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Managerial Economics > Pricing Techniques > Flashcards

Pricing Techniques Flashcards

1
Q

PMO

Pricing Decisions under the Market Structures

A

Perfect Competition
Monopoly
Oligopoly

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2
Q

It’s when the market price is beyond the control of individual buyers and sellers.

A

Perfect Competition

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3
Q

No individual firm is in a position to influence the price of a product.

A

Perfect Competition

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4
Q

It is determined by the equilibrium between supply and demand in the market period during a very short run.

A

Market Price

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5
Q

It is a price maker.

A

Monopoly

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6
Q

It has market power and can take the best of the demand and cost conditions without fear of new firms entering to take away profits.

A

Monopoly

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7
Q

The number of competing firms is small.

A

Oligopoly

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8
Q

Each firm controls an important proportion of supply.

A

Oligopoly

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9
Q

The effect of a change in the price or output of one firm on the sales of another firm is noticeable and significant.

A

Oligopoly

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10
Q

It is the measurement of change in total revenue as quantity sold changes by one unit.

A

Marginal revenue

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11
Q

What is the relationship between marginal revenue and the elasticity of demand in perfect competition?

A

Perfectly Elastic

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12
Q

In a perfect competition, MR is equal to what?

A

P

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13
Q

Why is MR=P in perfect competition?

A

Because the firm can sell all it wants at the going market price.

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14
Q

What would happen if a firm raises its price in a perfect competition?

A

It would be easy for customers to go to someone else because all goods are HOMOGENOUS and can be SUBSTITUTABLE for each other.

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15
Q

Who are very sensitive to price changes in a perfect competition?

A

Buyers

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16
Q

What should a monopoly firm do to sell more?

A

Reduce price

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17
Q

They are price makers and the demand for products are inelastic.

A

Monopoly

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18
Q

What would happen if a buyer chose not to buy a monopoly firm’s product because of its high price?

A

Buyer can’t get it anywhere else

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19
Q

Why do buyers still choose to buy a monopoly’s product despite the changes in price?

A

Because of its uniqueness

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20
Q

What lies between the two extremes of Perfect Competition and Monopoly?

A

Oligopoly

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21
Q

What is the demand for the product of oligopoly?

A

More inelastic

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22
Q

Why is the demand for the product of oligopoly more inelastic?

A

Because there are only few firms in the market that the buyer can get the product from

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23
Q

What are important in managerial decisions on price and quantity?

A

MR and Elasticity of Demand

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24
Q

What happens if a manager understands the elasticity of demand for its product?

A

The manager will make informed decisions on how consumers will react to a price increase or decrease.

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25
Q

What is the equation for the relationship between MR and elasticity,

A

MR = P [ 1 + (1/E) ]

P = Price
E = Elasticity of Demand

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26
Q

What happens to the total revenue if there’s an increase in price and the demand is elastic?

A

It will decrease

27
Q

PSM

General Objectives in Pricing

A
  1. Profit Maximization
  2. Sales Maximization
  3. Market Share
28
Q

It ignores market share and tries to work out the price where profit is maximized.

A

Profit Maximization

29
Q

What happens when the Profit Maximization Theory occurs?

A

MR=MC

30
Q

It aims to maximize sales while making normal profit or breakeven profit.

A

Sales Maximization

31
Q

Sales Maximization involves selling at what?

A

Price = Average Cost

32
Q

This is when the target is to increase market share.

A

Market Share

33
Q

Market Share involves setting the price at what?

A

Average Cost

34
Q

SPPP

Pricing Strategies to Maximize Sales and Profit

A

**PRICING FOR A NEW PRODUCT
**
* Skimming Price
* Penetration Price

**PRICING FOR A SPECIAL COST AND DEMAND STRUCTURES
**
* Peak-load Pricing
* Price Matching

35
Q

In this pricing strategy, companies tend to charge a higher price in the initial stages of the product.

A

Skimming Price

36
Q

Why do firms initially set high prices?

A

To identify the buyers who are not very price sensitive/price elastic

37
Q

In this pricing strategy, the firm initially offers the product at a low price to encourage buyers to try the product.

A

Penetration Pricing

38
Q

Who is the Penetration Pricing useful for?

A

New firms entering the market

39
Q

This is a pricing strategy wherein higher prices are charged during peak hours rather than off-peak hours.

A

Peak-load Pricing

40
Q

This is a pricing strategy wherein a firm advertises a price and a promise to match any lower price offered by a competitor.

A

Price Matching

41
Q

What happens during the low-peak periods if the firm charges a high price at all times of the day?

A

No one would purchase

42
Q

Why do firms lower the price during low-peak periods?

A

To increase the chances of selling to customers

43
Q

What happens during peak times if the firm charges a low price at all times of the day?

A

Firms would lose money

44
Q

LP

Pricing Strategies to Increase Market Share

A
  • Limit Pricing
  • Predatory Pricing
45
Q

Occurs when a firm sets a price lower than profit maximization to discourage entry.

A

Limit Pricing

46
Q

This enables the firm to make a supernormal profit, but the price is still low enough to discourage new firms from entering the market.

A

Limit Pricing

47
Q

In this strategy, a firm uses a selling price below marginal cost to try and force rival out of business.

A

Predatory Pricing

48
Q

This practice of increasing market share is illegal.

A

Predatory Pricing

49
Q

After the rival leaves the market, what will the firms do when using predatory pricing?

A

It will raise the price to increase profits

50
Q

AMMP

Other Pricing Strategies to Help Determine Price

A

Average-cost Pricing
Market-based Pricing
Markup Pricing
Profit Maximization

51
Q

It happens when a firm sets a price equal to average cost plus a certain profit margin.

A

Average-cost Pricing

52
Q

It happens when the firm sets a price depending on supply and demand.

A

Market-based Pricing

53
Q

This involves setting a price equal to marginal cost of production plus a profit margin a firm wants to make on each sale.

A

Markup Pricing

54
Q

In this strategy, the firm sets price and quantity so MR=MC.

A

Profit Maximization

55
Q

CPC

Conditions for Pricing Discrimination

A
  1. Can segment the market into customers with different price elasticities.
  2. Possesses some degree of monopoly power and can set the price.
  3. Customers can’t resell goods.
56
Q

It’s the process that limits the firm’s ability to benefit from price discrimination.

A

Arbitrage

57
Q

It’s the process wherein if customers are able to resell the good, those who pay a lower price can buy the good and sell it for a higher price, but not as high as the firm charges.

A

Arbitrage

58
Q

II

Impact of Price Discrimination

A

Increase in Output
Increase in Profit

59
Q

What do you call the difference between the price a consumer is willing to pay and the price the customer actually pays?

A

Consumer Surplus

60
Q

This is also called as perfect price discrimination.

A

First Degree Price Discrimination

61
Q

It exists when a firm charges a different price for each unit of the good sold - each customer pays a different price for each unit of the good sold.

A

First Degree Price Discrimination

62
Q

It is the ultimate extreme in price discrimination.

A

First Degree Price Discrimination

63
Q

What does a firm able to extract when the First Degree Price Discrimination exists?

A

All surplus from consumers, earning the highest possible profits

64
Q
A

Managerial Economics (15 decks)

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