Chapter 11

Chapter 11
Student: ___________________________________________________________________________
Chapter 11 Key
1. A firm with a company objective that can be implemented by focusing on target return pricing is using
a:

A. sales orientation.
B. customer orientation.
C. profit orientation.
D. demand orientation.
E. competitor orientation.
Even though all company objectives may ultimately be oriented toward making a profit, firms
implement a profit orientation as a part of their company objective by focusing on target profit pricing,
maximizing profits, or target return pricing.

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Grewal - Chapter 11 #1
Learning Objective: 11-02 Illustrate how the five Cs-company objectives; customers; costs; competition; and channel members-influence pricing decisions.
Topic: 11-02 Profit Orientation

2. The usual pricing strategy implemented by firms when they have a particular gain goal as their
overriding concern is the:

A. market penetration strategy.

B. target return pricing strategy.
C. improvement value strategy.
D. competitive parity strategy.
E. target profit pricing strategy.
Firms usually implement target profit pricing when they have a particular profit goal as their overriding
concern. To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a
certain profit per unit.

Blooms: Remember
Difficulty: Easy

3. What is implemented by firms that focus on the rate at which their profits are generated relative to their
investments rather than the absolute level of profits?

A. Maximizing profits strategy

B. Target return pricing strategy
C. Value-based strategy
D. Competitive parity strategy
E. Target profit pricing strategy
Target return pricing is a pricing strategy implemented by firms less concerned with the absolute level
of profits and more interested in the rate at which their profits are generated relative to their
investments. It is designed to produce a specific return on investment, usually expressed as a percentage
of sales.

Blooms: Remember
Difficulty: Easy

4. The maximizing profits strategy primarily relies on:

A. advertising theory.
B. management theory.
C. marketing theory.
D. relativity theory.
E. economic theory.
The maximizing profits strategy relies primarily on economic theory. If a firm can accurately specify a
mathematical model that captures all the factors required to explain and predict sales and profits, it
should be able to identify the price at which its profits are maximized.

Blooms: Remember
Difficulty: Easy

5. Slate Inc. is the parent company of five brands. Slate decides that all the products under every brand
must make a 20 percent gain margin in the upcoming financial year. This is an example of:

A. profit orientation.
C. sales orientation.
D. cost orientation.
This is an example of profit orientation. Profit orientation is a company objective that can be
implemented by focusing on target profit pricing, maximizing profits, or target return pricing.

Blooms: Apply
Difficulty: Hard

6. When determining its pricing strategy, if a firm is willing to let profits suffer in order to increase its
customer base, the company objective is most likely to be:

A. sales oriented.
B. customer oriented.
C. profit oriented.
D. cost oriented.
E. quality oriented.
Firms using a sales orientation to set prices believe that increasing sales will help the firm more than
increasing profits. Such firm could choose to set prices very low to generate a large volume of sales,
even if that would cause profits to suffer initially.

Blooms: Understand
Difficulty: Medium
Topic: 11-03 Sales Orientation

7. Blue Corp., a company that manufactures high quality mobile phones, is set to launch a new series of
tablets. In order to reduce competition and increase the demand for the new products, the company
launches them at a very low price. Blue's objective is most likely to be:

D. quality orientation.
Blue's objective is most likely to be sales oriented. Firms using a sales orientation to set prices believe
that increasing sales will help the firm more than increasing profits. Setting prices very low to generate
new sales and take sales away from competitors, even if profits suffer, is an example of sales-oriented
objectives.

Blooms: Apply
Difficulty: Hard

8. A company launches a new car in the luxury segment. It studies the quality and price of other luxury
cars available in the market and ensures that the price and features of the new launch are similar to the
existing cars. The company's objectives are most likely to be:

A. sales oriented
C. profit oriented.
D. cost oriented.
E. competitor oriented.
In this case, the company's objective is likely to be competitor oriented. When firms undertake a
competitor orientation, they strategize according to the premise that they should measure themselves
primarily against their competition. Some firms focus on competitive parity, which means they set
prices that are similar to those of their major competitors.

Blooms: Apply
Difficulty: Hard
Topic: 11-04 Competitor Orientation

9. A company objective that is based on the premise that the firm should measure itself primarily against
its rivals is:

A. sales oriented.
C. profit oriented.
D. cost oriented.
E. competitor oriented.
When firms undertake a competitor orientation, they strategize according to the premise that they should
measure themselves primarily against their competition. Some firms focus on competitive parity, which
means they set prices that are similar to those of their major competitors.

Blooms: Remember
Difficulty: Easy

10. Which of the following is true of pricing based on competitor-oriented strategies?

A. Value is only implicitly considered in this type of strategies.

B. Prices are decided based on the value perceived by customers.
C. Prices for new products are always low to reduce competition.
D. Products are priced to ensure a standard return on investment.
E. A profit margin is set, which determines the price of products.
Competitive parity is a firm's strategy of setting prices that are similar to those of their major
competitors. Value is only implicitly considered in competitor-oriented strategies, in the sense that
competitors may be using value as part of their pricing strategies, so copying their strategy might
provide value.

Blooms: Remember
Difficulty: Easy

11. A company specializing in bathroom fittings offers state-of-the-art products. The products are highly
priced, and the company is aware that sales will be limited. The main objective is to enhance its
reputation and image and thereby increase the company's value in the minds of consumers. This is an
example of:

D. cost orientation.
When a company's objective is customer oriented, it focuses on enhancing the image and reputation and
thereby increasing the company's value in the minds of consumers.

Blooms: Understand
Difficulty: Medium
Topic: 11-05 Customer Orientation

12. The pricing orientation that explicitly invokes the concept of value for the users of the product and in
which prices are set to match the users' expectations is called:

D. market share orientation.
Customer orientation is the pricing method that explicitly invokes the concept of customer value and
setting prices to match consumer expectations. A firm can use a "no-haggle" price structure to make the
purchase process simpler and easier for consumers, thereby lowering the overall price and ultimately
increasing value.

Blooms: Remember
Difficulty: Easy

13. Which of the following shows how many units of a product or service consumers will request for during
a specific period of time at different prices?

A. A supply graph

B. The break-even point
C. The input-output ratio
D. A demand curve
E. A workflow analysis
A demand curve shows how many units of a product or service consumers will demand during a
specific period of time at different prices. Although in general as price increases, demand for the
product or service decreases, not all products or services follow this downward-sloping demand curve
for all levels of price.

Blooms: Understand
Difficulty: Medium
Topic: 11-07 Demand Curves and Pricing

14. Which of the following refers to those products that consumers purchase for status rather than
functionality?

A. Consumer goods
B. Prestige products
C. Utility products
D. Convenience products
E. Standard products
Prestige products or services are those that consumers purchase for their status rather than their
functionality. The higher the price, the greater the status associated with it and the greater the
exclusivity, because fewer people can afford to purchase it. For such products, a higher price also leads
to a greater quantity sold—up to a certain point.

Blooms: Remember
Difficulty: Easy

15. A wealthy industrialist purchases a Van Gogh painting for his new home. He pays $140 million to
procure this piece of work. In this case, the painting is an example of a(n):

A. consumer good.
B. prestige product.
C. utility product.
D. convenience product.
E. standard product.
Prestige products or services are those that consumers purchase for their status rather than their
functionality. The higher the price, the greater the status associated with it and the greater the
exclusivity, because fewer people can afford to purchase it.

Blooms: Apply
Difficulty: Medium

16. Those products whose demand curves are positively related, such that they rise or fall together, are
called:

A. substitute products.
B. complementary products.
C. inverse products.
D. convenience products.
E. prestige products.
Products whose demand curves are positively related, such that they rise or fall together are called
complementary products; a percentage increase in demand for one results in a percentage increase in
demand for the other.

