Transcript Price and Competition

Price and Competition
• Basic economics
• Pricing decisions
• Consumer price
response
• Competition in food
markets
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
1
Some Basic Economic Concepts
• Supply
• Demand
– Curve of supply across
prices offered
– Generally upward
sloping
– Non-linear cost
structures may change
shape
• Quantity supplied
– Quantity supplied at any
given price
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– 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
PRICE AND COMPETITION
Lars Perner, Instructor
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Elasticity
• Price elasticity =
% change in quantity demanded
----------------------------------------------% change in price
• If
– Elasticity > 1, demand is elastic
– Elasticity < 1, demand is inelastic
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
3
Elasticity Issues
• Elasticities for
– Farmer’s commodities—can 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
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
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Hypothetical Demand for Steak Across Segments
60.00
Atkins Enthusiast
50.00
40.00
Low Fat
Enthusiast
30.00
Price Sensitive
Consumer
20.00
Average Joe
10.00
Total
0.00
$0.00
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$5.00
$10.00
$15.00
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Lars Perner, Instructor
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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”)
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PRICE AND COMPETITION
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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
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
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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
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PRICE AND COMPETITION
Lars Perner, Instructor
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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
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
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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
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
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Macroeconomic Ways of Changing Price Levels
•
•
•
•
•
Subsidies/taxes
Price controls
Import controls
Rationing
Government purchase
of excess crops
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PRICE AND COMPETITION
Lars Perner, Instructor
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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)
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PRICE AND COMPETITION
Lars Perner, Instructor
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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)
Ten percent
discount for
senior citizens!
• Implicit: e.g., coupons (typically
legal in U.S.; sometimes illegal in
other countries)
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PRICE AND COMPETITION
Lars Perner, Instructor
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Some Forms of Implicit Price Discrimination
• Coupons
• Periodic sales
– Predictable (periodic)
– Random
• Rebates
MKTG 442
PRICE AND COMPETITION
Lars Perner, Instructor
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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%
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PRICE AND COMPETITION
Lars Perner, Instructor
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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
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SAVE
125%
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Lars Perner, Instructor
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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.
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PRICE AND COMPETITION
SALE!
Hurry!
Lars Perner, Instructor
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Price as An Attraction Strategy
• Positioning
– Value--perception vs. reality
– Price ---> quality
• Loss leaders
• “Bait-and-Switch”--frequently
illegal
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PRICE AND COMPETITION
Lars Perner, Instructor
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Discounting of Discounts
• Promotional claims
(e.g., “Save 25%) are
often not taken at face
value
• Even implausible
claims appear to
impact perceived
savings
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PRICE AND COMPETITION
Lars Perner, Instructor
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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).
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PRICE AND COMPETITION
Lars Perner, Instructor
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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.
You’re note gettin’
away with this! You
mean tell me that you
are chargin’ me $1.29
for a $0.99
hamburger?
– Cereal above $2.00 per box in
1970s
– Coke above 5 cents per bottle
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PRICE AND COMPETITION
Lars Perner, Instructor
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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
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• Ineffective methods
– Direct questioning
(difference between
predicted behavior and
actual choice)
– Focus groups (small
sample size; nonindependent response)
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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 products—e.g.,
• Cola drinks
• Breakfast cereal
– Monopolistic competition
where more competitors
exist
• Brands with strong
equity (consumer
preference) influence
prices
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Lars Perner, Instructor
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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)
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