Please, write a discussion post about the Topic/Statement below(200 words) and respond to the two classmate discussion posts(150 words each).
Topic/Statement: What factors must a firm consider when deciding to raise or lower its price? In answering this question think about the content in Chapters 4 and 5 and use a real-world example that helps illustrate your answer.
(1 or 2 Citations needed for this discussion post)
The most important tool that firms could use when considering whether to raise or lower its prices is the demand curve. When demand increases, firms tend to be able to sell more and increase its prices; however, individuals tend to buy less when the price of certain goods increases. “Although it is conceptually possible that individuals might purchase more of a product as the price rises, as a practical consideration, managers are quite safe in assuming that the quantity demanded for their products varies inversely with price” (Brickley, 2015, p.135). Now, there are many factors that affect demand such as the price of the product, price of related goods (substitutes and complements) and consumer income.
The price of the goods could have a huge impact in the quantities demanded by consumers when they increase, especially if they are substitutes goods in the market. Markets where substitute goods exist are highly competitive, which makes firms to be price takers. Any increase or decrease in price will have a direct impact in total revenue as consumer will purchase of a cheaper substitute. Additionally, firms need to asset whether the products sold are complements of other goods sold in the market or not. For complements good the changes in prices turn somehow inelastic since the consumers may be forced to buy it along with another product; but it is still a risk that the firm could take by losing some revenue. Finally, the demand for the goods offer will vary based on consumers income. “As a person’s income increases, more products are purchased, and the combined expenditures across all products rise. The demand for specific products, however, can either rise or fall as income increases” (Brickley, 2015, p.147). Consumers tend to buy more luxury items as their income increases. These luxury items are then classified as normal goods; whereas cheaper products would be inferior goods.
For the longest time, Apple and Samsung have been competing to keep their market share and either maintain or increase sales and profitability. As any of these two firms increases or decreases the price of its goods, the demand curve for each company will shift. If Apple iPhone become more expensive, Samsung’s cellphones may fall into the “Substitute” category and ultimately sell more when consumer’s income remain the same. However, if consumer’s income increases and consumers prefer Apple’s cellphones over Samsung’s, then Apple’s cellphones would be normal goods and Samsung’s would be categorized as an inferior good.
References:
Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial economics and organizational architecture (6th ed.). New York: McGraw-Hill Education.
Classmate discussion post: (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response. No citation required)
Discussion 1:
Robert McCann
For many management decisions, a full understanding of market demand is necessary (Brickley, Smith, & Zimmerman, XXXXXXXXXXIf a company decides to increase or cut its product price, it must take several key factors must into consideration. First, the company needs to have a solid understanding of consumer demand for their products so that they can estimate their business potential sufficiently. They also need to assess the overall cost of producing their product. Finally, the company must evaluate the importance of understanding customer needs, creating awareness for its products, finding the best distribution model, and deriving an appropriate pricing structure.
When deciding to change the price, the business should perform an internal and external situational analysis consisting of the 5Cs: Context, Competitors, Customers, Collaborators, and Company (internal & external analysis) (Kinnear, James, & Deighan, XXXXXXXXXXThe next step would be to determine a Marketing Strategy. The business should use the STP method: Segmentation, Targeting, and Positioning to determine the value proposition (Kinnear et al., XXXXXXXXXXThey should use the 4Ps: Product, Place, Price, Promotion (Determine how to deliver value) to determine any price change (Kinnear et al., XXXXXXXXXXThe pricing change should consider MSRP and volume discounts (Kinnear et al., XXXXXXXXXXThese will help the business to determine the price charge.
A business must first assess consumer demand and deduce the elasticity (price sensitivity) for that particular product before it wants to increase or decrease the cost of its product (Brickley et al., XXXXXXXXXXManagers use three basic approaches to estimate demand: interviews, price experimentation, and statistical analysis (Brickley et al., XXXXXXXXXXEach method has its flaws. If the product or service is inelastic, a company may be able to raise the price while maintaining a strong consumer demand for its product (Kesselheim, Avorn, Sarpatwari, XXXXXXXXXXIf the product or service is flexible (elastic), it can be challenging to raise the cost without a decrease in consumer demand (Kesselheim et al., XXXXXXXXXXAccording to Brickley, Smith & Zimmerman (2016), a small price increase increases expenditures when demand is inelastic and a decrease in spending when demand is elastic (p. 147).