Blooms: Remember
Difficulty: Easy
Topic: 11-09 Factors Influencing Price Elasticity of Demand

17. Those products for which changes in demand are negatively related are called:

C. parallel products.
E. standard products.
Substitute products are those products for which changes in demand are negatively related—that is, a
percentage increase in the quantity demanded for one product results in a percentage decrease in the
quantity demanded for the other.

Blooms: Remember
Difficulty: Easy

18. The change in the quantity of a product demanded by consumers because of a change in their earnings is
called the:

A. substitution effect.
B. experience curve effect.
C. leader pricing effect.
D. markdown effect.
E. income effect.
Income effect refers to the change in the quantity of a product demanded by consumers because of a
change in their income. Generally, as people's income increases, they tend to shift their demand from
lower-priced products to higher-priced alternatives. Conversely, when incomes drop, consumers turn to
less expensive alternatives or purchase less.

Blooms: Remember
Difficulty: Easy

19. Consumers' ability to replace the focal brand with other products is called:

A. the substitution effect.

B. the markdown effect.
C. the experience curve effect.
D. the competitive parity effect.
E. the income effect.
The substitution effect refers to consumers' ability to substitute other products for the focal brand. The
greater the availability of substitute products, the higher will be the price elasticity of demand for any
given product.

Blooms: Remember
Difficulty: Easy

20. A fall in the price of gas leads to an increased demand for cars in the market. In this context, gas and car
are examples of:

C. alternate products.
D. luxury products.
E. prestige products.
Products whose demand curves are positively related, such that they rise or fall together are called
complementary products; a percentage increase in demand for one results in a percentage increase in
demand for the other.

Blooms: Apply
Difficulty: Hard

21. The fall in the price of coffee in the market led to a fall in the demand for tea. In this context, coffee and
tea are examples of:

C. luxury products.
E. standard products.
In this context, coffee and tea are examples of substitute products. They are considered substitute
products because changes in their demand are negatively related.

Blooms: Apply
Difficulty: Hard

22. Jeff is a hockey player who uses hockey sticks manufactured by Teal Inc. Teal increases the price of
hockey sticks, so Jeff switches to another brand offering the same quality of hockey sticks at a lower
price. This change in brand is an example of the:

B. complementary effect.
C. supply effect.
D. demand effect.
E. income effect.
The substitution effect refers to consumers' ability to substitute other products for the focal brand. The
greater the availability of substitute products, the higher the price elasticity of demand for any given
product will be.

Blooms: Apply
Difficulty: Hard

23. Megan was an assistant manager in a firm when she had bought a Hyundai Accent L hatchback. After
she was promoted to the position of a senior manager with a big pay raise, she bought a Volvo S80. This
is an example of the:

B. pricing effect.
C. supply effect.
D. demand effect.
E. income effect.
Income effect refers to the change in the quantity of a product demanded by consumers because of a
change in their income. Generally, as people's income increases, they tend to shift their demand from
lower-priced products to higher-priced alternatives. Conversely, when incomes drop, consumers turn to
less expensive alternatives or purchase less.

Blooms: Apply
Difficulty: Hard

24. Mike wants to set up a factory to manufacture roller skates. He plans to employ a hundred people in his
factory. Mike's primary expenses include rent, utilities, insurance, administrative salaries (for executives
and higher-level managers), and depreciation of the physical plant and equipment. The expenses for raw
material and labour to make the skates constitute the:

A. standard costs.
B. variable costs.
C. rebate.
D. improvement value.
E. fixed costs.
Variable costs are those costs, primarily labour and materials, which vary with production volume. As a
firm produces more or less of a good or service, the total variable costs increase or decrease at the same
time.

Blooms: Apply
Difficulty: Hard
Topic: 11-10 Costs

25. The expenses that change depending on production volume are called the:

A. standard costs.
B. variable costs.
C. rebatable expenses.
D. promotional expenses.
E. fixed costs.
Variable costs are those costs, primarily labour and materials, which vary with production volume. As a
firm produces more or less of a good or service, the total variable costs increase or decrease at the same
time.

Blooms: Remember
Difficulty: Easy
Topic: 11-11 Variable Costs

26. Those expenses that remain essentially at the same level, regardless of any changes in the volume of
production, are called:

A. rebatable expenses.
B. variable costs.
C. unit costs.
D. marginal costs.
E. fixed costs.
Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the
volume of production. Typically, these costs include items such as rent, utilities, insurance,
administrative salaries, and depreciation.

Blooms: Remember
Difficulty: Easy
Topic: 11-12 Fixed Costs

27. Which of the following is true of the break-even point?

A. It represents the point where a firm's profits is equal to that of its primary competitor.
B. It represents the point where a firm's revenue is proportionate to its market share.
C. It represents the point where the sales revenue equals the total costs of a product.
D. It represents the number of units required to be produced to meet the annual profit goal.
E. It represents the number of resources required to produce goods within the fixed labor costs.
Break-even point is the point at which the number of units sold generates just enough revenue to equal
the total costs. At this point, profits are zero.

Blooms: Understand
Difficulty: Medium
Topic: 11-14 Break-Even Analysis and Decision Making

28. The price excluding the variable costs per unit is referred to as the:

A. total cost per unit.

B. fluctuating cost per unit.
C. contribution per unit.
D. average cost per unit.
E. rebatable cost per unit.
Contribution per unit equals the price less the variable cost per unit. It is a variable used to determine
the break-even point in units.

Blooms: Remember
Difficulty: Easy

29. Which of the following occurs when only one firm provides the product or service in a particular
industry?

A. Duopoly
B. Monopsony
C. Oligopoly
D. Monopoly
E. Oligopsony
In a monopoly, only one firm provides the product or service in a particular industry, and as such results
in less price competition. A monopoly that restricts competition by controlling an industry can be
deemed illegal and broken apart by the government.

Blooms: Remember
Difficulty: Easy
Topic: 11-15 Competition

30. Which of the following occurs when only a few firms providing a particular product or service dominate
a market?

A. Duopoly
B. Monopsony
C. Oligopoly
D. Monopoly
E. Oligopsony
When a market is characterized by oligopolistic competition, only a few firms dominate the market.
Firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable
competitive environment.

Blooms: Remember
Difficulty: Easy

31. A situation in the market that occurs when two or more firms compete primarily by lowering their prices
is referred to as:

A. pure competition.
B. vertical price fixing.
C. horizontal price fixing.
D. price negotiation.
E. price war.
Price war occurs when two or more firms compete primarily by lowering their prices in an oligopolistic
market. Price wars often appear in the airline industry when a low-cost provider enters a market in
which established carriers already exist.

Blooms: Remember
Difficulty: Easy

32. When many firms sell closely related but not homogeneous products, it is called:

B. price engagement.
C. monopolistic competition.
D. oligopsony.
E. monopsony.
Monopolistic competition occurs when there are many firms competing for customers in a given market
but their products are differentiated. When so many firms compete, product differentiation rather than a
strict pricing competition tends to appeal to consumers.

Blooms: Remember
Difficulty: Easy

33. When different companies sell commodity products that consumers perceive as substitutable, this is
called:

B. price engagement.
D. oligopolistic competition.
E. noncompetitive marketing.
Pure competition occurs when different companies sell commodity products that consumers perceive as
substitutable. In such markets, price is usually set according to the laws of supply and demand.

Blooms: Remember
Difficulty: Easy

34. When a market legally circumvents authorized channels of distribution to sell goods at prices lower than
those intended by the manufacturer, it is called a:

A. black market.
B. pure competition market.
C. monopoly market.
D. grey market.
E. monopsonic market.
A grey market employs irregular but not necessarily illegal methods; generally, it legally circumvents
authorized channels of distribution to sell goods at prices lower than those intended by the
manufacturer.

