Chapter 11 - Pricing

Question 1

Price elasticity

3 factors

Answer 1

Volume
Price
Cost

=> profit

Inelastic = not very responsive to price change
Elastic = very responsive to changes in price

Question 2

Factors affecting price elasticiy

Answer 2

1. scope of market (larger markets are less elastic)
2. information within the market
3. availability of substitutes
4. complementary products
5. disposable income
6. necessities
7. habit

Question 3

Perfect market types

Answer 3

zero entry, exit barriers
perfect information
profit maximizing companies
homogeneous products

Question 4

Imperfect market types

Answer 4

monopoly
oligopoly
monopolistic competition (not the same, but similar products)

Question 5

Profit maximisation

Answer 5

MR = MC
marginal revenue = marginal costs (in a perfect market)

in practice:

• unlikely knowledge of demand curve
• org’s aim for target and not max profit
• determining accurate variable costs are difficult
• marginal costs change with units sold
• sales and marketing expense influence demand further

Question 6

Total cost-plus pricing

Answer 6

PRO’s

• required profit achieved if volume reached
• useful with low fixed costs (ie construction)
• quick and cheap to employ
• easy to justify selling price to customer

CON’s

• always difficult to establish suitable floor for pricing
• if volume is underachieved profits will not be reached
• does not factor competitor activity in
• does not factor in product life cycle

Question 7

Marginal cost plus

Answer 7

same as total cost, hard to estimate

price points between total and marginal allow maintaining utilization of capacity

factors in sunk costs

beneficial for where throughput is constraint

Question 8

Marketing based pricing

Answer 8

Premium pricing (above competition on a permanent basis, if differentiated)
Market skimming
Penetration
Price differentiation
Loss Leader (complementary products to stimulate sales of the later one - ie Gilette)
Controlled pricing (G’vmnt)
Product bundling

Question 9

Product Life Cycle

Answer 9

Introduction
Growth
Maturity
Decline

Question 10

Price-Quality relation

Income elasticity

Ethics

Answer 10

high price = good quality where quality is hard to measure

Sticky goods = no impact from income
Luxury goods = positive elast.
Inferior goods = negative elast.

Exploiting short term supply shortages is an ethically difficult decision (ie essential goods like oil or natural gas)