MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1 Price and Competition Basic economics...

MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1

Price and Competition

• Basic economics• Pricing decisions• Consumer price

response• Competition in food

markets


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


Elasticity

• Price elasticity =

% change in quantity demanded

-----------------------------------------------

% change in price• If

– Elasticity > 1, demand is elastic – Elasticity < 1, demand is inelastic


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


0.00

10.00

20.00

30.00

40.00

50.00

60.00

$0.00 $5.00 $10.00 $15.00

Atkins Enthusiast

Low FatEnthusiast

Price SensitiveConsumer

Average Joe

Total

Hypothetical Demand for Steak Across Segments


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”)


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


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


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


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


Macroeconomic Ways of Changing Price Levels

• Subsidies/taxes• Price controls• Import controls• Rationing• Government purchase

of excess crops

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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)


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 percentdiscount forsenior citizens!


Some Forms of Implicit Price Discrimination

• Coupons• Periodic sales

– Predictable (periodic)– Random

• Rebates


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%


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%


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!


Price as An Attraction Strategy

• Positioning– Value--perception vs. reality– Price ---> quality

• Loss leaders• “Bait-and-Switch”--frequently

illegal


Discounting of Discounts

• Promotional claims (e.g., “Save 25%) are often not taken at face value

• Even implausible claims appear to impact perceived savings


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).


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

You’re note gettin’away with this! You mean tell me that youare chargin’ me $1.29 for a $0.99 hamburger?


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)


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


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)

MKTG 442 PRICE AND COMPETITION Lars Perner, Instructor 1 Price and Competition Basic economics...

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