A pricing strategy is the system that the firms Perfect competition is a situation prevailing

use to price their products and services. in a market in which buyers and sellers are so
numerous and well informed that all elements
The methods of price determination in
of monopoly are absent and the market price
economics include the laws of supply and
of a commodity is beyond the control of
demand, and the effects of price elasticity.
individual buyers and sellers.
The concept of market structure is central to
 Pricing Decisions and Determinants
both economics and marketing. Both
of Price under Perfect Competition -
disciplines are concerned with strategic
Market price is determined by the
decision making.
equilibrium between demand and
Market structures are basically the number of supply in a market period or very
firms in the market that produce identical short run.
goods and services. Market structure
Monopoly is said to exist when one firm is
influences the behavior of firms to a great
the sole producer or seller of a product which
extent. The market structure affects the
has no close substitutes.
supply of different commodities in the
market. - single producer or seller of a product.
- perfect competition or monopolistic
Monopoly market has the biggest level of
competition will prevail depending
barriers to entry while the perfectly
upon whether the product is
competitive market has zero percent level of
homogeneous or differentiated.
barriers to entry. Firms are more efficient in
 Profit maximizer. A monopoly
a competitive market than in a monopoly
maximizes profits.
structure.
 Price maker. The monopoly decides the
Price determination is one of the most crucial price of the good or product being sold.
aspects in economics. Business managers are  High barriers to entry. Other sellers are
expected to make perfect decisions based on unable to enter the market of the
their knowledge and judgment. monopoly.
Types of Market Structures  Single seller. In a monopoly one seller
produces all of the output for a good or
service.
  Price discrimination. In a monopoly the - It can be used to defend an existing
firm can change the price and quantity market from new entrants, to increase
of the good or service. market share within a market or to
enter a new market.
Monopolistic competition is a form of
market structure in which a large number of Pricing a New Product
independent firms are supplying products
Skimming Price - short period device for
that are slightly differentiated from the
pricing.
point of view of buyers
Penetration Price -referred as stay out price
- Each firm is therefore the sole
policy since it prevents competition to a great
producer of a particular brand or
extent
“product”. It is monopolist as far as a
particular brand is concerned. - Lowest price for the new product is

- This type of market structure, where charged.

there is competition among a large Multiple Products - signifies production of

number of “monopolists” is called more than one product
monopolistic competition.
- produce more than one product and
Oligopolistic market there are small number then there exists interrelationships
of firms so that sellers are conscious of their between those products
interdependence. The competition is not - joint products or multi–products
perfect, yet the rivalry among firms is high. - joint products the inputs are common
Given that there are large number of possible in the production process
reactions of competitors, the behaviour of - multi-products the inputs are
firms may assume various forms independent but have common

- Oligopoly is a situation in which only overhead expenses.

a few firms are competing in the Pricing methods

market for a particular commodity.
Full Cost Pricing Method - price-setting
Pricing is the process of determining what a method under which you add together the
company will receive in exchange for its direct material cost, direct labor cost, selling
product or service and administrative cost, and overhead costs
for a product and add to it a mark-up his satisfaction is maximized, as the normal
percentage in order to derive the price of the income of the consumer is fixed.
product.
Income Effect- Change in demand of goods
- set long-term prices that are based on the change in consumer’s
sufficiently high to ensure a profit discretionary income. Income effect
after all costs have been incurred. comprises of two types of commodities or
products.
Marginal Cost Pricing Method - The practice
of setting the price of a product to equal the Normal goods − If there is a price fall,
extra cost of producing an extra unit of output demand increases as real income increases
is called marginal pricing in economics. and vice versa.

Transfer Pricing relates to international Inferior goods − In case of inferior goods,

transactions performed between related demand increases due to an increase in the
parties and covers all sorts of transactions. real income.
The most common being distributorship,
Competitive industry - Competition with
R&D, marketing, manufacturing, loans,
other firms is a key aspect of running a
management fees, and IP licensing.
business of any size, from a brand new
Dual Pricing - different prices offered for the venture to a large corporation.
same product in different markets
Many Sellers and Many Buyers - One of
- The objective of dual pricing is to essential components of a competitive
enter different markets or a new industry is the presence of many different
market with one product offering sellers of a particular good or service and
lower prices in foreign county. many potential buyers.

Price effect is the change in demand in Market Entry and Exit - A competitive
accordance to the change in price, other industry allows firms to freely enter and exit
things remaining constant. the market and has few barriers to entry.

