Whereas costs set the lower limit of prices, the market and demand set the upper limit. Both consumer and industrial buyers balance the price of a product or service against the benefits of owning it. Thus, before setting prices, the marketer must understand the relationship between price and demand for its product.
In this section, we explain how the price-demand relationship varies for different types of market and how buyer perceptions of price affect the pricing decision. We then discuss methods for measuring the priee-demand relationship,
PKICING IN DIFFERENT TYPES or MARKET. The seller's pricing freedom varies with different types of market. Economists recognize four types of market, each presenting a different pricing challenge.
Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper or financial securities. No single buyer or seller has much effect on the going market price. A seller cannot charge more than the going price because buyers can obtain as much as they need at the going price. Nor would sellers charge less than the market price because they can sell all they want at this price. If price and profits rise, new sellers can easily enter the market. In a purely competitive market, marketing research, product development, pricing, advertising and sales promotion play little or no role. Thus sellers in these markets do not spend much time on marketing strategy,
Under monopolistic competition, the market consists of many buyers and sellers that trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Either the physical product can he varied in quality, features or style, or the accompanying services can be varied. Buyers sec differences in sellers' prodxicts and will pay different prices for them. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising and persona] selling to set their offers apart. For example, Danonc's Lea and Perrins and several other bottled sauces compete with dozens of national and international varieties differentiated by price and non-price factors. Because there are many competitors, each firm is less affected by competitors' marketing strategies than in oligopolistic markets.
Under oligopolistic competition, the market consists of a few sellers that are highly sensitive to eaeh other's pricing and marketing strategics. The product can be uniform (steel, aluminium) or non-uniform (cars, computers). There are few-sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors' strategies and moves. If a steel company slashes its price by 10 per cent, buyers will quickly switch to this supplier. The other steel makers must respond by lowering their prices or increasing their services. An oligopolist is never sure that it will gain anything permanent through a price cut. In contrast, if an oligopolist raises its price, its competitors might not follow this (cad. The oligopolist would then have to retract its price increase or risk losing customers to Competitors."
In a pure monopoly, the market consists of one seller. The seller may be a government monopoly (a Postal Service), a private regulated monopoly (a power company) or a private non-regulated monopoly (Microsoft with DOS and Windows). Pricing is handled differently in each ease, A government monopoly can pursue a variety of pricing objectives. It might set a price below cost because the product is important to buyers who cannot afford to pay full cost. Or the price might be set either to cover costs or to produce good revenue. It can even be set quite high to slow down consumption. In a regulated monopoly, the government permits the company to set rates that will yield a 'fair return', one that will let the company maintain and expand its operations as needed. Non-regulated monopolies are free to price at what the market will bear. However, they do not always charge the full price for a number of reasons: for example, a desire not to attract competition, a desire to penetrate the market faster with a low price, or a fear of government regulation.
CONSUMER PERCEPTIONS OF PRICE AND VALUE, in the end, the consumer will decide whether a product's price is right. When setting prices, the oligopolistic competition A market in which there are a few sellers that are highly sensitive to eavli other's pricing and marketing strategies.
pure monopoly A market in which then1 is a single seller - it may be a government monopoly, a private regulated monopoly or a private non-regulated monopoly.
Quantity demanded per period B. Elastic demand t
Quantity demanded per period B. Elastic demand
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