Tuesday, January 22, 2008

3 External Factors of Pricing

there are 3 external factors of pricing:

1) market demand: own-price demand elasticity and cross price demand elasticity (consumers point of view: if they are substitutes, you cant raise the price because the customer will go to the other brand).

2) competition: perfect competition (everyone knows everything, identical quality product, sells at market price), pure monopoly, monopolistic competition (many suppliers in industry, but you have monopoly power, set your own prices), oligopoly, and dominant firm price leadership (lowest cost firm, walmart & smaller stores competing with walmart. walmart set the market price and everyone else has to follow. walmart has the largest market share).

3) other environmental factors: economic conditions such as business cycle (growth, peak, down, trough start over), inflation (price keeps going up, dont want to change price more than inflation rate), and interest rate (durable goods, housing market, interest rate up = lower your price so people can afford it), government regulation such as antitrust policies, regulatory price hearings, patent and copyright policies (grant you the right to behave like a monopoly, make whatever price you want), and fair pricing.

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