Chapter 8

Outline the Chapter

Define each key term you find.
Summarize each term in your own words. List the important points for each term. Give a "real life" example of each term.

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Chapter8

Answer the objectives.
These tell you what you are expected to know upon completion of the chapter.
I have made some notes for you. Expand on any that are new to you.

1. Discuss the various terms used for pricing.

4. Discuss elasticity and pricing.
   Price elasticity, or, more technically, price elasticity of demand, is a measure of customer responsiveness to price changes. Price elasticity of demand

   (Ed) = % change in Quantity ÷ % change in Price.

   If price elasticity is elastic…

   *decreases in price will result in increases in total revenue, and

   *increases in price will result in decreases in total revenue.

   If price elasticity is inelastic…

   *decreases in price will result in decreases in total revenue, and

   *increases in price will result in increases in total revenue.

5. Review pricing and competitive structures.
   Pure competition exists when many firms are selling the same basic product such as an agricultural commodity.

   An oligopoly exists when a few firms control the majority of an industry's sales.

   A pure monopoly exists when there is only one firm producing and selling a product to an entire market.

   Monopolistic competition is the most frequent market structure.

6. Discuss the legal issues surrounding the pricing decision.
   The practice of price fixing occurs when managers from two or more companies collude in some fashion to artificially maintain or set prices or at least make an attempt to do so.

   Price fixing via collusive efforts are illegal under the Sherman Act (1890), which specifically prohibits any contract, combination, or conspiracy in interstate commerce that restrains trade or attempts to monopolize a specific market or industry.

   Predatory pricing is unlawful under the Sherman Act and also the Federal Trade Commission Act (1914), which was passed by Congress to strengthen the Sherman Act and which empowered the FTC to deal with antitrust matters and investigate deceptive and unfair marketing practices.

   The Clayton Act (1914) was passed by Congress to make it unlawful for firms to discriminate in price where the effect of such discrimination lessens competition.

   Robinson-Patman Act (1936) amended the Clayton Act. Price discrimination is illegal only if identical products (i.e. commodities of like grade and quality) are sold to competitive customers and the result is to create substantial economic injury to one or more competitors.

   Dumping is a form of import price discrimination that occurs when a U.S. firm sells goods in a foreign market for less than their fair value or when a foreign firm prices products to be sold in the United States substantially below what they are sold in that firm's domestic market.

7. Describe demand considerations of pricing.
   Demand sets a ceiling on prices. It is the quantity of a product that will be sold during a period of time, say a year, at different prices. A forecast estimates the amount that will be sold during a specified period at a particular price. Demand is best thought of in terms of a demand schedule, which is the mapping of specific quantities onto specific prices. A demand schedule when graphed becomes a demand curve. The shape of the demand curve depends on the market structure, whether pure competition, pure oligopoly, monopolistic competition, or pure monopoly. The price and quantity information contained in a demand schedule permits a price setter to calculate the revenue associated with each price under consideration.
   
8. Describe cost considerations of pricing.
   Costs set a floor on prices.

   Fixed costs (FC) are costs that are fixed in total and invariant to the number of units sold. Variable costs (VC) are cost items that vary in total depending on the number of units sold but are constant per unit. Marginal cost (MC) is the change in total cost associated with selling an additional item. Price setting in practice establishes prices with costs as the basis for price determination rather than profits. Break-even occurs when total revenue equals total cost (TR = TC)—there is no profit but no loss either.

9. Discuss new product pricing policies.
   
      A skimming price is a strategic option for innovative products that couple relatively high prices with heavy promotional expenditures.

   A penetration price involves the use of relatively low prices as the means for rapidly penetrating the mass market.

10. Define the various types of discounts and allowances.

A discount is a percentage reduction from the seller's list price, whereas an allowance is a payment to the buyer for providing a service to the seller or for trading in a product.

Trade: Functional discounts compensate the trade for functions performed. Quantity discounts are percent discounts from the list price for purchases in excess of specified quantities. A noncumulative quantity discount bases the discount on individual orders. A cumulative quantity discount bases the discount on the cumulative quantity purchased during a specified period, which usually is a year. The seasonal discount is a pricing mechanism that permits manufacturers of seasonal merchandise to maintain steady production and seasonal service providers (e.g., resort hotels) to sustain operations during out-of-season lulls. Cash discounts are used to encourage prompt payment from customers. Invoices include payment terms regarding the period of time in which the buyer must pay the seller for the invoiced amount. Off-invoice allowances are deals offered periodically that allow the trade to deduct a fixed amount from the full price. Bill-back allowances are offered as payment to retailers for featuring the manufacturer's brands in advertisements or for providing special display space. Slotting allowances are paid to retailers to induce their carrying new products offered by the manufacturer.