Blooms: Remember
Difficulty: Easy
Topic: 11-16 Channel Members

35. The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-
and price-oriented retailers is called:

A. prestige shopping.
B. wholesale shopping.
C. grey-market shopping.
D. cross-shopping.
E. premium shopping.
Cross-shopping is the pattern of buying both premium and low-priced merchandise or patronizing both
expensive, status-oriented retailers and price-oriented retailers. These stores offer fashionable
merchandise at great values—values so good that if items last for only a few wearings, it doesn't matter
to the customers.

Blooms: Remember
Difficulty: Easy
Topic: 11-18 Economic Factors

36. Which of the following pricing methods determine the final price to charge without recognizing the role
that consumers or competitors' prices play in the marketplace?

A. Cost-based pricing method

B. Value-based pricing method
C. Competitor-based pricing method
D. Supply-based pricing method
E. Demand-based pricing method
Cost-based pricing methods determine the final price to charge by starting with the cost. These methods
do not recognize the role that consumers or competitors' prices play in the marketplace.

Blooms: Remember
Difficulty: Easy
Learning Objective: 11-03 Describe various pricing methods (e.g.; cost-based pricing; competitor-based pricing; value-based pricing) and strategies (e.g.; new
product pricing and psychological pricing) that are used in marketing.
Topic: 11-19 Cost-based Methods

37. Which of the following approaches attempts to reflect how a firm wants consumers to interpret its
products relative to the offerings of rival companies?

A. Cost-based pricing method

B. Value-based pricing method
C. Competitor-based pricing method
D. Supply-based pricing method
E. Demand-based pricing method
Competitor-based pricing method is an approach that attempts to reflect how the firm wants consumers
to interpret its products relative to the competitors' offerings. For example, setting a price very close to a
competitor's price signals to consumers that the product is similar, whereas setting the price much
higher signals greater features, better quality, or some other valued benefit.

Blooms: Remember
Difficulty: Easy
Topic: 11-20 Competitor-based Methods

38. Which of the following pricing methods focuses on the overall worth of the product offering as
perceived by consumers, who compare it what they need to sacrifice in order to acquire the product?

A. Cost-based pricing methods

B. Value-based pricing methods
C. Competitor-based pricing methods
D. Supply-based pricing methods
E. Demand-based pricing methods
Value-based pricing methods include approaches to setting prices that focus on the overall value of the
product offering as perceived by the consumer. Consumers determine value by comparing the benefits
they expect the product to deliver with the sacrifice they will need to make to acquire the product.

Blooms: Remember
Difficulty: Easy
Topic: 11-21 Value-based Methods

39. The method in which a manager must estimate how much more, or less, consumers are willing to pay
for a product relative to other comparable products is called the:

A. improvement value method.

B. supply-based method.
C. price skimming method.
D. premium pricing method.
E. cost of ownership method.
In the improvement value method, the manager must estimate the improvement value of a new product
or service. This improvement value represents an estimate of how much more, or less, consumers are
willing to pay for a product relative to other comparable products.

Blooms: Remember
Difficulty: Easy
Topic: 11-22 Improvement Value Method

40. A method for setting prices that determines the total expense of possessing a product over its useful life
is called the:

A. improvement value method.

B. supply-based method.
C. demand-based method.
D. premium pricing method.
E. cost of ownership method.
The cost of ownership method is a value-based method for setting prices that determines the total cost of
owning the product over its useful life. Using the cost of ownership method, consumers may be willing
to pay more for a particular product because, over its entire lifetime, it will eventually cost less to own
than a cheaper alternative.

Blooms: Remember
Difficulty: Easy
Topic: 11-23 Cost of Ownership Method

41. A strategy of selling a new product or service at a high price that innovators and early adopters are
willing to pay to obtain is called:

A. price fixing.
B. price skimming.
C. price discrimination.
D. bait and switch.
E. predatory pricing.
Price skimming is a strategy of selling a new product or service at a high price that innovators and early
adopters are willing to pay to obtain it. After the high-price market segment becomes saturated and sales
begin to slow down, the firm generally lowers the price to capture (or skim) the next most price
sensitive segment.

Blooms: Remember
Difficulty: Easy
Topic: 11-24 Price Skimming

42. Which of the following pricing strategies sets the initial price low for the introduction of a new product
or service, with the objective of building sales, market share, and profits quickly?

A. Market development pricing

B. Market extension pricing
C. Market establishment pricing
D. Market testing pricing
E. Market penetration pricing
Firms using market penetration pricing set the initial price low for the introduction of the new product
or service. Their objective is to build sales, market share, and profits quickly. The low market
penetration price encourages consumers to purchase the product immediately.

Blooms: Remember
Difficulty: Easy
Topic: 11-25 Market Penetration Pricing

43. A car company introduces a new car in the market. It maintains a low introductory price to reach the
middle-income group. The main objective of the company is to build sales and profits quickly. This is
an example of:

A. everyday low pricing.

B. external reference price.
C. high/low pricing.
D. market penetration pricing.
E. internal reference price.

Blooms: Understand
Difficulty: Medium

44. Blue Corp., a laptop manufacturer, introduces a new model in the market. Since the target audience for
this product is students, Blue Corp. launches the model at a low price. The main objective of the
company is to build sales and profits quickly. This is an example of:


E. internal reference price.

Blooms: Apply
Difficulty: Hard

45. Ochre Inc. had marked its refrigerators at $729.94 as the original price. This was close to the standard
price for refrigerators of the same quality in the market. Later, the price is brought down to $650.99. A
customer compares Ochre's marked-down price with the original price and perceives an increased value.
This is an example of:


E. price skimming.
A reference price is the price against which buyers compare the actual selling price of the product and
that facilitates their evaluation process. The seller labels the reference price as the "regular price" or an
"original price." When consumers view the "sale price" and compare it with the provided external
reference price, their perceptions of the value of the deal will likely increase.

Blooms: Apply
Difficulty: Hard
Topic: 11-26 Consumers Use of Reference Prices

46. Jared's, an exclusive deli, marked down its smoked sausages from $9.99 to $6.99 in a prominently
displayed poster at its smoked meats section. When consumers viewed the sale price, they tended to
pick more smoked sausages than they required. This is an example of strategy using:

A. everyday low price.

E. rebates.
A reference price is the price against which buyers compare the actual selling price of the product,
which facilitates their evaluation process. The seller labels the reference price as the "regular price" or
an "original price." When consumers view the "sale price" and compare it with the provided external

Blooms: Apply
Difficulty: Hard

47. Which of the following strategies is used by sellers to build a perception of the price as being lower than
it actually is?

A. Everyday low pricing

B. Price discrimination
C. Price skimming
D. Premium pricing
E. Odd pricing
Odd prices end in odd numbers, usually 9. Some sellers believe that consumers mentally truncate the
actual price, making the perceived price appear lower than it really is.

Blooms: Understand
Difficulty: Medium
Topic: 11-27 Odd Prices

48. A company prices its shoes at $74.99 instead of $75.00. This is an example of a(n):

A. seasonal discount.
B. advertising allowance.
C. odd price.
D. listing allowance.
E. cash discount.
Odd prices end in odd numbers, usually 9. Some sellers believe that consumers mentally truncate the
actual price, making the perceived price appear lower than it really is.

