Managerial Economics, Economic Approaches to Pricing - Essay Example

?Managerial Economics Introduction Pricing can be referred to the process of setting what an organisation will obtain in exchange for its products orservices. Pricing plays the key role in determining the profitability and sustainability of a business firm. Nowadays organisations specifically focus on their pricing strategies so as to ensure competitive advantages over the rival products/services. Multinational corporations maintain separate departments for pricing purposes, because a range of factors are to be taken into account while setting price for a product in a thick competitive market. This paper will discuss different economic approaches for Aslan communications’ price setting, and identify factors that may limit the firm’s choice in pricing decisions. Economic Approaches to Pricing According to Marn, Roegner, and Zawada (2003), pricing can be approached at three distinct levels such as industry level, market level, and transaction level. Industry level pricing process considers overall economics of the industry including changes in customer needs and supplier prices. Zuponcic (n.d) states that Market level pricing takes into account market trends and competitors’ strategies; whereas, transaction level pricing specifically focuses on the discounts management. Modern marketers practice a range of pricing strategies mainly including cost plus pricing, skimming pricing, market oriented pricing, penetration pricing, premium pricing, price leadership, target pricing, absorption pricing, and value based pricing. A set of economic factors is to be considered before recommending a pricing strategy for a particular product since pricing is the most effective profit lever. As Sloman (2006, pp. 55-56) points out, it is necessary to evaluate market demand and price elasticity of the product. For instance, if there is high market demand for a product, the marketer can fix a relatively higher price whereas he will be forced to lower product prices when market demand declines. Some products including jewelleries and automobiles are very sensitive to price; and hence, even a small increase in price will lead to a noticeable decline in their market demand. As Clausen (2005, p. 3) indicates, economic theories do not encourage the setting of higher prices for such price sensitive products. In addition, production costs and expected profit margin have to be analyzed while choosing a pricing strategy (ibid). When a product’s cost of production is high, firms generally charge higher prices in order to ensure adequate return on the huge investments. In the view of Senior (1852, p. 102), organizations need to consider huge profit margins if the cost production is high and fix a low profit margin if production costs incurred are near to the ground. Shaw (2001, pp.58-59) points out that market structure also plays a crucial role in ensuring successful pricing since market demand is the key driver behind product movement. To illustrate, a skimming pricing policy would probably fail to attract customers in a market where competition is intense, because a set of other product choices are available to customers. Therefore, it is better to adopt a cost plus pricing policy or penetration pricing policy while operating in a highly competitive market environment. Similarly, price discrimination strategy would be advisable in a market which contains diverse population. This strategy seems to be potential for mobile phone industry, particularly to Aslan. According to George, Joll, and Lynk (1992, pp.181-185), in an oligopolistic market environment, a small number of sellers dominate the market; and hence economic theories advise firms to compete in such market segments with relatively low prices and high production. If a marketer increases his product prices in an oligopolistic market environment, customers will certainly switch their demand to other sellers who market their products more affordably. Marketers must give specific focus on the pricing of simple configurable products. Economic approaches direct that price for simple configurable products has to be charged directly from the associated simple products but not from the configurable product itself. This strategy will assist marketers to have direct control over the price of every individual product configuration while allowing customers to take advantages of the flexibility of configurable products. Likewise, existing pricing approaches and managerial policies have to be considered while thinking of a price policy change because a thoughtless change in pricing tactics may adversely affect the market acceptance of a product. As Vives (2001, pp.143-145) claims, product differentiation strategy also plays a crucial role in determining how the price level should be maintained. In the opinion of Hofstetter et al, 2009, pp.27-28) an organization’s innovativeness also influences its pricing strategies. If a firm’s innovation management (or R&D team) performs well, it may adopt a penetration pricing policy as this feature would assist the firm to retain its customers with growing prices. Factors limiting the choice in pricing decisions When majority competitors are practicing a common pricing strategy which has already been accepted in the market, it would be a troublesome task for a seller to experiment with a new mode of pricing. Under such circumstances, the marketer will be forced to follow the common pricing strategy which has been practicing in the market. In addition, unexpected contingencies like inflationary pressures, adverse exchange rate fluctuations, and recessionary issues may greatly limit the number of choices in pricing decisions. These unforeseen issues will certainly restrict choices in pricing decisions because every pricing strategy cannot survive such a troubling business environment. In the given case, Aslan telecommunications plc operates under an oligopolistic market. Referring to the above discussed economic approaches, it is recommendable for the company to compete in Narnian market with relatively low prices since competition would be high in the market. If the company tries to adopt a skimming policy or penetration pricing policy, people may turn to other players who offer cheaper prices and this situation would threaten the existence of Aslan telecommunications plc. However, the market-oriented pricing policy is advisable for the Aslan. Under this policy, the company can set prices based on the results obtained from the target market analysis. For instance, if the competitors are lowering their prices, Aslan must determine the changes in its pricing strategy to be made in response to the competitors’ strategic change. The Aslan may also practice price discrimination policy on the basis of age since market surveys indicate that demand on mobile phone largely varies in accordance with age. Nowadays mobile phones have become an inseparable aspect of social life, and hence they have high market demand too. However, demand for luxury models is extremely sensitive to price. Therefore, it is advisable for the company to set moderately low prices for its luxury models. In contrast, high class customers consider luxury handsets as status products and they normally do not buy such products unless company sets a higher price for them. Therefore, it is advisable for Aslan to identify such market segments and practice a premium pricing through which the price is kept artificially high. In addition, psychological pricing would be a fruitful strategy for the Aslan as it can positively influence consumers. For instance, it may be better to set the price for a handset at $149.99 rather than $150. Anyhow, the proposed pricing policy change would be a very risky task as the firms operates in a highly competitive business environment. Conclusion In total, economic approaches consider elements such as demand, elasticity, cost, oligopolistic behaviour, market structure, product differentiation, and innovation management while setting price for a product. Since the Aslan telecommunications plc operates in an oligopolistic market, it is recommendable for the company to set relatively low prices and increase production. Evidently, the oligopolistic structure of the Narnian mobile phone market is the major issue that may limit the Aslan’s ability to set the price it wants. References Clausen, GJ 2005, Price Sensitivity for Electronic Entertainment: Determinants and Consequences, Universal Publishers, USA. George, KD, Joll C & Lynk, EL 1992, Industrial Organisation: Competition, Growth and Structural Change, Routledge, USA. Hofstetter, R, Reto, H, Matthias, MK & Miller, KM 2009, Precision Pricing: Measuring Consumers' Willingness to Pay Accurately, Herstellung and Verlag, Norderstedt Marn, MV, Roegner, EV & Zawada, CC 2003, ‘The power of pricing’, The McKinsey Quarterly, no.1, pp. 27-36, Viewed 02 January 2012, Sloman, J 2006, Economics, Pearson Education, US. Senior, NW 1852, Political economy, Griffin, London. Shaw, J 2001, Telecommunications Deregulation and the Information Economy, Artech House, USA. Vives, X 2001, Oligopoly Pricing: Old Ideas and New Tools, MIT Press, USA. Zuponcic, R n.d, ‘A simple three tiered structure for price management’, GBQ, Viewed 02 January 2012, Read More