Consumer: Trade-in allowances are offered to encourage consumers to upgrade to newer and more expensive products. Age-based discounts are offered special groups, especially children and senior citizens. Rebates are provided when after purchasing a product consumers are invited to submit a proof-of-purchase indicator to the manufacturer, who remits payment at a later date.

11. Analyze the concepts of price lining and bundling.
    The practice of producing or merchandising multiple products at different price points is called price lining. The pricing issue faced both by manufacturers and retailers when practicing price lining is one of whether to price each product in a line separately on the basis of its own cost, demand, and competitive characteristics or to jointly price the multiple products in recognition of the overall image that the firm wishes to convey and the interrelated demand, or cross elasticity, between the products.

    Bundling is "the practice of marketing two or more products and/or services in a single 'package' for a special price." The objective of price bundling is to enable a firm (or a coalition of firms, such as an airline and a resort) to increase overall profits while achieving cost economies.

12. Discuss psychological pricing strategies.
    Price setters sometimes price their products or services at relatively high levels so as to convey an image of high quality and perhaps also snobbishness, or exclusivity. This is the practice of prestige pricing. Odd pricing refers to a price that ends in an odd number or just under a round number (e.g., 49, 98, 99). When retailers offer products at prices below or near the cost the retailer has paid for the items, these items are called loss leaders.
    
13. Discuss geographic pricing strategies.
    FOB origin pricing means that the buyer pays the transportation charges and also chooses the mode of transportation and specific carrier. (FOB stands for free on board, and origin represents the point of shipment, which typically is the seller's factory or distribution center.)

    In freight absorption pricing the seller pays for, or absorbs, the transportation charges. Shipping terms are quoted FOB destination, which means that the seller pays for the freight charges and is responsible for product safety until the goods are delivered to the buyer.

    Uniform delivered pricing means that the seller charges all customers the same transportation cost regardless of where they are located. This same cost is an average of shipping expenses to all customers.

    In zone pricing the seller divides the geographic market into multiple zones and then charges the same delivered price in each zone. That is, prices are uniform within zones but differ from zone to zone due to differences in average shipping charges.

    In the multiple basing-point pricing system the basing point switches depending on which shipping point charges lower freight rates.

14. Analyze price bidding strategies.
    Bid pricing entails establishing a specific price for each exchange relationship in contrast to setting a basic, or list, price that applies to all exchanges. Bid pricing is especially prevalent in doing business with government agencies, on construction projects, and in pricing some services to business customers. Negotiated pricing occurs when the subset of selected bidders are requested to revise their opening bids. The negotiations include contract terms such as completion dates and penalty terms if, say, in the case of a construction project the job is not completed on time.

Chapter8

Answer the Discussion Questions.

1. What factors cause a marketing textbook to lose value during the period of one semester? It is not unusual for a student to receive less than one-half of the purchase price when he or she sells the book at end of the semester. (demand)
2. If two nearly identical wristwatches - except for brand name - have different prices, consumers generally conclude that the higher priced watch is of higher quality. What factors led to this conclusion?
3. You are in a supermarket shopping for soda and other party items. A six-pack of Pepsi on a special display is priced at $5.95. Using the concept of reference prices, how would you and other consumers determine whether this is a good value?
4. Bob Martin, a local information technology manager, is prepared to build high quality desktop computers that would compete favorably with Dell Computers in a direct-mail market. He estimates annual fixed costs of $600,000 and variable costs of $1,800 per unit if he were to establish a production capacity of 100 units per month. Bob feels confident of selling 100 units per month. Should he take on the business? (Assume a comparable Dell Computer would sell for $2,500.)
5. Windows 95, introduced in August 1995, was uniformly priced at $89.95 through advertising support agreements between Microsoft and retailers. Was uniform pricing a good decision or should Microsoft have encouraged retailers to set their own prices? Was $89.95 a good price; was it too high; was it too low?
6. Price haggling is an American tradition when buying an automobile. Saturn has established a no-haggle pricing policy. Is this a good or bad marketing move for Saturn? What are the advantages and disadvantages?
7. Sam’s Club is thought of as a deep discounter that sells merchandise in a warehouse setting. What factors allow Sam’s to offer deep discounts? How successful is the concept now? How successful will it be in the future? (Hint: wheel of retailing) (See http://www.wal-mart.com)
8. Airline customers must travel over the weekend to get a discount from most major airlines. What are the airlines objectives for charging differential prices over the weekend? (See http://www.travelocity.com and http://www.iflyswa.com)

Chapter8

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