Blooms: Understand
Difficulty: Medium
Topic: 11-27 Odd Prices

49. A strategy companies use to emphasize the continuity of their retail prices at a level somewhere
between the regular, nonsale price and the deep-discount sale prices their competitors may offer is
called:


E. price skimming.
With an everyday low pricing (EDLP) strategy, companies stress the continuity of their retail prices at a
level somewhere between the regular, nonsale price and the deep discount sale prices their competitors
may offer. By reducing consumers' search costs,

Blooms: Remember
Difficulty: Easy
Topic: 11-28 Everyday Low Pricing (EDLP)

50. A company sells shoes at a price somewhere between the regular, nonsale price and the deep-discount
sale prices that its competitors may offer. This is an example of:


B. external reference pricing.
D. price skimming.
E. odd pricing.
With an everyday low pricing (EDLP) strategy, companies stress the continuity of their retail prices at a
level somewhere between the regular, nonsale price and the deep discount sale prices their competitors
may offer. By reducing consumers' search costs,

Blooms: Understand
Difficulty: Medium
Topic: 11-28 Everyday Low Pricing (EDLP)

51. A store that sells childrens' clothes reduces its prices drastically during promotional sales. This is an
example of:


E. value-based pricing.
A high/low pricing strategy relies on the promotion of sales, during which prices are temporarily
reduced to encourage purchases.

Blooms: Understand
Difficulty: Medium
Topic: 11-29 High/Low Pricing

52. A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to
encourage purchases, is called:


B. price skimming.
E. odd pricing.

Blooms: Remember
Difficulty: Easy

53. As the number of tourists in a village increases during Christmas, the hotels in the locality temporarily
increase the rates of accommodation to make profit. This is an example of:

A. price skimming.
B. external reference pricing.
E. odd pricing.

Blooms: Apply
Difficulty: Medium
Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers.

54. A shoe manufacturer produces shoes for customers in the middle-range segment and the upper-range
segment. It also has shoes in between these segments, at different prices, to represent distinct
differences in quality. This is an example of:

A. price fixing.
B. price bundling.
D. leader pricing.
E. price lining.
When marketers establish a price floor and a price ceiling for an entire line of similar products and then
set a few other price points in between to represent distinct differences in quality, the tactic is called
price lining. Having options at different price points means a company can satisfy customers with a
range of tastes and budgets.

Blooms: Apply
Difficulty: Hard
Topic: 11-31 Lining

55. A car manufacturer offers cars in the luxury segment. It establishes a price floor and a price ceiling for
its entire line of cars and then sets a few other price points in between to represent distinct differences in
quality. It helps the manufacturer to satisfy a wide range of tastes and budgets. This is an example of:

A. markdown.
B. price bundling.
C. price lining.
D. leader pricing.
E. listing allowance.
When marketers establish a price floor and a price ceiling for an entire line of similar products and then
set a few other price points in between to represent distinct differences in quality, the tactic is called
price lining. Having options at different price points means a company can satisfy customers with a
range of tastes and budgets.

Blooms: Understand
Difficulty: Medium
Topic: 11-31 Lining

56. A department store offers a discount if a shirt is purchased with a pair of trousers. The combined
purchase would cost less than it would cost the customer to purchase the two individually. This is an
example of:

A. price fixing.
B. price bundling.
D. leader pricing.
E. price lining.
This practice of selling more than one product for a single, lower price is called price bundling. Firms
bundle products together to encourage customers to stock up so they won't purchase competing brands,
to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or
service to obtain a more desirable one in the same bundle.

Blooms: Apply
Difficulty: Hard
Topic: 11-32 Price Bundling

57. A store that sells hockey equipment offers a discount if a customer also buys a pair of skates. The
combined purchase costs less than it would cost the customer to buy the products individually. This is
an example of:

A. predatory pricing.
B. price bundling.
C. price lining.
D. leader pricing.
E. price fixing.

Blooms: Understand
Difficulty: Medium
Topic: 11-32 Price Bundling

58. A newly opened supermarket offers vegetables at reduced prices so as to attract customers. The idea
behind lowering the prices is that the customers who visit the supermarket to purchase these vegetables
at lower costs are more likely to purchase other items offered in the supermarket. This pricing tactic is
an example of:

A. price fixing.
B. price bundling.
C. price lining.
D. leader pricing.

Blooms: Apply
Difficulty: Hard
Topic: 11-33 Leader Pricing

59. A company selling air conditioners finds that sales begin to decrease at the end of summer. The
company then reduces the price of air conditioners to get rid of the slow-moving merchandise. This is
an example of a:

A. rebate.
B. size discount.
C. markdown.
D. coupon.
E. quantity discount.
Markdowns are the reductions retailers' take on the initial selling price of the product or service. An
integral component of the high/low pricing strategy, markdowns enable retailers to get rid of slow-
moving or obsolete merchandise, sell seasonal items after the appropriate season, and match
competitors' prices on specific merchandise.

Blooms: Understand
Difficulty: Medium
Topic: 11-35 Markdowns

60. A supermarket offers a 1-litre milk carton, a 2-litre milk carton, and a 3-litre milk jug at $3.50, $6.25,
and $9.00, respectively. Thus, the larger the quantity bought, the lower the cost. This is an example of
a:

A. rebate.
B. size discount.
C. markdown.
D. coupon.
E. quality discount.
A size discount is the most common implementation of a quantity discount at the consumer level. The
larger the quantity bought, the less the cost per unit.

Blooms: Understand
Difficulty: Medium
Topic: 11-36 Quantity Discounts for Consumers

61. A store advertises a pair of shoes at $79.99 with a cash-back offer of $20. The refund is made by the
manufacturer. This is an example of a:

A. rebate.
B. size discount.
C. markdown.
D. coupon.
E. quality discount.
A rebate is a consumer discount in which a portion of the purchase price is returned to the buyer in cash.
The manufacturer, not the retailer, issues the refund.

Blooms: Understand
Difficulty: Medium
Topic: 11-37 Coupons and Rebates

62. Which of the following, when presented by a consumer, provides him or her instant savings?

A. Rebates
B. Size discounts
C. Odd prices
D. Coupons
E. Cumulative quantity discounts
Coupons provide a stated discount to consumers on the final selling price of a specific item. By saving
the consumer money, firms add value to their products. A coupon provides instant savings when
presented.

Blooms: Understand
Difficulty: Medium

63. A company advertises that winter pullovers and jackets will be sold at half price if they are ordered
before September 30. This is an example of a(n):

C. odd pricing.
E. rebates.
This is an example of seasonal discount. A seasonal discount is an additional reduction offered as an

incentive to retailers to order merchandise in advance of the normal buying season.

Blooms: Understand
Difficulty: Medium
Topic: 11-39 Seasonal Discounts

64. A department store announces 30 percent off the price of Christmas trees if the trees are bought before
December 1. This is an example of:

A. a quantity discount.

B. geographic pricing.
C. an allowance.
D. a seasonal discount.
E. uniform delivered pricing.
This is an example of a seasonal discount. A seasonal discount is an additional reduction offered as an

incentive to retailers to order merchandise in advance of the normal buying season.

Blooms: Understand
Difficulty: Medium
Topic: 11-39 Seasonal Discounts

65. A dairy farm sells milk to a confectionery company. The dairy offers the company a reduction of 10
percent on the total amount of the invoice if the company settles the amount within a period of 7 days
instead of the usual 30 days. This is an example of a(n):

B. listing allowance.
C. cumulative quantity discount.
D. rebate.
E. cash discount.
A cash discount reduces the invoice cost if the buyer pays the invoice prior to the end of the discount
period. Typically, it is expressed in the form of a percentage.

Blooms: Understand
Difficulty: Medium
Topic: 11-40 Cash Discounts

66. A confectionery company pays a fee to a retailer to place its products near the checkout counter. By
doing so, the confectionery company hopes to tempt customers to make impulse purchases. In this
example, the fee paid to the retailer is a(n):

A. markdown.
C. odd price.
E. rebate.
Listing allowances are fees paid to retailers simply to get new products into stores or to gain more or
better shelf space for their products. Some argue that listing allowances are unethical because they put
small manufacturers that cannot readily afford allowances at a competitive disadvantage.

