1. Economics of Pricing Strategies
Introduction to Economics of Pricing Strategies
Faculty:
Prof. Sunitha Raju
Session Date:

2. Business Decision Making – Why?
Economic system operates under certain guiding principles
Scarcity & trade-offs (choice)
Economic interactions (specialisation)
Rule based (incentives)
Allocation Issues for a firm
Optimise resource use
Efficient pricing
Maximise profits/ value

3. Firm and Goals (1) Definition of a Firm/Market
Basis of Corporate Strategy
what products/services will firm offer for sale
who will be the firm’s customers
What should the firm continue to do or plan to abandon
How does the firm’s strategy align with the market and competitive realities
How should a firm compete against its market rivals

4. Firm and Goals (2) Trade-offs among Alternate goals
To pursue short run profits or long run profits
To improve profit margins or increase market share
To increase penetration of existing markets or enter new markets
To diversify into related products or into unrelated products
To seek faster growth or stability

5. Theory of Firm – Some Basics
Based on the objective of Project Maximisation
Transaction Costs (uncertainty, asset-specificity)
Market vs. non-market issues for organising a business activity
Reducing transaction costs by incentivising employees (trade-off)
bonuses, perquisites, stock options

6. Modern Corporation : Principal – Agent Problem
Owners & Managers of firm differ with different objectives
Profit maximisation is constrained by limited information available to managers
Optimisation vs. satisfying
Alternate theories of firm
Value maximisation

7. What is Value Maximisation?
Inputs
Process
Output
Value creation

8. Business Firm’s Decisions (1)
Objective of Profit Maximisation
Total Revenue and Total Cost
What to supply, How much to supply and Where to supply
Price : Economic Properties
Measure of scarcity
Signals to both consumers and producers for efficient decision making
Determined in markets where demand and supply forces interact
Price Controls lead to Market distortions

9. Business Firm’s Decisions(2)
Pricing Decision issues
Product demand and Supply curves
Efficient price and Output
Markets and Price level
A Systematic Approach to Pricing
Price Environment
Price Determination
Price Strategy

10. Structure of Car Sector
YEAR/
COMPANY
HML
PAL
MARUTI MS
PAT
(RS. LAKHS)
52.9 NA
46.2
610 -
23.4
29.1
1146
47.0
300
15.9
272.5
23.6
1717
60.4
4194
12.6
(1820.4)
18.77**
(169.7)
68.8
3539*
15.7
(3049.5)
11.3
69.5
3661
12.4
1756
11.9
(2241)
72.4
13600*
9.8
10.5 75
HML : HINDUSTAN MOTORS LIMITED
PAL : PREMIER AUTOMOBILE LIMITED
MS : MARKET SHARE
PAT : PROFIT AFTER TAX
: PROFIT BEFORE TAX (PBT)
** : FOR 9 MONTHS

11. Decision Making Framework of a Firm
Business and Social Environment
Market Environment
Customer Demand
Level of Competition
Supplier Capability
Legal Environment
Tax Burden
Regulatory Policy
Trade Policy
Technology
Production Capacity
Worker Knowledge
Communications
Capability
Research and
Development
Competitive Strategy
Product Choice
Pricing Strategy
Promotion Strategy
Organisation Design
Assignment of Decision Rights
Match Worker Incentives with
Managerial Motive
Decision Management and control
Pay for Performance
Worker Pay for Performance
Divisional Pay for Performance
Management Pay for Performance
Shareholder Value Maximization

12. Categories of Goods & Services
Rival Consumption
Yes No
Private Goods Collective
goods (Theater)
(Car or Coke)
No Yes
Exclusion
Commons Public Goods
(Ocean Fishery) (National Defense)

13. Firm and Goals (1) Stages of corporate development
Definition of a Firm/Market
Basis of Corporate Strategy
what products/services will firm offer for sale
who will be the firm’s customers
What should the firm continue to do or plan to abandon
How does the firm’s strategy align with the market and competitive realities
How should a firm compete against its market rivals

14. Firm and Goals (2) Firm’s Strategic Alternatives Profit Maximisation
Concentration on a single business
Vertical integration
Horizontal integration
Diversification
Joint ventures
Innovation
Profit Maximisation
Compensatory and functional theories of profit
Frictional and Monopoly theories of profit
Technology and Innovation theories of profit
Contd…

15. Firm and Goals (2) Trade-offs among Alternate goals
To pursue short run profits or long run profits
To improve profit margins or increase market share
To increase penetration of existing markets or enter new markets
To diversify into related products or into unrelated products
To seek faster growth or stability

16. Market Framework for Firm’s Decision
Demand and Supply factors determine market price
Price always tends toward equilibrium
(iii) Price serves as a rationing mechanism