Competing on Price
Competing on Price
Courses Info
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Pricing Strategies
Cost Plus
- This can be used when a retailer wants to find out the gross profit margin of a sale in advance
- Since retailers know the cost will be covered if they sell the good, it reduces the uncertainty of profits
- The price is uncompetitive, therefore it can lead to a reduction in quantity sold, revenue, profits and market share
Penetration
- A low price is set initially to attract more consumers by switching to this brand
- Once consumer loyalty is gained, the price increases
Price Skimming
- This is used when a new product is launched and is therefore a short term pricing strategy
- A high price is set because the product has little competition
- The supernormal profits earned in the short run act as a signal for other firms to enter the market and increase competition
Predatory
- Firms want to drive out other competitors in the market and therefore set low prices
- In the short run, firms make losses
- The remaining firms in the industry raise their prices to increase revenue, however ensure the prices are below average costs as this reduces contestability
Psychological
- This pricing strategy uses emotional reactions to the price of a good
- It does not use rational methodology
Competitive
- Firms use the prices their competitors set when setting their own prices as the products sold are similar
Factors used to determine the most appropriate pricing strategy
Number of UPS / amount of differentiation
- Firms are more likely to charge higher prices if the products sold are differentiated
- Businesses which sell homogenous goods are likely to be sold at a lower price
PED
- Goods which have a low PED are not as responsive to changes in price and are therefore likely to have higher prices as they do not affect the quantity sold
- Goods which have a strong brand image are more price inelastic
Stage in the Product Life Cycle
- Products which have just been launched and have a lot of competition may result in businesses using penetration pricing
- This encourages consumers to purchase products from their firm instead of their competitor’s
- New products which have no competition are likely to cause firms to engage in price skimming
Quick Fire Quiz – Knowledge Check
1. Identify and explain five pricing strategies (15 marks)
2. Identify and explain three factors used to determine the most appropriate pricing strategy (9 marks)
Next Revision Topics
- Price Elasticity of Demand
- Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Price Mechanism
- Price Determination
A Level Economics Past Papers