Blooms: Understand
Difficulty: Medium
Topic: 11-41 Allowances

67. Ray Inc., a shoe manufacturer, pays a good amount to a department store to allow it to display its shoes
in the store's window where they are likely to attract a lot of attention from customers. The money paid
by Ray's to the department store is an example of a(n):

A. premium price.
B. markdown.
C. listing allowance.
D. rebatable expense.
E. improvement value expense.
This example illustrates allowance, which is a pricing tactic that lowers the final cost to channel
members. Listing allowances are fees paid to retailers simply to get new products into stores or to gain
more or better shelf space for their products.

Blooms: Apply
Difficulty: Hard

68. A clothing line company promises a large price reduction to its wholesalers if they feature the
company's goods in their promotional campaigns. This is an example of a(n):

C. odd price.
E. cash discount.
members. An advertising allowance offers a price reduction to channel members if they agree to feature
the manufacturer's product in their advertising and promotional efforts.

Blooms: Understand
Difficulty: Medium

69. Purple Corp., a retailer selling air conditioners, aims to sell 5,000 air conditioners in a year. If Purple
reaches this target, the manufacturer will offer a discount on every air conditioner bought by the retailer
during that year. This is an example of a(n):

B. quantity discount.
C. odd price.
D. price bundling.
E. markdown.
A quantity discount provides a reduced price according to the amount purchased. A cumulative quantity
discount uses the amount purchased over a specified time period and usually involves several
transactions.

Blooms: Apply
Difficulty: Hard
Topic: 11-42 Quantity Discounts

70. A shoe store gets a 30 percent discount from the manufacturer when it places an order worth $5000. The
discount increases when the order worth increases. This is an example of a(n):

B. cumulative quantity discount.
C. allowance.
D. noncumulative quantity discount.
E. cash discount.
A quantity discount provides a reduced price according to the amount purchased. A noncumulative
quantity discount is based only on the amount purchased in a single order. Therefore, it provides the
buyer with an incentive to purchase more merchandise immediately.

Blooms: Understand
Difficulty: Medium

71. A furniture manufacturing company in Canada delivers goods to its customers in Europe. The shipping
company that delivers the goods to customers charges the same irrespective of the country in which the
customer is located. This is an example of:

A. geographic pricing.
B. price bundling.
C. price lining.
D. leader pricing.
This example illustrates uniform delivered pricing, a pricing tactic specific to shipping, which represents
a major cost for many manufacturers. With a uniform delivered pricing tactic, the shipper charges one
rate, no matter where the buyer is located, which makes things very simple for both the seller and the
buyer.

Blooms: Understand
Difficulty: Medium
Topic: 11-43 Uniform Delivered Versus Geographic Pricing

72. A home decor company in the United States delivers goods to its customers in Europe. The shipping
company that delivers the goods to the customers has divided the continent into five different zones and
charges according to the rate prevalent in each of these zones. This is an example of:

A. geographic pricing.
B. price bundling.
C. price lining.
D. leader pricing.
a major cost for many manufacturers. Geographic pricing, however, sets different prices depending on a
geographical division of the delivery areas.

Blooms: Understand
Difficulty: Medium

73. Books Inc. is an online seller of books. It ships its books to different parts of the world. When it delivers
its shipments, it charges customers based on the zone in which they are located. This is an example of:

A. price bundling.
B. geographic pricing.
C. an allowance.
D. leader pricing.
E. premium pricing.
This example illustrates geographic pricing. Geographic pricing sets different prices depending on a

Blooms: Apply
Difficulty: Hard

74. Snails Inc., a 10-year-old bookstore situated in New York, recently launched an online store that offers
uniform delivered pricing to all its customers across the globe. It also offers all the books from the
previous year at a discount. Which of the following statements about Snails and its customers is true in
this case?

A. Customers from Canada are likely to pay a lesser shipping price than those in Asia.
B. Snails uses rebates to wholesalers and retailers that deal with its books.
C. Books from the previous year are offered at a size discount.
D. Snails uses price bundling to offer older goods to customers when it delivers them for at a standard
shipping price.
E. Customers from Mexico are likely to pay the same shipping price as those from China.
a major cost for many manufacturers. With a uniform delivered pricing tactic, the shipper charges one
rate, no matter where the buyer is located. This makes things very simple for both the seller and the
buyer.

Blooms: Apply
Difficulty: Medium

75. A computer store advertises to sell a particular laptop model at a discounted price. When a customer
visits the store to purchase the discounted model, he is informed that it is out of stock. The salesperson
then tries to sell him a different model that is priced higher than the model for which he had come. This
action of the salesperson is an example of:

D. price discrimination.
E. bait and switch.
Bait and switch is a deceptive practice of luring customers into the store by advertising a low-priced
item (the bait), only to aggressively pressure them into purchasing a higher-priced item (the switch) by
disparaging the low-priced item, comparing it unfavourably with the higher-priced model, or professing
an inadequate supply of the lower-priced item.

Blooms: Understand
Difficulty: Medium
Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing.
Topic: 11-47 Bait and Switch

76. A prominent fast-food chain sets a very low price for its burgers with the intent of driving its
competition out of business. This is an example of:

E. bait and switch.
When a firm sets a very low price for one or more of its products with the intent to drive its competition
out of business, it is using predatory pricing. Predatory pricing is illegal under the Competition Act
because it constrains free trade and represents a form of unfair competition.

Blooms: Understand
Difficulty: Medium
Topic: 11-48 Predatory Pricing

77. A company manufacturing shampoo charges a low price to customers who buy sachets on the premise
that these customers belong to lower income groups and are more price sensitive. On the other hand, it
charges higher prices to customers who purchase the same shampoo in bottles. This is an example of:

E. bait and switch.
The practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or
to the ultimate consumer at different prices is called price discrimination. Some, but not all, forms of
price discrimination are illegal.

Blooms: Understand
Difficulty: Medium
Topic: 11-49 Price Discrimination

78. Two dairy farms supply milk to a local town. Both of them work together to control the price that the
townspeople pay for milk. This is an example of:

E. bait and switch.
Price fixing is the practice of colluding, or working together, with other firms to control prices.
Horizontal price fixing occurs when competitors that produce and sell competing products collude, or
work together, to control prices, effectively taking price out of the decision process for consumers.

Blooms: Understand
Difficulty: Medium
Topic: 11-50 Price Fixing

79. A vegetable farm supplies vegetables to a supermarket in Pemberton. The vegetable vendor and the
supermarket work together to control the prices passed on to consumers. This is an example of:

E. bait and switch.
Price fixing is the practice of colluding, or working together, with other firms to control prices. Vertical
price fixing occurs when parties at different levels of the same marketing channel (e.g., manufacturers
and retailers) collude to control the prices passed on to consumers.

Blooms: Understand
Difficulty: Medium

An image with examples of the four types of competition

Grewal - Chapter 11

80. Ramsons manufactures binoculars. Although the binoculars are priced unreasonably high, Ramsons
manages to sell a large number of units each year because Ramsons is the sole supplier of binoculars in
the market. This is an example of:

A. a monopoly.
B. an oligopoly.
D. pure competition.
E. more price competition.
In a monopoly, only one firm provides the product or service in a particular industry, and as such results
in less price competition. A monopoly that restricts competition by controlling an industry can be
deemed illegal and broken apart by the government.

