PRICING TACTICS

LECTURER
SRI MARYATI, SE, MSi
2
Price :The amount of money charged for a
product or service,or the sum of the values
that consumers exchange for the benefits
of having or using the product or service.

Dynamic pricing: Charging different
prices depending on individual customers
and situations.
Price Defined
3
Factors affecting price decisions

Internal factors

Marketing
objectives;
Marketing
mix strategy;
Costs;
Organizational
consideration
External factors
Nature of the
market and
demand;
Competitors;
Other
environment
factors(economy,
reseller,
government

Pricing
decision
4

Pricing in different types of markets
Pure competition
Oligopolistic
competition
Monopolistic
competition
Pure monopoly

Pricing

Price Discrimination
Charging different prices for a
product when the price differences
are not justified by cost differences.

Objective of the firm is to attain
higher profits than would be
available otherwise.
Price Discrimination
1. Firm must be an imperfect competitor (a
price maker)
2. Price elasticity must differ for units of the
product sold at different prices
3. Firm must be able to segment the market
and prevent resale of units across market
segments
First-Degree
Price Discrimination
Each unit is sold at the highest possible
price
Firm extracts all of the consumers surplus
Firm maximizes total revenue and profit
from any quantity sold
Second-Degree
Price Discrimination
Charging a uniform price per unit for a
specific quantity, a lower price per
unit for an additional quantity, and so
on
Firm extracts part, but not all, of the
consumers surplus
First- and Second-Degree
Price Discrimination
In the absence of price
discrimination, a firm that charges
$2 and sells 40 units will have
total revenue equal to $80.
First- and Second-Degree
Price Discrimination
In the absence of price
discrimination, a firm that charges
$2 and sells 40 units will have
total revenue equal to $80.
Consumers will have consumers
surplus equal to $80.
First- and Second-Degree
Price Discrimination
If a firm that practices first-degree
price discrimination charges $4
and sells 20 units, then total
revenue will be equal to $160 and
consumers surplus will be zero.
First- and Second-Degree
Price Discrimination
If a firm that practices second-
degree price discrimination
charges $4 per unit for the first 20
units and $2 per unit for the next
20 units, then total revenue will be
equal to $120 and consumers
surplus will be $40.
Third-Degree
Price Discrimination
Charging different prices for the
same product sold in different
markets
Firm maximizes profits by selling a
quantity on each market such that
the marginal revenue on each
market is equal to the marginal cost
of production
Third-Degree
Price Discrimination
Q
1
= 120 - 10 P
1
or P
1
= 12 - 0.1 Q
1
and MR
1
= 12 - 0.2 Q
1

Q
2
= 120 - 20 P
2
or P
2
= 6 - 0.05 Q
2
and MR
2
= 6 - 0.1 Q
2

MR
1
= MC = 2 MR
2
= MC = 2
MR
1
= 12 - 0.2 Q
1
= 2
Q
1
= 50
MR
2
= 6 - 0.1 Q
2
= 2
Q
2
= 40
P
2
= 6 - 0.05 (40) = $4
P
1
= 12 - 0.1 (50) = $7
Third-Degree
Price Discrimination
Pricing Practices in Oligopoly
The Kinked Demand Curve Model
To find the kink or point of intersection of
demand curve; set:

Determine The Upper and lower limits of MR
gap; find MR
1
and MR
2
To find the total profit of the oligopolist;

Q
1
= Q
2
=Q
= TR-TC or = (P-ATC)Q
Pricing Practices in Oligopoly
The Centralized Cartel Model
To find max ,set: MC = MR
To find the quantity of firm, set:
MC
i
= MR
Profit of the firm:
i
= TR
i
TC
i
Total Profit of the oligopolist ;
=
1
+
2
+..
n

Pricing Practices in Oligopoly
The Market - Sharing Cartel
Find the share of each firm
To find max ,set: MC
i
= MR
i
Profit of the firm:
i
= TR
i
TC
i
Total Profit of the oligopolist ;
=
1
+
2
+..
n


Pricing Practices in Oligopoly
The Sales Maximization Model
The firm maximizes sales or total
revenue, where: dTR
dq
To find profit :
i
= TR
i
TC
i

= MR= 0
Pricing in Practice
Two-Part Tariff: consumers pay
an initial fee for the right to
purchase a product or services
Tying: requirement to buy or lease
a product also purchase another
needed in the use of the first.
Bundling: customers have
different tastes but firm cannot
price discriminate
Pricing in Practice
Prestige Pricing: setting high price to attract
prestige-oriented consumers.
Price Lining: setting a price target than
developing a product to max profit at that price.
Skimming: setting a high price and gradually
lowering its price
Value Pricing: selling of quality goods at much
lower prices than previously.
Price Machting: promises to match any lower
price offered by competitor
Auction Pricing: rapidly growing pricing for
internet purchases.

New-product Pricing Strategies


Market-Skimming
Pricing
Market-Penetration
Pricing
1High quality and
imageenough buyer
2Cost is not high for
smaller volume
3Competitors hardly
enter the market
1Market is high
price sensitive
2Cost is falling as
sales volume increase
3Low price can keep
out the competition

Price-Adjustment Strategies

STRATEGY DESCRIPTION

Discount and allowance
pricing

Segmented pricing


Psychological pricing


Promotional pricing


Value pricing


Geographical pricing

Reducing prices to reward customer
responses such as paying early or
promoting the product

Adjust prices to allow for differences
in customerproductsor locations

Adjust price for psychological effect

Temporarily reducing prices to
increase short-run sales

Adjust prices to offer the right
combination at a fair price

Adjust prices to account for location

Price Changes

Initiating Price Cuts;

Initiating Price Increases;

Buyer Reactions to Price Changes;

Competitor Reactions to Price
Changes.