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Chapter 11

Management and Organizational Studies 2320A/B Chapter Notes - Chapter 11: Oligopoly


Department
Management and Organizational Studies
Course Code
MOS 2320A/B
Professor
Reyes
Chapter
11

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Chapter 11 Notes
Pricing Concepts and Strategies: Establishing Value
5 C’s of Pricing
Successful pricing strategies are built through the five critical components. Each makes a significant contribution to
formulating good pricing decisions.
- Company Objectives
oThe first step is to develop the company’s pricing objectives
oFor every company its different: Wal-Mart uses Every Day Low Prices (EDLP) to make them look like a
value-based company, whereas Holt Renfrew’s high prices reflect its high-fashion image
oCommon company objectives include:
Profit oriented
Example: Institute a companywide policy that all products must provide for at least an 18
percent profit margin to reach a particular profit goal for the firm
Firms implement a profit orientation by focusing on target profit pricing, maximizing
profits, or target return pricing
oTarget profit pricing
Firms have a particular profit goal and to meet this targeted profit objective
firms use price to stimulate a certain level of sales at a certain profit per unit
oMaximizing profits
If a firm can use economics, and identify the price at which its profits are
maximized. Gathering the data on relevant factors is very difficult though.
oTarget return pricing
For firms less concerned with the absolute level of profits and more
concerned in the rate at which their profits are generated relative to their
investments
Sales-oriented
Example: set prices very low to generate new sales and take sales away from competitors,
even if profits suffer
If their concerned with capturing a larger market share, they may try this option
It’s not always about having the lowest price, it’s about having a low enough price but still
have a good quality product that will generate the sales desired
Competitor-oriented
Firms strategize according to the premise that they should measure themselves primarily
against their competition
Some firms focus on competitive parity (set prices similar to their competitors)
Customer-oriented
Explicitly invokes the concept of value
Sometimes a firm may attempt to increase value by focusing on customer satisfaction and
setting prices to match consumer expectations
Firms can have “no-haggle” low prices to increase the perceived value of the product. Other
firms have done the opposite and offered a high price, labeling something “state-of-the-art”
to enhance the company’s reputation and image, and therefore increase the companys value
in the minds of the consumer
- Customers
oUnderstanding the consumer’s reactions to different prices
oConsumers want value, and price is half of the value equation
oTo look at how they react to a price change, consider their demand curve, and price elasticity of demand
- Costs
oTo make effective pricing decisions, firms need to understand their cost structures so they can determine
the degree to which their products or services will be profitable at different prices

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oIn general, prices should not be based on costs because consumers make purchase decisions based on their
perceived value, they care little about the firm’s costs to produce and sell. Consumers use just the price
they must pay and the benefits they may receive to judge value.
- Competition
oThere are four levels of competition and each has its own set of pricing challenges and opportunities
Less Price Competition More Price Competition --------
Monopoly (one firm controls the
market) Oligopoly (a handful of
firms control the market) Fewer
Firms
Monopolistic Competition (many
firms selling differentiated
products at different prices)
Pure Competition (many
firms selling commodities
for the same prices)
Many
Firms
oMonopoly
No price competition, so they can charge consumers whatever they want. Usually regulated by the
government though
oOligopolistic Competition
Only a few firms dominate the marketplace
Firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable
competitive environment.
Sometimes reactions to prices in oligopolistic markets can result in a price war, which occurs when
two or more firms compete primarily by lowering their prices
Take an airline: a new company may have low prices to gain a larger market share. Where an
already established airline may lower prices to conserve their current market share.
oMonopolistic Competition
When so many firms compete, product differentiation rather than a strict pricing competition tends
to appeal to consumers.
This form of competition is the most common
oPure Competition
Consumers perceive their products as substitutable. So price is determined mostly based on supply
and demand.
The secret to pricing success here is not to offer the lowest price because then it may begin a price
war and erode profits, but to somehow differentiate your commodity from the competition.
- Channel Members
oThe different channel members, manufacturers, wholesalers, and retails, can have different perspectives
when it comes to pricing strategies
oConsider a manufacturer that is focused on increasing the image and reputation of its brand but working
with a retailer that is primarily concerned with increasing its sales. The manufacturer will want to keep
prices high to convey a better image, whereas the retailer want to lower prices and will accept lower profits
to move the product, regardless of consumers’ impressions of the brand. Unless channel members carefully
communicate their pricing goals and select channel partners that agree with them, conflict will surely arise
oWith channels there are also issues with grey markets where there are channels of distribution that sell
goods at lower prices than those intended by the manufacturer (for instance a retailer trying to get rid of
excess stock will charge just above the cost they incurred to buy the product, but the manufacturer wants
the products to be sold at higher prices to maintain the prestige of the product) (or take Winners for
instance, charging much lower prices for items that are sold in other stores for much higher prices). Some
manufacturers have disclaimers to discourage the grey market. Like Canada Goose, their jackets never go
on sale.
- Other influences on pricing
oThese are the more broader factors that have a more sweeping effect on pricing in general:
oThe internet
The shift consumers have had to purchasing things online has made them more price sensitive
because it is easier to shop around and find prices of multiple products with the click of a button
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