The price of related products can affect the demand for a product (Brickley et al., XXXXXXXXXXGoods that compete with each other are refe
ed to as substitutes (Brickley et al., XXXXXXXXXXProducts that tend to be consumed together are complements (Brickley et al., XXXXXXXXXXOne frequently used measure of substitution between two products is the cross elasticity of demand (Brickley et al., XXXXXXXXXXThe cross elasticity is positive for substitutes and negative for complements (Brickley et al., XXXXXXXXXXThe price of prescription drugs in the United States, for instance, is at an all-time high In real-world examples, such as Xarelto, made by Janssen Pharmaceuticals, Inc., may charge high prices because demand has not changed. The drug treats conditions that will continue throughout life, such as clotting disorders and atrial fi
illation. Although there are substitutes, the demand for Xarelto remains high due to patient and Doctor preference.
Businesses must finally analyze competing for products from industry competitors by performing a competitor analysis, which can also include a SWOT analysis (Brickley et al., XXXXXXXXXXA market structure analysis attempts to assess the cu
ent and potential competition (Brickley et al., XXXXXXXXXXOpportunity cost is the value of a resource in its next best alternative use. Cu
ent market prices more closely reflect the opportunity costs of inputs than historical costs. The relevant costs for managerial decision making are the opportunity costs (Brickley et al., 2016).
Often, consumers have the choice of buying several similar products, and the prices that competitors set for their products are an essential consideration. The business must understand its relationship between the price of its products, the price of related products, and the income of potential customers to obtain a competitive advantage (Brickley et al., XXXXXXXXXXIncome elasticity measures the sensitivity of demand for income (Brickley et al., XXXXXXXXXXPrice is one of the most critical variables that customers consider.
References:
Brickley, J., Smith, C., & Zimmerman, J XXXXXXXXXXManagerial economics and organizational architecture, (6th ed.), McGraw-Hill/Irwin: New York.
Kesselheim AS, Avorn J, Sarpatwari A XXXXXXXXXXThe high cost of prescription drugs in the United States origins and prospects for reform. JAMA. 2016;316(8):858-871.
Kinnear, T. C., James, S. W., & Deighan, M XXXXXXXXXXPharmaSim marketing management simulation. Retrieved from https:
www.interpretive.com
usiness-simulations/pharmasim
Discussion 2:
Morgan Dye
Obviously, the firm's ultimate goal is to make a profit and getting to that goal is going to depend on multiple factors that come into developing and deciding on what type of pricing would be the most beneficial for profitability and the steps needed in order to achieve those goals.
I believe the first thing that a firm needs to be aware of the effectiveness in understanding when and when to not raise prices and being strategic about what is influencing the cost and reduction in pricing. Price elasticity of demand refers to the relationship between change in the quantity of demand for a good and a change in price (Brickley, 2016).
The promotion of such products also need to be considered when to implement these price raises and reductions. Product costs tend to be higher than one would expect, not only are you having to develop the product, it has to be tested and packaged – the marketing of the product is a whole other can of worms but promotion costs can be pricey because if this is a product that is being newly introduced, it will need some marketing and promotional value added to the mix. It all comes down to price elasticity. If a new product shows credence to higher demand in value, then the demand in elasticity is in demand. However, if there is no significance with the product, and there is little to no difference in the demand for the product it is then considered to be inelastic.
We know from experience that when a product that we know is worth a lot more than what it is typically sold for, we consider it a deal and more inclined to buy it at a much discounted rate. It is like going to Target and seeing something that you’ve been eyeing for a while but it just seems to just be “too much” for what is cu
ently priced as, as soon as you see it discounted, suddenly, everything logical goes in your
ain and you buy it because it’s on sale. People just have the tendency no matter what to buy when the price tag is much lower or on sale than a regular higher-priced item.
References
Brickley, J. A., Smith, C. W., & Zimmerman, J. L XXXXXXXXXXManagerial economics and
organizational architecture (6th ed.). New York, NY: McGraw-Hill/Irwin.
Topics discussed in Chapter 4 and 5
Demand Functions
Demand Curve
Law of Demand
Elasticity of Demand
Linear Demand Curves
Other Factors That Influence Demand
1. Prices of Related goods
2. Products
3. Consumer Income
4. Other Variables