Pricing strategies

Question 1

When might a retailer use cost plus pricing?`

Answer 1

When they want to know the gross profit margin of a sale in advance

Question 2

What is the benefit of cost plus pricing?

Answer 2

The retailer reduces the uncertainty of profits, since they know the costs will be covered if they can sell the good

Question 3

What is the drawback to cost plus pricing?

Answer 3

It could lead to a fall in the quantity sold, revenue, profit and market share if the price is uncompetitive

Question 4

When is price skimming most commonly used?

Answer 4

Short term pricing strategy used most commonly when a new product is launched. It is used most commonly when technology has changed or a product is distinctive

Question 5

What is price skimming?

Answer 5

When a product has little to no competition, a high price will be set temporarily until other firms enter the market.

Question 6

Why is price skimming only used in the short term?

Answer 6

Because the high profits earned in the market act as a signal for other firms to enter the market, so competition increases

Question 7

What is price penetration?

Answer 7

This involves setting a low price initially, which is below the intentional price, in order to attract customers. The aim is to encourage customers to switch to the brand because the price is low, and once consumer loyalty is gained, the price is increased again

Question 8

How does predatory pricing work?

Answer 8

Involves firms setting low prices to drive out other firms in the industry. Leads to losses in the short run. As firms leave, those that remain increase their prices slowly to make up for the loss in revenue. They price their goods and services below their average costs. This reduces contestability

Question 9

What is competitive pricing?

Answer 9

This is when prices are set on the basis of the price set by competitors. It is used when products are extremely similar

Question 10

What is psychological pricing

Answer 10

Uses emotional reactions to the price of a good, rather than rational reactions

Question 11

Give an example of psychological pricing

Answer 11

A good might be priced at 99p rather than £1, since the 99p price tag seems much cheaper than the £1 price tag, even though there is only a penny difference. Therefore, consumers may be more inclined to purchase the good

Question 12

What can firms with large market power engage in?

Answer 12

Price discrimination

Question 13

What is first degree price disrimination?

Answer 13

Pricing for each individual consumer

Question 14

What is second and third degree price discrimination?

Answer 14

Price discriminating by using market segmentation and PED

Question 15

Why do firms limit prices?

Answer 15

To deter market entry

Question 16

What is the legal status of predatory pricing?

Answer 16

It is illegal in the UK but it is also very hard to prove

Question 17

What is marginal cost pricing?

Answer 17

This is where the prices is the same as the marginal cost of supply in order to encourage more consumers into the market

Question 18

How is marginal cost pricing used?

Answer 18

It is used for allocative efficiency and is therefore often present in nationalised industries

Question 19

Why have firms become better able to engage in price discrimination?

Answer 19

Because algorithmic pricing has become more common