The Strategy of Setting Price for Products and Services

The Strategy of Setting Price for Products and ServicesIntroductionPricing is a basic and interesting paper in the business. This paper will be described the dodge of setting equipment casualtys for harvestings and services especially it will focus on atomic number 53 specific strategy called price discrimination, which is to charge contrastive prices to different customers for the same or similar product and service. Price discrimination is one of the most in effect(p) strategy to maximise a companys profits when compared with a exclusive pricing. However, it represents a transfer of value from consumers to companies and people may argue it hits less to customers than to companies. In the following(a), one-third types of price discrimination will be described, and real examples will be employ to illustrate them. The advantages and disadvantages of price discrimination as well as its benefit to consumers and society will be discussed.The first type of price discrimination The first type of price discrimination is based on two concepts modesty price and consumer surplus. For a product and service, the reservation price is defined as the maximum price that a customer is willing to make up (Pindyck Rubinfeld, 2001, p.371), and the consumer surplus is variance between the reservation price and the price the consumer actually pays (Hubbard OBrien, 2012, p.98). The goal of the first type of price discrimination is to capture the consumer surplus and turn it into its profit for a company.For example, a tea shop sells a good brand of tea. For a cup of the tea, the competitive price ( covered by many competitive suppliers) and the monopoly price (offered by few dominant suppliers) are $3.50 and $4 respectively. It is supposed that there are three customers to buy the tea, and the reservation price of these three customers are $6, $5 and $3.5 respectively. ground on the competitive market price ($3.5), their consumer surplus would be $2.5, $1.5 and $0 re spectively. By using the first type of discrimination, the tea shop can subscribe different prices to these three customers which is $6, $5 and $3.5. By doing so the shop will sell three cups of the tea, and all consumer surplus ($4) would be captured. However, if the shop sets a single price $4, then it can only sell two cups of tea, and the third customer would be eliminated from service. Therefore, not only the profit is reduced but similarly the consequence of customers served is reduced as well.Although it sounds great that a company can increase their profits and the quantity of products sold as well as the number of customers serviced, in practice it is hard to conduct. There are two reasons first, it is difficult to know each customers reservation price second, in ordinance to know customers reservation price, companies need a lot of efforts in marketing research and investigation, which adds extra cost to the product and then reduces the products profit. Therefore, it i s more competent for some professional people much(prenominal) as dentists, lawyers and accountants, as they know their customers relatively well. For example, a lawyer may offer a reduced service fee to low-income client, but may charge a high service fee to upper-income clients as they have the ability to pay. The practical problem is some customers who pay higher price may object price discrimination and argue that it represents a transfer of consumer surplus from customers to companies, which benefits less to customers than to companies such impressioning an unfairness to rich people.The second type of price discriminationA company can discriminate prices concord to the quantity purchased. The practice of setting different prices per unit for different quantities is called the second type of price discrimination or block pricing (Pindyck Rubinfeld, 2001, p.374).There are many companies who use this type of price discrimination such as grocery stores, suppliers of electri city, water and natural gas. For example, for electric power, consumers are charged different price per kilowatt depending on the quantity consumed. Its usual, as an instance, the first 100 kilowatts of electricity consumed are charged at a higher rate, and after the first 100 kilowatts, consumers are charged at a discredit rate per kilowatt.This price strategy allows a company to convert part of consumer surplus into producers profit, and at mean clock time it increases the products quantities sold and the number of consumers served. Even though it has greater benefit to the company, it cannot be widely use in some business regions or areas. For examples, in China, it has huge population but limited water and power resources, so single pricing for power and water would be more suitable than price discrimination. The price discrimination may encourage people to use more power and water such may result in resources shortfall and air pollution, and eventually may damage the environm ent. Therefore, price discrimination should be applied under conditions, and only if it is used correctly, then it would create positive match on the environment and society.The third type of price discriminationThird-degree price discrimination is based on two steps dividing consumers into two or more groups and charging different prices to each group (Pindyck Rubinfeld, 2001, p.376). One group may have the ability to pay a higher price such as upper-income customers other group may only be able to pay a lower price such as students and seniors. Companies also would charge customers a higher price if the customers demand for it is inelastic such as a service is urgent and it must be done immediately, and charge other customers a lower price if their demand for the service is elastic. This strategy may cause price competition among suppliers to offer discount to different groups, such competition may result in lower price for products. If it is used by few suppliers in some perio d of time, then it may encourage consumers to buy more products. However, if it is used from wide range of suppliers over long period of time, then it may make the product permanently reduce price, and some companies may have difficulty to get profits.To practice this type of price discrimination companies often set prices based on the consumers occupation, age, income, preference, time of use. Some of them will be discussed in the following(a) Based on occupation and income Hubbard and OBrien (2012) noted, In mid-2009, Apple was selling an iMac desktop with a 24-inch display for $1,499 to general public, but university students and faculty members could buy the same reckoner from Apple for $1,399 (p.498). In this example, apple assumed the manufacturing cost of a computer is $400, so selling one iMac to university user would get profit $999, and selling one iMac to general user would get profit $1,099. In that period Apple sold 20,000 iMac to university users and 30,500 computers to general public users. The total profit from these sales is $53,499,500 ($999*20,000 + $1,099*30,500). However, if Apple used a single pricing, and if it also charged $1,399 in the general public market, it would sell 32,500 iMac (Hubbard OBrien, 2012, p.499), and then the profit from these sales would become $52,447,500 ($999*20,000 + $999*32,500). The difference of the profit make between using price discrimination and setting single pricing is $1,052,000 ($53,499,500 $52,447,500). This example shows this strategy increased Apples profit. However, from another point of office that the total iMac sold was reduced from 52,500 (single price) to 50,500 (price discrimination), price discrimination reduced the number of products made/sold, and in turn it may influence the number of people apply and also may generate negative effect on the society.(b) Based on preference and time one example is that early adopters of new products would pay a higher price, such as new type cell pho nes, new books, new released music DVDs. Airlines usually charge ticket differently according to time. During the holiday such as Christmas and New Year, the tickets price is normally higher than other times. Customers sometimes are argue that the airline gets extra profit by exaction of customers surplus and leaves very little to customers.ConclusionsThis paper provides analysis on three types of price discrimination. Price discrimination is one of the most effective strategy to maximize a companys profit when it is compared with a single pricing for the products and services. All three types of price discrimination raise a companys profit, and they all have both positive and negative effect on the society. I personally think that price discrimination is a reality and it is acceptable to many customers in most situations. It exists in our daily life, and it is used widely in various industries.ReferencesAguirre, I., Cowan, S., Vickers, J. (2010, September). Monopoly price discrimi nation and demand curvature. The American Economic Review, 100(4), 1601-1615. doi 10.1257/aer.100.4.1601Armstrong, M. (2006, October). Price discrimination. Retrieved from http//else.econ.ucl.ac.uk/papers/uploaded/222.pdfHubbard, R. G., OBrien, A. P. (2012). Microeconomics (4th edition). Prentice Hall.Pettinger, T. (2013, March 6). Examples of price discrimination. Retrieved from http//www.economicshelp.org/blog/7042/economics/examples-of-price-discrimination/Pindyck, R. S., Rubinfeld, D. L. (2001). Microeconomics (5th edition). Prentice Hall.Round, D. K., McIver, R. P. (2006, Spring). Teaching third-degree price discrimination. The Journal of Economic Education, 37(2), 236-243. Retrieved from http//www.jstor.org/ durable/30042708Shmanske, S. (1991). Price discrimination and monopolistic competition. Studies in Economics and Finance, 14(1), 25-48. Retrieved from http//dx.doi.org/10.1108/eb028698