Blooms: Apply
Difficulty: Hard

81. Which of the following is reflective of oligopolistic competition?

A. A large number of companies sell silver in a market where the price of silver is determined by
demand and supply.
B. Ramsons is the sole supplier of military binoculars in the market.
C. Hundreds of firms make wristwatches, and the market is highly differentiated.
D. Pure Diamonds Inc. controls the diamond market as it is the only supplier of diamonds.
E. A price war occurs between Comfort Airlines and Air Secure, the only two airlines in the market.
When a market is characterized by oligopolistic competition, only a few firms

Blooms: Apply
Difficulty: Hard

Lee's, a department store, decides to promote its sales during Christmas. In the clothing section, it offers
customized men's T-shirts for $11.99. To every customer who purchases a pair of shoes, the shoe
department issues a document promising a discount of $20 on the customer's next shoe purchase. The
store also has its air conditioners on sale at a reduced price because the sale of air conditioners is slow
during the month of December and the company wants to get rid of its slow-moving merchandise.

Grewal - Chapter 11

82. The price reduction that Lee's offers for its air conditioners is an example of a:

A. rebate.
B. size discount.
C. markdown.
D. coupon.
Markdowns are the reductions retailers take on the initial selling price of the product or service. As an
integral component of the high/low pricing strategy, markdowns enable retailers to get rid of slow-
moving or obsolete merchandise, sell seasonal items after the appropriate season, and match
competitors' prices on specific merchandise.

Blooms: Apply
Difficulty: Hard
Topic: 11-35 Markdowns

83. Lee's offer of customized men's T-shirts for $11.99 is an example of:

A. rebates.
B. size discounts.
C. markdowns.
D. odd prices.
E. quality discounts.
Odd prices are those that end in odd numbers, usually 9. Most marketers believe that odd pricing got its
start as a way to prevent sales clerks from just pocketing money.

Blooms: Apply
Difficulty: Hard

84. The document the shoe department gives to every customer who buys a pair of shoes is a:

A. rebate.
B. size discount.
C. markdown.
D. coupon.
Coupons provide a stated discount to consumers on the final selling price of a specific item. By saving
the consumer money, firms add value to their products.

Blooms: Apply
Difficulty: Medium

A table describing various business-to-business pricing tactics

Grewal - Chapter 11

85. Jade's manufactures electronic appliances. Jade's does not have any retail stores of its own and prefers to
sell its products through Ramon. Ramon stores are striking in decor, well maintained, and serviced by a
polite and well-informed staff that pays great attention to customer service and feedback. Ramon also
has a huge promotional budget and launches prominent promotional campaigns on a regular basis. In
fact, Jade's offers Ramon a discount on products that are included in these campaigns. This is an
example of a(n):

B. cash discount.
C. advertising allowance.
D. quantity discount.
members. An advertising allowance offers a price reduction to channel members if they agree to feature
the manufacturer's product in their advertising and promotional efforts.

Blooms: Apply
Difficulty: Hard

86. Which of the following would a shipping company adopt in order to set a price that would charge its
customers based on the actual distance?

A. Seasonal discounts
B. Cash discounts
C. Geographic pricing
D. Quantity discounts
E. Uniform delivered pricing
a major cost for many manufacturers. Geographic pricing sets different prices depending on a

Blooms: Apply
Difficulty: Hard

87. Tangerine, an exclusive retailer of handbags, chooses its suppliers very carefully. It prefers one supplier
mainly because it offers great quality and 40 percent discount on any single order of more than $20,000.
The supplier is offering a(n):

B. cash discount.
C. listing allowance.
D. quantity discount.
E. advertising allowance.
A quantity discount provides a reduced price according to the amount purchased. A quantity discount
can be either cumulative or noncumulative.

Blooms: Apply
Difficulty: Hard

Clove, a fitness centre, opens a new gym in Boston. Two gyms already exist around the same locality.
To attract customers and drive its competitors out of business, Clove, offers a very low enrolment and
monthly fee. The owners of the other gyms meet with the director of Clove to negotiate. Finally, all
three gyms collude and decide to fix a standard enrolment and monthly fee that customers will have to
pay. They also decide to charge a higher fee for men because they spend greater time in the gym.

Grewal - Chapter 11

88. When Clove decided to offer enrolment at a very low price, it was with an intention to drive its
competitors out of business. This is an example of:

E. bait and switch.

Blooms: Apply
Difficulty: Hard

89. All three gyms decide to charge a higher fee from men. This is an example of:

C. external reference allowance.
E. bait and switch.
The practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or
to the ultimate consumer at different prices is called price discrimination. Some, but not all, forms of
price discrimination are illegal.

Blooms: Apply
Difficulty: Hard

90. All the gyms collude and decide to control the enrolment and monthly fee payable by customers. This is
an example of:

E. bait and switch.
Price fixing is the practice of colluding with other firms to control prices. Horizontal price fixing occurs
when competitors that produce and sell competing products collude, or work together, to control prices,
effectively taking price out of the decision process for consumers.

Blooms: Apply
Difficulty: Hard

91. Price is the only element of the marketing mix that generates revenue.

TRUE
Price is the only element of the marketing mix that generates revenue. Every other element in the
marketing mix may be perfect, but with the wrong price, sales simply will not occur.

Blooms: Remember
Difficulty: Easy
Learning Objective: 11-01 Explain what price is and its importance in establishing value in marketing.

92. Consumers are more likely to judge a product's quality based on its price when they are less
knowledgeable about the product category.

TRUE
We now know that price is not only a sacrifice but also an information cue as well. That is, consumers
use the price of a product or service to judge its quality particularly when they are less knowledgeable
about the product category.

Blooms: Remember
Difficulty: Easy
Learning Objective: 11-01 Explain what price is and its importance in establishing value in marketing.

93. Firms concerned with the absolute level of profits are most likely to employ target return pricing.

FALSE
Target return pricing is a profit-oriented pricing strategy implemented by firms less concerned with the
absolute level of profits and more interested in the rate at which their profits are generated relative to
their investments.

Blooms: Remember
Difficulty: Easy

94. Target profit pricing is designed to produce a specific return on investment, usually expressed as a
percentage of sales.

FALSE
Firms usually implement target profit pricing when they have a particular profit goal as their overriding
concern. To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a
certain profit per unit.

Blooms: Remember
Difficulty: Easy

95. In any given market, the firm that offers the lowest price tends to be the dominant brand.

FALSE
Adopting a market share objective does not always imply setting low prices. Rarely is the lowest-price
offering the dominant brand in a given market.

Blooms: Remember
Difficulty: Easy

96. Value is only implicitly considered in customer-oriented strategies.

FALSE
A customer orientation explicitly invokes the concept of value. In this strategy, offerings are designed to
enhance the company's reputation and image and thereby increase the company's value in the minds of
consumers.

Blooms: Remember
Difficulty: Easy

97. Demand curves are downward sloping for prestige products.

FALSE
For prestige products or services, which consumers purchase for their status rather than their
functionality, the higher the price, the greater the status associated with it and greater the exclusivity. In
this case, a higher price also leads to a greater quantity sold—up to a certain point.

Blooms: Remember
Difficulty: Easy

98. Cost-based methods recognize the role that consumers or competitors' prices play in the marketplace.

FALSE
Cost-based pricing methods determine the final price to charge by starting with the cost. Cost-based
methods do not recognize the role that consumers or competitors' prices play in the marketplace.

Blooms: Remember
Difficulty: Easy

99. For price skimming to work, the product or service must offer consumers new benefits currently
unavailable in alternative products.

TRUE
Price skimming is a strategy of selling a new product or service at a high price that innovators and early
adopters are willing to pay to obtain it. For price skimming to work, the product or service must offer
consumers new benefits currently unavailable in alternative products.

Blooms: Remember
Difficulty: Easy

100. When consumers view the sale price and compare it with the provided external reference price, their
perceptions of the value of the deal is likely to decrease.

FALSE
that facilitates their evaluation process. The seller labels the reference price as the "regular price" or an
"original price." When consumers view the "sale price" and compare it with the provided external
reference price, their perceptions of the value of the deal is likely to increase.

