1. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1 Price and Competition Basic economics Pricing decisions Consumer price response Competition in food markets

2. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 2 Some Basic Economic Concepts Supply –Curve of supply across prices offered –Generally upward sloping –Non-linear cost structures may change shape Quantity supplied –Quantity supplied at any given price Demand –Curve of demand across prices offered –Generally downward sloping (but high price may signal quality Quantity demanded –Quantity demanded at any given price Equilibrium: Intersection of supply and demand curves

3. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 3 Elasticity Price elasticity = % change in quantity demanded ----------------------------------------------- % change in price If –Elasticity > 1, demand is elastic –Elasticity < 1, demand is inelastic

4. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 4 Elasticity Issues Elasticities for –Farmers commoditiescan only sell at or below clearing price –Product category (e.g., flour) –Brand elasticity (< product category elasticity) Cross price elasticity = % change in quantity demanded ----------------------------------------------------- % change in price of competing product

5. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 5 Hypothetical Demand for Steak Across Segments

6. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 6 Determinants of Supply Long term investments made based on market price expectations and expected costs Current market situation –Current crop size –Variable costs of production (fixed costs are sunk)

7. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 7 Costs Fixed –Short run: Existing investments and contracts already in place –Long run: Planned investments and contracts Variable –Supplies (inputs such as feed, energy, and fertilizer) –Labor –Other processing

8. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 8 Some Causes in Changes in Supply and Demand Change in number of customers –Overall –Within segments Changes in income or wealth Change in tastes or preferences Change in prices of competing products (cross-price elasticity) Future expectations of prices

9. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 9 Short Term Decisions May be optimal to sell at a loss so long as variable costs are covered Contracts may require production at predetermined price even if not profitable

10. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 10 Clearing Price Allocates current supply to those who value it most Encourages substitution where appropriate Encourages investment in markets with profitably served unfilled demand Encourages market exit under insufficient demand

11. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 11 Macroeconomic Ways of Changing Price Levels Subsidies/taxes Price controls Import controls Rationing Government purchase of excess crops

12. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 12 Ways to Change Prices Sticker price Quantity (e.g., smaller candy bars for same price and/or fewer products per package) Quality (charge separately for services or dilute product) Terms (e.g., charge for delivery)

13. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 13 Price Discrimination Explicit: Lower rates for some customers –Discounts to select customers –Quantity discounts (if customers compete against each other, the seller must prove that the discount is justified by reduced costs in serving the larger account) Implicit: e.g., coupons (typically legal in U.S.; sometimes illegal in other countries) Ten percent discount for senior citizens !

14. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 14 Some Forms of Implicit Price Discrimination Coupons Periodic sales –Predictable (periodic) –Random Rebates

15. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 15 Consumer Price Awareness A survey revealed of consumers who had just selected a product suggested:: –Avg. time spent before departing from product area: 12 seconds –Avg. no. of products inspected: 1.2; only 21.6% claimed to check price of non-chosen brand –55.6% could state price of just chosen product within 5%

16. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 16 Yet... Scanner data shows large effects of price on sales (own price elasticity is typically around -2.0) Price cuts combined with other factors may greatly influence sales –shelf space –signs SAVE 125%

17. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 17 The Promotion Signal A segment of consumers will respond to negligible discounts- -e.g., SALE! $3.95 (Was $4.02). However, merely placing a sign EVERYDAY LOW PRICE randomly also increased sales of affected products. SALE! Hurry!

18. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 18 Price as An Attraction Strategy Positioning –Value--perception vs. reality –Price ---> quality Loss leaders Bait-and-Switch--frequently illegal

19. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 19 Discounting of Discounts Promotional claims (e.g., Save 25%) are often not taken at face value Even implausible claims appear to impact perceived savings

20. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 20 Odd/Even Pricing--Does It Have an Impact? Theory: $3.00 is rounded to $3.00 while $2.99 is rounded to $2.00 plus change Reality: Studies in U.S. have found some impact; no impact found in Germany Note that odd pricing may signal receiving a bargain, which may nor may not be compatible with the desired product image Odd pricing has typically been used by tradition (initially implemented to force cashiers to ring up purchases).

21. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 21 Price Changes Consumers tend to resist prices being raised above expectations--latitude of acceptance varies between products and consumers Certain thresholds are difficult to pass; e.g. –Cereal above $2.00 per box in 1970s –Coke above 5 cents per bottle Youre note gettin away with this! You mean tell me that you are chargin me $1.29 for a $0.99 hamburger?

22. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 22 Estimating Consumer Price Response Very difficult-- since precision matters a great deal Some possible methods: –Empirical Test marketing Split catalog –Conjoint analysis with price as one attribute --> determine weight Ineffective methods –Direct questioning (difference between predicted behavior and actual choice) –Focus groups (small sample size; non- independent response)

23. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 23 Competition in Food Markets At the farm level –Commodities are usually sold under perfect competition (market clearing price for a commodity of a specified grade) Manufactured Products –Oligopoly for very highly branded productse.g., Cola drinks Breakfast cereal –Monopolistic competition where more competitors exist Brands with strong equity (consumer preference) influence prices

24. MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 24 Realities of Competition in the U.S. Market Types of competition –Price (everyday price, periodic discounts, coupons) –Non-price (product quality, brand building) Collusion (discussing how to set prices) among competitors is illegal Competitors do signal to each other Cooperative measures (taking turns promoting each brand)