Price
The
word “Price” revolves around our daily life and most of the time, we do not put
so much of a great emphasis to it. However, through the learning of my module
of Microeconomics and after a series of research, I have come to realized that
the word actually carries more weight than being just a normal word.
Firstly, let me
begin with the law of pricing strategy in the economics terms. The law of price
states that all firms charges a single price for the particular good that they
are selling. For example, all the goods and services that McDonalds provides
are charged the fixed amount of money. However,
most of the times in the real word, firms charges in three different
ways where one, a firm charges different prices to different consumers, two; a
firm charges two-part parties and thirdly, a firm offering in fixed bundles.
In the law of
one price, it is understood that identical products in the market should be
sold for the same price everywhere. So, in the event that the law of one price
is breached, arbitrage occurs. Arbitrage is a situation where a firm will make
the most of out a single product through various prices at different locations.
Firms will buy in large amount and then repackaged them into a new product,
selling them more than they are worth in a single location. For example,
McDonalds that is situated along the Klang Valley have a range of fixed price
ranging from the burgers to their ice-cream and so forth. On the other hand,
McDonalds that are situated out of the Klang Valley will have various pricing
of products depending on the location and the characteristics of the consumers
at the particular location. A good example would be the outlet in Genting
Highland, a tourist attraction destination and located out of the Klang Valley
area. The pricing of the goods are doubled because of the location, the
transportation fee incurred and the fact that it is a tourist destination.
Another
regularly used pricing method by firms today is price discrimination. Price
discrimination means imposing different prices to various consumers for a fixed
product or service (Businessdictionary.com). The
differences in price are not related in the perspective of the differences in
cost. To achieve successful price discrimination, the three factors of
determinants are the market power, the willingness to pay of the consumers and
the power to classify the different types of customers.
Based on the illustrations below, it is clear that price
discrimination can occur in two situations.
Assuming that I
owned a shop that sells cloths and based on the graphs above, I will further
explain the relationship of elasticity demand and price. The first graph shows
the price and quantity of cloths sold during peak seasons whereas the second
graph shows the price and quantity of cloths during sales seasons. I apply
price discrimination towards my product which is cloth during sales season
knowing that more people are willing to spend on my product even if it is
RM2.00 more than what I usually sell for.
In the beginning
I mentioned that there are three ways that a firm charges its products in the
market. The article that I’ve researched on relating to price discriminations
states the other two ways which are bundling and versioning. In the article, it
is proven that when a firm engages one of these methods to sell its product,
there’s a high tendency of price discrimination occurring.
For example, in
the article, the example used on selling laptops and office software shows
price discrimination occurring in bundling. Below are the different prices that
I’ve derived from the article.
Types of Situation |
Price of Laptops
|
Price of Office Software
|
Total Price
|
Outcome
|
Consumers willing to pay $900 for a laptop and
$100 for office software
|
$799
|
$199
|
$998
|
Consumers may only buy the laptop and not the
office software
|
Consumers willing to pay $700 for a laptop and
$300 for office software
|
$799
|
$199
|
$998
|
Consumers may only buy the office software but not
the laptop
|
Every firm’s
main goal is to achieve profit maximization. In the article, the firm alternative
resort is to bundle both the office software and laptop together and sell them
as an item for $999. This allows the firm to have access to both groups of
consumers mentioned above. On the other hand, it benefits the firm to sell both
its products at the same time and not holding on to too many of each inventory.
In the above
example, the firm is practicing perfect price discrimination. To achieve
success in perfect price discrimination, the firm must know the willingness to
pay of all the customers to charge them the right price. The firm above has
made an analysis and breaking down its data very clearly, understanding the
behaviour and decision making of its customers when it comes to purchasing its
laptops and office software.
With perfect price discrimination, economic efficiency is improved because there is no more dead weight loss. Firms will know how much its consumers are willingly to pay for the product. This will lead to profit earned increases in a company and consumer surplus will eventually disappear.
In the real world, it is harder to find cases to reference but over the time, when a new product is introduced, firms will usually take advantage and discriminate the price of the product during transaction of sale. Another obvious example would be books sold in the bookstore. Usually, the books come in two different forms, a hardcover and paperback. The contents of the book are the same but the firm takes its products and repackaged it a little and charges a higher price of hardcover. The idea of hardcover was targeted for book lovers or consumers who enjoy making a collection of its books.
To conclude, I personally feel that there is a good and bad side towards price discrimination. And after this research, I find myself understanding the law and strategies of price better. I realized that the law of economics do occurs in our daily lives and we don’t usually come across.
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