Blooms: Remember
Difficulty: Easy

101. Generally, a pricing tactic represents a long-term response to a competitive threat.

FALSE
Generally, a pricing tactic represents either a short-term response to a competitive threat (e.g., lowering
price temporarily to meet a competitor's price reduction) or a broadly accepted method of calculating a
final price for the customer that is short term in nature.

Blooms: Remember
Difficulty: Easy
Topic: 11-30 Pricing Tactics Aimed at Consumers

102. Leader pricing is an illegal attempt to increase store traffic by pricing a regularly purchased item much
higher than the store's cost.

FALSE
Leader pricing is a tactic that attempts to build store traffic by aggressively pricing and advertising a
regularly purchased item, often priced at or just above the store's cost. The rationale behind this tactic is
that, while in the store to get the great deal on one item, the consumer will also probably pick up other
items he or she needs.

Blooms: Remember
Difficulty: Easy
Topic: 11-33 Leader Pricing

103. Laws against bait and switch practices are difficult to enforce because salespeople, simply as a function
of their jobs, are always trying to get customers to trade up to a higher- priced model without
necessarily deliberately baiting them.

TRUE
The laws against bait and switch practices are difficult to enforce because salespeople, simply as a
function of their jobs, are always trying to get customers to trade up to a higher-priced model without
necessarily deliberately baiting them. The key to proving deception centres on the intent of the seller,
which is also difficult to prove.

Blooms: Remember
Difficulty: Easy
Topic: 11-47 Bait and Switch

104. Predatory pricing, although representative of a form of unfair competition, promotes free trade.

FALSE

Blooms: Remember
Difficulty: Easy

105. It is illegal to charge a different price to a reseller if the firm is attempting to meet a specific
competitor's price.

FALSE
The Competition Act requires companies to demonstrate only that their price discounts do not restrict
competition. While quantity discounts may be a grey area, it is perfectly legitimate to charge a different
price to a reseller if the firm is attempting to meet a specific competitor's price.

Blooms: Remember
Difficulty: Easy

106. Differentiate between an elastic and an inelastic market.

An elastic market refers to a market for a product or service that is price sensitive. It means that
relatively small changes in price will generate fairly large changes in the quantity demanded. An
inelastic market refers to a market for a product or service that is price insensitive. It means that
relatively small changes in price will not generate large changes in the quantity demanded.

Blooms: Understand
Difficulty: Medium
Topic: 11-08 Price Elasticity of Demand

107. Differentiate between complementary products and substitute products.

Complementary products are those whose demand curves are positively related, such that they rise or
fall together. It means that a percentage increase in demand for one results in a percentage increase in
demand for the other. Substitute products are those for which changes in demand are negatively related.
It means that a percentage increase in the quantity demanded for Product A results in a percentage
decrease in the quantity demanded for Product B.

Blooms: Understand
Difficulty: Medium

108. Explain the limitations associated with a break-even analysis.

The price used in a break-even analysis could probably represent an average price that attempts to
account for variances in the price of a product. Second, prices often get reduced as quantity increases
because the costs decrease, so firms must perform several break-even analyses at different quantities.
Third, a break-even analysis cannot indicate for sure, in the case of products, how many units will sell at
a given price. It tells the firm only what its costs, revenues, and profitability will be given a set price and
an assumed quantity. To determine how many units the firm actually will sell, it must bring in the
demand estimates.

Blooms: Understand
Difficulty: Medium

109. Explain what motivates firms to enter price wars.

New entrants might want to gain market share, whereas established firms may drop their prices to
preserve their market share. Other reasons include avoiding the appearance of being insensitive to
consumers and simply overreacting to a price decrease offered by competitors.

Blooms: Understand
Difficulty: Medium

110. Explain how the economic environment influences pricing.

The economic environment at local, regional, national, and global levels influences pricing. Starting at
the top, the growth of the global economy has changed the nature of competition around the world.
Many firms maintain a presence in multiple countries: products are designed in one country, the parts
are manufactured in another, the final product assembled in a third, and after-sales service is handled by
a call centre in a fourth. By thinking globally, firms can seek out the most cost-efficient methods of
providing goods and services to their customers. On a more local level, the economy still can influence
pricing. Competition, disposable income, and unemployment all may signal the need for different
pricing strategies. For instance, rural areas are often subjected to higher prices because it costs more to
get products there and because competition is lower. Similarly, retailers often charge higher prices in
areas populated by people who have more disposable income and enjoy low unemployment rates.

Blooms: Understand
Difficulty: Medium
Topic: 11-18 Economic Factors

111. Explain the drawbacks associated with the market penetration strategy.

A market penetration strategy has drawbacks. First, the firm must have the capacity to satisfy a rapid
rise in demand—or at least be able to add that capacity quickly. Second, low price does not signal high
quality. Of course, a price below customers' expectations decreases the risk for consumers to purchase
the product and test its quality for themselves. Third, firms should avoid a penetration pricing strategy if
some segments of the market are willing to pay more for the product; otherwise, the firm is just "leaving
money on the table."

Blooms: Understand
Difficulty: Medium

112. Briefly explain reference price and external reference price.

that facilitates their evaluation process. The seller labels the reference price as the "regular price or an
original price. When consumers view the "sale price" and compare it with the provided external

Blooms: Understand
Difficulty: Medium

113. Explain the difference between a cumulative quantity discount and a noncumulative quantity discount.

A cumulative quantity discount uses the amount purchased over a specified time period and usually
involves several transactions. This type of discount encourages resellers to maintain their current
supplier because the cost to switch must include the loss of the discount. A noncumulative quantity
discount, though still a quantity discount, is based only on the amount purchased in a single order.
Therefore, it provides the buyer with an incentive to purchase more merchandise immediately. Such
larger, less frequent orders can save manufacturers order processing, sales, and transportation expenses.

Blooms: Understand
Difficulty: Medium

114. Explain the difference between predatory pricing and price discrimination.

Predatory pricing refers to a firm's practice of setting a very low price for one or more of its products
with the intent of driving its competition out of business. On the other hand, price discrimination refers
to the practice of selling the same product to different resellers—wholesalers, distributors, or retailers—
or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are
illegal.

Blooms: Understand
Difficulty: Medium

115. Differentiate between horizontal price fixing and vertical price fixing.

Horizontal price fixing occurs when competitors that produce and sell competing products collude, or
work together, to control prices, effectively taking price out of the decision process for consumers.
Vertical price fixing occurs when parties at different levels of the same marketing channel (e.g.,
manufacturers and retailers) collude to control the prices passed on to consumers.

Blooms: Understand
Difficulty: Medium

116. Ben wants to open a restaurant in his hometown. What would be the fixed and variable costs that he
would need to take care of while setting up the restaurant?

Student answers will vary but must include the following.
Variable costs are those costs, primarily labour and materials, which vary with production volume. As
each unit of the product produced incurs the same cost, marketers generally express variable costs on a
per-unit basis.
Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the
volume of production.

Blooms: Apply
Difficulty: Hard
Topic: 11-10 Costs

117. Meg wants to start a gym in her hometown. Two other gyms already exist in the town. What kind of
pricing method could she employ to establish herself?

Student answers will vary. They should reference at least one of the following.
• Cost-based methods: As the name implies, cost-based pricing methods determine the final price to
charge by starting with the cost. Cost-based methods do not recognize the role that consumers or
competitors' prices play in the marketplace. Although relatively simple compared with other methods
used to set prices, cost-based pricing requires that all costs can be identified and calculated on a per-unit
basis.
• Competitor-based methods: Most firms know that consumers compare the prices of their products with
the different product/price combinations that competitors offer. Thus, using a competitor-based pricing
method, they may set their prices to reflect the way they want consumers to interpret their own prices
relative to the competitors' offerings.
• Value-based methods: Value-based pricing methods include approaches to setting prices that focus on
the overall value of the product offering as perceived by the consumer. Consumers determine value by
comparing the benefits they expect the product to deliver with the sacrifice they will need to make to
acquire the product.

