1. CH 2 The Economics of Price Determination
Kent B. Monroe (2007). Pricing: Making Profitable Decisions.
3rd Edition (Singapore: McGraw-Hill) .

2. 02 Chapter Objectives (P.26)
To summarize the traditional neoclassical economic theory of price determination
To introduce some useful concepts for actual pricing decisions such as revenue, elasticity, marginal revenue, marginal costs etc.

3. 03 Price Determination Theory (P.26-27) Minimize input cost
The firm
Minimize input cost
Maximize profit
Economic theory is more concerned with the behavior
of aggregates or markets, particularly how persistent
and widespread behavior leads to stable results called
“Equilibrium”.

4. 04 Price Determination Theory (P.26-27) Economic Perspective
The firm is a pricetaker, not the pricemaker
Management determines the quantity to
produce
The market sets price through the forces of
supply and demand
Marketing Perspective
Price is a decision variable.

5. 05 The Profit-Maximizing Firm (P. 28) Q1 Q* Q Fixed costs Revenues orQ1 Q* Q
Fixed costs
Revenues or
Costs $
Units
Total Revenue
Maximum Profits
Total Costs
Price
Figure 2.1 Output Determination for Profit-Maximizing Firm – Short Run
(Constant Prices) : Aggregate Analysis

6. 06 The Profit-Maximizing Firm (P. 28) Q* Q Costs $ Units PriceQ* Q
Costs $
Units
Price
Average cost
Marginal cost
(Marginal revenue)
Figure 2.2 Output Determination for Profit-Maximizing Firm – Short Run
(Constant Prices) : Marginal Analysis

7. 07 The Profit-Maximizing Firm (P. 29) Q* Q Price $ Units DemandQ* Q
Price $
Units
Demand
Marginal cost
(Marginal revenue) P*
Figure 2.3 Output Determination for Profit-Maximizing Firm – Short Run
(Varying Prices)

8. 08 Challenges to the Profit Maximization Obj.(P. 29)
Profits are not the only objective of managers of the firm.
The actual objectives of the organization are determined by a wide range of …
personal objectives
pressures
constraints from the external environment
The goal of some managers may be to simply attain satisfactory profits.

9. 10 Corporate and Pricing Objective (P. 30)
Pricing objectives should be
consistent with & should advance
corporate & marketing objectives
Overall corporate objectives
must be considered.
The organization’s specific marketing objectives are based on those corporate objectives.
Setting objectives for one element of the marketing mix.

10. 11 3 Classifications of Pricing Objectives (P. 30) VOLUME-BASED
COMPETITIVE
Objectives
PROFITABILITY
Objectives

11. 12 Profitability Objectives (P. 30)
Realizing maximum profits in the business.
Pricing objectives need to be measured precisely in order to be able to assess performance
Profitability objectives are measured and expressed in specific $ or %
$1.1 million for 3 years
10% increase in revenue before tax, etc.

12. 13 Elements of Profitability (P. 30-31)Pi
VCi FC Qi
Monetary
sales mix
Pi = Price per unit of each product or service offering.
VCi = Variable costs per unit of each offering.
FC = Fixed costs per period.
Qi = Volume produced and sold of each offering.
Monetary sales mix of the offering sold.

13. 14 Profit Maximization (P. 31)
Low prices
High prices
Low unit profit margins
High unit profit margins
High unit sales
Low unit sales
High inventory turnover
Low inventory turnover
Depending on the marketing situation, maximum profits over a planning period
may be obtained by either pricing the firm’s offerings relatively low or relatively high.
Which pricing strategy to follow if you want to maximize profit?
Depending on the nature of market demand and competition.

14. 15 Target Return on Investment (P. 31) WHAT DO THEY INVEST ON ?
The ratio of profits to investments
An ROI objective can be expressed
as a specific % of the investment
A variation is target return on sales
Wholesalers
& Retailers
Inventory
Buildings
Manufacturers
Capital
Machinery
Buildings
Land
Inventory
A firm with $10 million in capital assets, seeking a 15% ROI, would seek to achieve net contribution to profits of___________for the planning period.
Example
$1.5 million

15. 16 Volume-Based Objectives (P. 32)
Sales Volume
Revenue (sales) growth - prices are set
to demand and unit sales.
Market share - prices are set to sales
faster than competition; or to a sales decline
to be slower than competition.
Customer
Demand
Creation

16. 17 Competitive Objectives (P. 32)
Price stability - as a market leader,
the firm attempts to keep prices from declining
(usually found in mature markets);
usually leads to non-price competition.
Aggressive pricing - price below competition to take advantage of market changes,
when market demand is growing,
or when opportunities to grow market share.

