricing. Pricing with a Perfect Competitive Firm was when the firm being a Price Taker must set P = MC. This being said, because there are so many Gas C Marts all over town, most gas prices are lower because there are so many. However, in many cases gas has become a loss leader to many Company C Marts that try to leverage gas, to get people to buy higher priced in store products like coffee and donuts. However, because there are so many C Marts selling the same products, price still depends on what the customer is willing to pay whether in gas or product. Monopolistic Competition; and Oligopoly firms are price makers because there are much fewer. These firms due to market differentiation are able to raise prices of their products. The firms that are within the market have decided not to create a price war, but allow each firm to set a higher price, but then they compete in the other 3 P's of marketing against each other. They compete in product, place and promotion. McDonald's is an example of a monopolistic competitive firm, while many Pharmaceuticals like Pfizer are the example of oligopolies. There are not many real monopolies, and most are natural monopolies like your local electric company which have sizable fixed costs that need to be spread over a large number of users. Chapter 8 dealt with different pricing strategies such as price discrimination or multiple pricing or even cost plus pricing and several others.

Chapters 9 and 10 New Product and Market Pricing and Competitive Bidding and Cost-Plus Pricing. Firms are always trying to entertain what Market Pricing of its product is. We studied earlier the importance of a firm knowing its elasticity of demand. The reason a firm want so understand its elasticity is because it is a clue to whether a firm is a price taker or a price maker. For example, price taker firms that have a lot of competition like gas stations, have less choice over the price of its gas. However, firms that have less competition like Cole and Pepsi are price maker firms which are firms that have more control of their price. Or gas stations are said to have a more elastic demand curve while both Coke and Pepsi which by the way are oligopolies are said to have inelastic demand curves so they can raise prices higher.  One firm that is great and continuous rising prices is Apple which every 6 months seems to come out with a newer product offering to raise prices on. Later, after 3 months it will drop prices to find additional users who are more interested in purchasing at a lower price. So there is those firm’s that must keep prices lower, those who will keep them higher like de Beers diamond merchants and Apple who will do a mix of the two. As for de Beers, it has an inelastic demand curve so it can price its product at very high prices and still receive sales. However, Wal Mart which we discussed last time has a more elastic demand curve so it can only price its products with lower prices to capture more customers. Most of you have shopped both for diamonds and at Wal-Mart so you know what I mean. Both firms are able to make higher than normal profits using both a skimming with de Beers and market penetration with Wal Mart.  Once a firm knows what sort of elasticity it has whether it is elastic or inelastic then it must see out on whether it will do Competitive Bidding pricing which is where a firm will use some sort of price discrimination of setting prices of what different customers are willing to pay. Also Cost-Plus Pricing where a firm will simply add a percentage of 10 - 20% markup on cost which is a far simpler approach to pricing. Finding some sort of methodology that works both for the firm and the customer base is what most firms must try to do. So below I have created some videos to help. 

This week, we will examine the pricing of new-to-the-market and new-to-the-world products introductions, and considered

Economic Issues on Pricing: