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Pricing Practices

Pricing practices refer to the methods businesses use to determine the price of their goods or services.

  • These practices are influenced by market conditions, costs, competition, and the nature of the product or service.
  • Price Discrimination
  • Cost Plus Pricing
  • Two-Part Tariff
  • Bundling/Bundle Pricing

Price Discrimination is defined as selling same product at different prices to different customers or markets.

  • It is only possible in monopoly market.
  • The main objective of price discrimination is profit maximization, enhance social welfare through pricing.
  • The monopoly firm which adopts the policy of price discrimination is called as discriminating monopoly.
  • Examples of price discrimination: NEA charges different rates of electricity for household consumption and industrial uses.

Condition for Price Discrimination:

  • Monopoly Power:
    • It is possible only if monopoly exists and there is no competition in the market.
  • Market Segmentation:
    • The seller must be able to divide the market into distinct groups or segments with varying willingness or ability to pay.
  • Different Elasticities of Demand:
    • The elasticity of demand should be different in each sub-market. If price elasticities of demand in the different market are same, the price discrimination is not gainful.
  • Market Sealing:
    • The seller must prevent customers in lower-priced segments from reselling the product or service to customers in higher-priced segments.

Degree or Types of Price Discrimination:

a.) First Degree of Price Discrimination

  • The First Degree of Price Discrimination is defined as the situation in which the the seller charges each customer the maximum price they are willing to pay for a product or service.
  • It is also known as perfect price discrimination.

b.) Second Degree of Price Discrimination

  • The Second Degree of Price Discrimination is defined as the situation in which the seller charges different prices for different quantity purchased.

c.) Third Degree of Price Discrimination

  • The Third Degree of Price Discrimination is defined as the situation in which the seller charges different prices to different market having demand of different elasticities.

Cost Plus Pricing is a simple pricing strategy where the price of a product or service is determined by adding a fixed markup on average variable cost.

  • It is one of the most popular and shortcut method of pricing.

The steps of cost plus pricing are below:

  • Determining Actual cost of Producing a Commodity
  • Adding Markup on Estimated Average Cost
  • Markup on Price

Advantages of Cost Plus Pricing:

  • It is the safest pricing method.
  • This method is easy and convenient.
  • This method reduces cost of pricing.
  • This method is socially fairer.
  • The method ensures profit for business.
  • This method provides a clear justification for price changes.

Two-Part Tariff is defined as the pricing practice in which two part price is charged by suppliers of goods and services.

Condition Required for Two Part Tariff:

  • The firm should have capacity to control price and its competitors.
  • The demand of consumers must be homogenous.
  • The firm must have control over entrance right.

Advantages of Two Part Tariff:

  • This system assures a stable return or revenue to the producer or seller.

The pricing strategy which involves offering multiple products or services as a package deals at a discounted price is called bundling.

  • The main objective of bundle pricing is to increase consumer`s satisfaction by providing access to multiple products as well as increasing profit.

Advantages of Bundling/Bundle Price:

  • It helps to increase sales volume.
  • It helps in profit maximization.
  • It make easier for business to target potential consumers.

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