Blooms: Apply
Difficulty: Hard
Topic: 11-20 Competitor-based Methods
Topic: 11-21 Value-based Methods

118. Explain the concept of price skimming.

In many markets, and particularly for new and innovative products or services, innovators and early
adopters are willing to pay a higher price to obtain the new product or service. This strategy, known as
price skimming, appeals to these segments of consumers who are willing to pay the premium price to
have the innovation first. After this high-price market segment becomes saturated and sales begin to
slow down, companies generally lower the price to capture (or skim) the next most price-sensitive
market segment, which is willing to pay a somewhat lower price. This process can continue until the
demand for the product has been satisfied, even at the lowest price points. Luxury products are often an
exception.
For price skimming to work, the product or service must be perceived as breaking new ground in some
way, offering consumers new benefits currently unavailable in alternative products. Firms use skimming
strategies for a variety of reasons. Some may start by pricing relatively high to signal high quality to the
market. Others may decide to price high at first to limit demand, which gives them time to build their
production capacities. Similarly, some firms employ a skimming strategy to try to quickly earn back
some of the high R&D investments they made for the new product. Finally, firms employ skimming
strategies to test consumers' price sensitivity. A firm that prices too high can always lower the price. But
if the price is initially set too low, it is almost impossible to raise it without significant consumer
resistance.
For a skimming pricing strategy to be successful, competitors should not be able to enter the market
easily; otherwise, price competition will likely force lower prices and undermine the whole strategy.
Competitors might be prevented from entering the market through patent protections, their inability to
copy the innovation (because it is complex to manufacture, its raw materials are hard to get, or the
product relies on proprietary technology) or the high costs of entry.

Blooms: Apply
Difficulty: Hard

119. Ryan owns a store that sells shoes and clothes. Explain how he could use price lining, price bundling,
and leader pricing to attract customers.

Student answers will vary. However, they must include the following concepts:
• Price lining: When marketers establish a price floor and a price ceiling for an entire line of similar
products and then set a few other price points in between to represent distinct differences in quality, the
tactic is called price lining.
• Price bundling: When firms are stuck with a slow-moving item, to encourage sales, they sometimes
will "bundle" it with a faster-moving item and price the bundle below what the two items would cost
separately.
• Leader pricing: Leader pricing is a tactic that attempts to build store traffic by aggressively pricing and
advertising a regularly purchased item, often priced at or just above the store's cost.

Blooms: Apply
Difficulty: Hard
Topic: 11-30 Pricing Tactics Aimed at Consumers

120. A company manufactures tires that are sold to retailers as well as automobile companies. What kind of
pricing tactics is likely to be advantageous for different customers?

Student answers will vary. However, they must include the following concepts.
The pricing tactics employed in business-to-business settings are seasonal and cash discounts,
allowances, quantity discounts, and uniform delivered versus geographic pricing.
• Seasonal discounts: A seasonal discount is an additional reduction offered as an incentive to retailers
to order merchandise in advance of the normal buying season
• Cash discounts: A cash discount reduces the invoice cost if the buyer pays the invoice prior to the end
of the discount period
• Allowances: Another pricing tactic that lowers the final cost to channel members is allowances, such
as advertising or listing allowances, offered in return for specific behaviours
• Quantity discounts: A quantity discount provides a reduced price according to the amount purchased
• Uniform delivered pricing: The shipper charges one rate, no matter where the buyer is located, which
makes things very simple for both the seller and the buyer
• Geographic pricing: The setting of different prices depending on a geographical division of the
delivery areas

Blooms: Apply
Difficulty: Hard
Topic: 11-38 Business-to-Business Pricing Tactics and Discounts

Chapter 11 Summary

Category # of Questions
Accessibility: Keyboard Navigation 99
Blooms: Apply 36
Blooms: Remember 46
Blooms: Understand 38
Difficulty: Easy 46
Difficulty: Hard 32
Difficulty: Medium 42
Grewal - Chapter 11 124
Learning Objective: 11-01 Explain what price is and its importance in establishing value in marketing. 2
Learning Objective: 11-02 Illustrate how the five Cs-company objectives; customers; costs; competition; and channel m 48
embers-influence pricing decisions.
Learning Objective: 11-03 Describe various pricing methods (e.g.; cost-based pricing; competitor-based pricing; value- 31
based pricing) and strategies (e.g.; new product pricing and psychological pricing) that are used in marketing.
Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers. 25
Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing. 14
Topic: 11-02 Profit Orientation 7
Topic: 11-03 Sales Orientation 3
Topic: 11-04 Competitor Orientation 3
Topic: 11-05 Customer Orientation 3
Topic: 11-07 Demand Curves and Pricing 4
Topic: 11-08 Price Elasticity of Demand 1
Topic: 11-09 Factors Influencing Price Elasticity of Demand 9
Topic: 11-10 Costs 2
Topic: 11-11 Variable Costs 1
Topic: 11-12 Fixed Costs 1
Topic: 11-14 Break-Even Analysis and Decision Making 3
Topic: 11-15 Competition 8
Topic: 11-16 Channel Members 1
Topic: 11-18 Economic Factors 2
Topic: 11-19 Cost-based Methods 3
Topic: 11-20 Competitor-based Methods 2
Topic: 11-21 Value-based Methods 2
Topic: 11-22 Improvement Value Method 1
Topic: 11-23 Cost of Ownership Method 1
Topic: 11-24 Price Skimming 3
Topic: 11-25 Market Penetration Pricing 4
Topic: 11-26 Consumers Use of Reference Prices 4
Topic: 11-27 Odd Prices 2
Topic: 11-28 Everyday Low Pricing (EDLP) 2
Topic: 11-29 High/Low Pricing 3
Topic: 11-30 Pricing Tactics Aimed at Consumers 2
Topic: 11-31 Lining 2
Topic: 11-32 Price Bundling 2
Topic: 11-33 Leader Pricing 2
Topic: 11-35 Markdowns 2
Topic: 11-36 Quantity Discounts for Consumers 1
Topic: 11-37 Coupons and Rebates 4
Topic: 11-38 Business-to-Business Pricing Tactics and Discounts 1
Topic: 11-39 Seasonal Discounts 2
Topic: 11-40 Cash Discounts 1
Topic: 11-41 Allowances 4
Topic: 11-42 Quantity Discounts 4
Topic: 11-43 Uniform Delivered Versus Geographic Pricing 5
Topic: 11-47 Bait and Switch 2
Topic: 11-48 Predatory Pricing 3
Topic: 11-49 Price Discrimination 4
Topic: 11-50 Price Fixing 4

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Chapter 11

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Chapter 11

A. market penetration strategy.

A. Maximizing profits strategy

A. Value is only implicitly considered in this type of strategies.

A. A supply graph

A. the substitution effect.

A. total cost per unit.

A. Cost-based pricing method

A. Cost-based pricing method

A. Cost-based pricing methods

A. improvement value method.

A. improvement value method.

A. Market development pricing

A. everyday low pricing.

A. everyday low pricing.

A. everyday low pricing.

A. everyday low price.

A. Everyday low pricing

A. everyday low pricing.

A. everyday low pricing.

A. everyday low pricing.

A. everyday low pricing.

This is an example of seasonal discount. A seasonal discount is an additional reduction offered as an

A. a quantity discount.

This is an example of a seasonal discount. A seasonal discount is an additional reduction offered as an

When a market is characterized by oligopolistic competition, only a few firms

Student answers will vary but must include the following.

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