Substitution Effect Perfect Information - In a perfectly

competitive market, consumers and
In this effect the consumer is compelled to
producers have perfect information about the
choose a product that is less expensive so that
products, prices and production practices in Different Types of Price Discrimination
the market.
1. First Degree Price Discrimination- This
Similar Products - In a competitive industry, involves charging consumers the maximum
firms must offer products that are similar price that they are willing to pay. There
enough to one another to be considered
will be no consumer surplus.
interchangeable.
2. Second Degree Price Discrimination- This
Monopoly and Monopsony - A monopoly is
involves charging different prices depending
a market that only has one seller, while
upon the choices of consumer e.g., quantity,
monopsony is a market with only one buyer.
time period, collecting coupons
Industry Analysis and Competition - also
3. Third Degree Price Discrimination – also
known as Porter’s Five Forces Analysis - is a
known as group price discrimination
very useful tool for business strategists.
 Student discounts,
Porter’s Five Forces Model
 Senior citizen railcard
- Threat of new entrants  Peak travel/ off-peak travel
- Bargaining power of suppliers
Personalized Pricing. It refers to selling to
- Bargaining power of customers
each customer at a different cost according to
- Threat from substitutes
the likes and preferences of the customers.
- Rivalry among current players
Product Versioning. It pertains to creating a
Price discrimination is a type of selling
different product line similar to a menu card
strategy that involves a firm selling a good or
in which more options are given for the same
service to different buyers at two or more
product with minor changes in order to sell
different prices, for reasons not necessarily
them at a differential price.
associated with cost.
Group Pricing: It refers to creating Sectors or
markets in which a particular price will be
charged to that market.

Complete Discrimination: It applies to the

style of costing where the customer’s
marginal benefits are equal to the marginal Antiselection, adverse selection is a term
cost of the product. used in economics and insurance to describe
a market process in which buyers or sellers of
Direct Segmentation: It pertains to the
a product or service are able to use their
strategy when the seller segments the
private knowledge of the risk factors
customers on the basis of their age, sex or
involved in the transaction to maximize their
preferences.
outcomes, at the expense of the other parties
Indirect Segmentation: It refers to the to the transaction.
strategy when the seller segments the
A moral hazard transpires when one party in
customers on the basis of package size, the
a transaction has the opportunity to assume
quantity of the usage, etc.
additional risks that negatively affect the
Psychological pricing strategies other party. The decision is based not on what

1. Artificial Time Constraints - Stores place is considered right, but what provides the

these restrictions on their sales because they highest level of benefit. Thus, the reference is

act as catalysts for consumers to spend. to morality. This can apply to activities
within the financial industry, such as with the
2. Charm Pricing - the official (read fancy)
contract between a
name for all those 9’s that you see at the end
of prices in your local stores. A. The Problem of Adverse Selection

3. Innumeracy - where consumers are unable Adverse selection is a problem that arises

to recognize or understand fundamental math from information asymmetry or “hidden”

principles as they apply to everyday life.) information.

Other ways that innumeracy appears in - It refers to a scenario where either the
pricing include double discounting, coupon buyer or the seller has information
design, and percentage pumping. about an aspect of product quality that

4. Price Appearance- The design of your the other party does not have.

prices can also have a tremendous impact on - occurs when one party in a transaction

how customers perceive the value of your possesses more accurate information

product. compared to the other party.

Adverse Selection between Buyer and Seller producer of a low-quality item than
for the producer of a high-quality
- Adverse selection may occur when a
item.
buyer intends to purchase a product or
service from a seller, but the seller has Screening
more information about the product.
- refers to a strategy that is used to
Such a situation places the buyer at a
combat adverse selection by filtering
disadvantage since they are entering
out false information and retaining
into an agreement with a seller who
only the true information.
may not willingly disclose all the
- used in contemporary markets where
information about the product being
the products being released into the
sold.
market are getting increasingly
Adverse Selection in the Capital Markets complex for an ordinary consumer to
comprehend.
- In the capital markets, some securities
are more prone to adverse selection Moral Hazard is the concept that individuals
than others. have incentives to alter their behaviour when
their risk or bad-decision making is borne by
Solution to Adverse Selection
others.
- One of the ways that insurance
- also defined as “any situation in
companies can avoid adverse
which one person makes the decision
selection is by grouping high- risk
about how much risk to take, while
individuals and charging them higher
someone else bears the cost if things
premiums.
go badly”
Market Signalling
Examples of moral hazard include:
- In some markets, sellers send buyers
 Comprehensive insurance policies
signals that convey information about
decrease the incentive to take care of
the quality of a product. Guarantees
your possessions
and warranties effectively signal
 Governments promising to bail out
product quality because an effective
loss-making banks can encourage
warranty is more costly for the
banks to take greater risks.
Overcoming Moral Hazard

1. Build in incentives.
2. Penalise bad behaviour.
3. Split up banks
4. Performance related pay.

Asymmetric information as previously

mentioned, exists when one party in a
transaction possesses better information than
the other party.