17. 18 Establishing Relevant Pricing Objectives (P. 33-34)
Profitability Objectives
Volume-Based Objectives
Competition Objectives
The firm is the low-cost supplier
The firm is low-cost supplier
The firm is the price leader
The market is price sensitive
There are no perceived value differences across sellers in the minds of buyers
There is an internal required rate of return for new product introductions
Cost decline as volume increases
Market share could be captured using non-price marketing efforts
There is a short lead time for new products before competitors will likely to enter the market.
There is a strong “captive” aftermarket for replacement supplies
There is a growth market segment
There is little differential perceived value in the offerings of firms in the market
To limit competitive entry

18. 19
Summary (P. 34)
There is no one apparent pricing objective for a specific set of market conditions.
A profitability objective does not specify either a high- or low- price strategy.
Using low price to pursue a volume objective must be viewed as an investment over several years.
The significance of being the low-cost supplier is …
it allows the firm to invest in non-price marketing efforts.
it is not a license to use price as a key competitive tool.

19. 20
Seat Work 1 (P. 35)
Read the case given at Box 2.1 and answer the questions carefully.
What was Boeing Pricing Objective in the beginning of the case?
2. What was the result of their change in pricing objective?
3. How did they resolve the losses incurred to Boeing in 1997?
4. What is Boeing’s current pricing objective?

20. 21 Market Structure : Degree of Competition (P. 35)
Depending on the structure of competitors within a market, firms may have
considerable discretion to determine prices.
Table 2.1 Characteristics of Market Structure
Perfect (Pure) Monopoly
Perfect (Pure) Competition
Imperfect Competition
Monopolistic Competition
Oligopoly

21. 22 Market Structure : Degree of Competition (P. 36)
Perfect Monopoly ตลาดผูกขาดแท้จริง
Only one seller supplies the product or service
Considerable degree of power over price/Government regulations

22. 23 Market Structure : Degree of Competition (P. 36)
Perfect Competition ตลาดแข่งขันสมบูรณ์
Many sellers offer many buyers an identical (homogeneous) product;
no seller can influence price

23. 24 Market Structure : Degree of Competition (P. 36)
Imperfect Competition ตลาดแข่งขันไม่สมบูรณ์
Large number of sellers and buyers
Few sellers, some sellers may hold relatively
large market shares and thus be able to influence the prices
of products they sell.
Monopolistic Competition
Oligopoly
Year 2008

24. 25 Market Structure : Degree of Competition (P. 37)
Monopolistic Competition ตลาดกึ่งแข่งขัน กึ่งผูกขาด
Large number of firms market heterogeneous (dissimilar) products
The greater the degree of product differentiation perceived by buyers,
the greater is the opportunity for competing firms to set different prices

25. 26 Market Structure : Degree of Competition (P. 37)
Oligopoly ตลาดผู้ขายน้อยราย
Few sellers dominate the marketplace and thus have substantial influence
over price.
The greater the degree of product differentiation perceived by buyers,
the greater is the opportunity for competing firms to set different prices

26. 27 The Laws of Supply and Demand (P. 38) supply and demand.
Whether one, a few, or many sellers are operating
in marketplace, their pricing decisions are influenced
to some degree by the economic laws affecting
supply and demand.

27. 28
The Laws of Demand (P. 38)
Demand is a relation among various amounts of a product that buyers would be willing and able to purchase at possible alternative prices during a given time, all other things remaining the same
If supply is held constant…
an increase in demand leads to and increased market price,
a decrease in demand leads to a decreased market price.

28. 29 Factors Affecting Laws of Demand Price Income of households
Price and availability of substitute goods
Price and availability of complement goods
Expectations about future prices
The size and composition of the population

29. 30
The Laws of Supply (P. 38)
Supply is a relation showing the various amounts of a product that a seller would make available for sale at possible alternative prices during a given period of time, all other things remaining the same
When the price of a good is raised, more will be produced
If demand is held constant…
an increase in supply leads to a decreased in price.
a decrease in supply leads to an increased price.

30. 31
Equilibrium (P. 39)
In well-behaved markets, the supply and demand curves will intersect at some point.
An equilibrium between supply and demand is established, producing an equilibrium price
The market price at which the supply of an item equals the quantity demanded.

31. 32 Price Elasticity of Demand (P. 43) ΔQ = quantity change in demand
Price elasticity of demand measures the responsiveness of the quantity demanded for a product or service to a change in the price of the product or service
Ed = price elasticity of demand
ΔQ = quantity change in demand
ΔP = quantity change in demand
Q1, P1 = original quantity demanded and price, respectively

32. 33 Income Elasticity of Demand (P. 44)
Income elasticity of demand: responsiveness of the quantity demanded of a product or service to a change in personal income
If EI is negative, the product is an inferior good
 Income goes up fewer units are demanded (switch to steak, less hamburger)
If EI is positive, the product is a normal good
 Demand increases as income increases
If 0<EI<1, the product becomes less important in households’ consumption plan
If EI >1, the product becomes more important as income increases.

33. 34 Cross-Price Elasticity of Demand (P. 45)
Cross price elasticity of demand: responsiveness of demand for a product to a change in the price of another product
If EC is negative, the two products are complementary
If EC is positive, the two products are substitutes

34. 35 Consumers’ Surplus (P. 50)
The difference between the maximum amount consumers are willing to pay for a product (known as the reservation price) and the amount they actually pay

35. 36
Sellers’ Surplus (P. 51)
The seller also enjoys a sellers' surplus, which we may define as the difference between his minimum price and the market price.

36. 37
END OF CHAPTER II