Why Firms Have Different Pricing Strategies and React Differently to a Price Change by a Rival - Essay Example

Use The Concept Of Elasti As Applied To Demand, Supply, And Income To Explain Why Firms May Have Different Pricing Strategies And Why They May React Differently To A Price Change By A Rival? Use Real World Examples to Demonstrate Your Answers Table of Contents Introduction 3 Discussion 3 Concepts of Elasticity in Demand, Supply and Income 3 Pricing Strategy and Elasticity of Supply, Demand and Income 5 Approach of Companies toward Price Changing Aspect 6 Conclusion 7 References 8 Bibliography 10 Introduction The changing nature and environment of the modern day business has forced companies or firms to develop various noteworthy strategies in order to sustain for a longer period in the markets wherein they operate. Contextually, it has been noted that firms often develop diverse set of strategies in order to meet the demands of the customers and deal with the fluctuating nature of business market. In this regard, one of such strategies of the companies can be found to develop diverse pricing strategies for complying with the changing demand as well as supply trends of the customers (Pasmore, 1994). The discussion of this particular essay will focus on depicting the reasons about why firms in the modern day scenario practice different pricing strategies through using the conceptions of elasticity of demand, supply and income with the assistance of real world or practical examples. Discussion The perception of ‘elasticity’ is regarded as the ratio of the percentage change of one particular variable with that of the percentage change in another variable. Its significance can also be observed in terms of the aspects of demand, supply and income of people (Barber, 2009). It would be vital to mention that elasticity in the domain of demand, supply and income of people has imposed considerable impact on the business procedures of the companies that mainly include their strategy towards pricing. These have been described in detail hereunder. Concepts of Elasticity in Demand, Supply and Income Price elasticity of demand is a particular concept of economics, which depicts elasticity of goods demanded to the change in price of the same. Notably, the impact of one percentage change in the demand of the product with regard to one percentage change in the price of the same is fundamentally regarded as price elasticity as per the demand of products (Iowa State University, 2014). This can be better understood with the help of the following pictorial illustration. Source: (Cengage Learning, No Date). It will be crucial to mention that higher the income of the customers as per the price of the product, higher will be the increase in power of the customers towards purchasing the same, which further give rise to higher price elasticity (Barber, 2009). Correspondingly, the concept of price elasticity of supply in economics depicts the elasticity of supply of the goods with regard to price of the product offered by any business. In numerical form, elasticity of supply depicts the percentage of supply of any good divided by the percentage of supply in the change of the price of the same (Mankiw, 2011). A pictorial illustration has been provided below for better comprehension. Source: (McGraw-Hill Education, No Date). Price elasticity of income includes the aspect of change in the demand of the products with the change in the income of the consumers. All these fluctuations in the context of elasticity of demand, supply and income further impacts pricing and other business strategies of any company or firm in the modern day scenario (Mankiw, 2011). Pricing Strategy and Elasticity of Supply, Demand and Income Pricing strategy of any business tends to get effected owing to the change in demands of the products, increase in supply of the products and fluctuating level of income of the customers who are the ultimate buyers of any product. Notably, when the demands of the products in the business market show a declining trend amid the customers, companies are inclined to take steps to deal with the same (UN, 2011). In this regard, companies in most of the occasions prefer to decrease the price of the products so that the customers are attracted towards buying them in bulk at a minimal price without harming their budgets and financial health (Moschandreas, 2000). An example in this regard can be the approach of Tesco PLC, wherein the company decreases the price of petrol and diesel by 3 pound per litre owing to the assumptions in the decline of demand for oil throughout the globe (Tesco, 2008). Again, when the demand of any product of a particular company get increased at a rapid pace in the global market, companies tend to emerge with a augmented pricing strategy for acquiring maximum benefits from selling their products (McGraw Hill, n.d.). Notably, in certain scenarios, suppliers are unable to supply the amount of goods that are demanded in the business markets. In those circumstances, companies emerge with the idea of increased level of