Pricing and non-pricing stratgies

Question 1

Define cost plus pricing?

Answer 1

Adding a set profit margin to the total cost per unit

Question 2

2 Advantages of cost plus pricing

Answer 2

1. The firm will always cover its cost and make profits.

2. Useful for business with high uncertainty such as construction.

Question 3

2 Disadvantages of cost plus pricing?

Answer 3

1. Not flexible as if market change sales will be damaged by the high price.
2. Miscalculations can lead to uncompetativness

Question 4

What is predatory pricing?

Answer 4

Firms set the price at the cost of production (AC) to force firms out of the market.

Question 5

3 Advantages of predatory pricing

Answer 5

1. The firm can capture market share and expand.
2. Increase revenues and profits in the LR.
3. Bigger market share increase the firms reputation.

Question 6

4 Disadvantages of predatory pricing

Answer 6

1. Firm makes substantial losses in the short run
2. Its illegal so large fines may be imposed
3. Damage the look of the product e.g. making it seem cheap.
4. Only works if the market is Price elastic, price has to be sensitive.

Question 7

Define Limit pricing?

Answer 7

Setting prices below AC cost of new entrants into the market.

Question 8

2 Advantages to limit pricing?

Answer 8

1. Increases profits in the long run

2. Maintains the market leader of the industry

Question 9

3 disadvantages to limit pricing?

Answer 9

1. Firms losses revenue in the short run.
2. Consumers may now expect the lower price in the LR.
3. Its illegal so firm could receive fines.

Question 10

What is a price fixing agreement?

Answer 10

Colluding with other firms to fix price.

Question 11

3 Advantages of price fixing?

Answer 11

1. Enables firms to make abnormal profits.
2. Abnormal profits means more reinvestment and greater dividends for shareholders.
3. Higher profits more investment

Question 12

3 Disadvantages of price fixing

Answer 12

1. its illegal
2. Difficult in the LR as members may break the agreement
3. Due to less competition complacency in the market will result in less innovation.

Question 13

4 Advantages of advertising and branding?

Answer 13

1. Increased demand leading to greater profit.
2. strengthens brand loyalty.
3. Can be used to diversify a product by giving it a USP.
4. Makes demand more inelastic easier to control prices.

Question 14

3 Disadvantages of branding and advertising?

Answer 14

1. Large cost may not be affordable.
2. How effective is it.
3. Opportunity cost, money could be spent on different things.

Question 15

2 advantages of improving service?

Answer 15

1. Cheap way of adding value.

2. used to create a USP

Question 16

A disadvantage of improving service?

Answer 16

May quickly become the norm

Question 17

4 Advantages to take overs and mergers?

Answer 17

1. Reduces competition in the market.
2. Increased market power, allows you to contro
3. Increased EOS.
4. Increased profitability mean more investment.

Question 18

3 Disadvantages of Take overs and mergers?

Answer 18

1. Cost of the take over.
2. DEOS on 50% of mergers are successful
3. Merger may be blocked by the competition commission.