PENETRATION PRICING: Undercutting competitors to gain a foothold.
- Gives consumers a reason to try the product
- Best suited where Price elasticity of Demand (PED) is high.
- Low or no profits so is only temporary
- Can give product a 'cheap' image
- Can be difficult to raise prices later
- Can invite a 'price war'.
SKIMMING: Charging a 'premium' or high price.
- Can give the product prestige or status
- Provides extra profit
- Allows price reduction later.
- Only suited for recently launched or 'new' or improved products with little competition (or at xmas!)
- Reductions needed as competition intensifies
- Consumers need to be convinced of good value for money.
DESTRUCTION PRICING: Low prices to destroy competitors.
- Can increase prices once competitors are gone.
- Low or no profits initially
- Can start price war
- Big company resources needed.
Know any more?
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- Thread Starter
- 13-06-2005 10:51
- 13-06-2005 15:12
Cost-plus pricing and predatory pricing and limit pricing! Thats all i know!! Never heard of penetration pricing though Is that edexcel?
Cost-plus pricing = adding a standard mark up to AC.
Predatory pricing = charging price below average cost to drive out competitors
Limit pricing = charging price below profit max. price, to limit entry of new competitors into market.
The pricing you've talked about is price discrimination right?
Perfect price discrimination = segmenting market and charging each individual customer what they are willing to pay (extracts consumer surplus and turns in into producer surplus)
Second degree p.discrim. = charging lower prices that market price (usually when a firm has high fixed costs but low variable costs e.g. low-cost airlines)
Third degree p.discrim. = changing different groups of consumers different prices (depending on their PED)
- 13-06-2005 15:29
I'm a bit confused by limit pricing and sales maximisation - my teacher told me they're the same thing, but I'm not convinced.
Sales maximisation (or sales revenue maximisation, whatever you call it!) is where ATC cuts the demand curve (i.e. AR curve), right? So the firm is making normal profits.
But then I read earlier that limit pricing is when firms temporarily charge below ATC, so surely it can't be the same as sales maximisation? Also, wouldn't it be the same as predatory pricing i.e. charging below cost?
The only thing I can think of is that my teacher means they're the same in that they can both be used for the same purpose, namely to prevent entry to the market by new firms by not profit-maximising for a time, rather than being exactly the same thing.
Argh, help me!