pricing, which not only stabilise the products demanded but also ensures maximum profitability. These aspects also favourably affect the brand image of the companies (University of Hawaii, 2014). An example in this regard will be the pricing strategy of Toyota particularly for its Prius product line, which has shown immense rise in terms of demand in recent years owing to the aspect of fuel efficiency associated with it. In order to deal with this demand rise, the company has developed a high pricing strategy for this particular product in order to stabilise the demand as well as acquiring maximum benefits from the same (Smith, 2011). Notably, when income level of customers decline, their purchasing power also gets negatively affected, which is further accompanied by the decrease in consumer demands. In this regard, companies need to adopt effective pricing strategies that suit the income level of the customers, so that they can afford to buy their desired products from the companies. An example in this regard will be the pricing strategy of Wal-Mart Stores, Inc., which offers its broad assortment of products at the cheapest possible price to the customers. This strategy has certainly helped the company to sustain in the retail sector during recession (Daily Finance, 2012). Approach of Companies toward Price Changing Aspect Observably, when competitors in similar industry perform their respective operations, they mostly compete based on product diversification and innovation in the quality of the products or services that are provided to the customers. However, in case, if a company comes up with products that ensure high competitive advantage, it tends to increase the prices of the same to earn maximum profitability. In this particular scenario, the competitors will need to come up with the products that are reasonable or low price, which can attract maximum number of customers and attain superior competitive position over their chief business market competitors. On the other hand, when companies come up with the products having low pricing status, competitors develop high quality products with an increased pricing strategy so that they could be able to differentiate themselves from that of their competitors and can attract the customers at large (Mills, 2002). Hence, it is apparent that the pricing strategy of one business unit affects the strategy of the other and vice versa. This can be directly related with the aspect of gaining maximum competitiveness. Conclusion To conclude the discussion, it can be affirmed that fluctuations in demands of the product and the income level of the customers impose major impacts on the operational approaches of the companies particularly with regard to their respective pricing strategy. Companies tend to change their pricing strategy in accordance with the business market conditions with the aim of gaining superior competitive position over their major business market contenders. References Barber, J. R., 2009. Elasticity. Springer. Cengage Learning, No Date. Price Elasticity Of Demand: Its Effect On Total Revenue And Total Expenditure. Demand and Elasticity, pp. 103-122. Daily Finance, 2012. Retailers Try to Replicate Wal-Mart’s Pricing Success. Home. [Online] Available at: http://www.dailyfinance.com/2012/09/04/retailers-try-to-replicate-walmarts-pricing-success/ [Accessed March 07, 2014]. Iowa State University, 2014. Elasticity of Demand. Home. [Online] Available at: http://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-207.pdf [Accessed March 07, 2014]. Mankiw, N., 2011. Principles of Economics. Cengage Learning. Mills, G., 2002. Retail Pricing Strategies and Market Power. Melbourne Univ. Publishing. McGraw Hill, No Date. Demand and Supply. Chapter 2. Home. [Online] Available at: http://highered.mcgraw-hill.com/sites/dl/free/0070741786/692664/Lovewell5e_Chapter02.pdf [Accessed March 07, 2014]. Moschandreas, M., 2000. Business Economics. Cengage Learning EMEA. McGraw-Hill Education, No Date. Price Elasticity of Supply. Elasticity, pp. 75-91. Pasmore, W. A., 1994. Creating Strategic Change: Designing the Flexible, High-Performing Organization. John Wiley & Sons. Smith, R., 2011. Demand for Toyota Prius Rises. Toyota. [Online] Available at: http://usnews.rankingsandreviews.com/cars-trucks/daily-news/110317-Demand-for-Toyota-Prius-Rises-/ [Accessed March 07, 2014]. Tesco, 2008. Tesco Cuts Petrol Price by 3p As Slump Threatens Demand for Oil. Mail Online. [Online] Available at: http://www.dailymail.co.uk/news/article-1076194/Tesco-cuts-petrol-price-3p-slump-threatens-demand-oil.html [Accessed March 07, 2014]. UN, 2011. An Introduction to Transfer Pricing. Working Draft. [Online] Available at: http://www.un.org/esa/ffd/tax/2011_TP/TP_Chapter1_Introduction.pdf [Accessed March 07, 2014]. University of Hawaii, 2014. Increase/Decrease in Quantity Demand. Home. [Online] Available at: http://windward.hawaii.edu/facstaff/briggs-p/introduction%20and%20syllabus/supplydemandworksheet.pdf [Accessed March 07, 2014]. Bibliography Jolly, A., 2003. Managing Business Risk. Kogan Page Publishers. Read More