ESSAY. Write your answer in the space provided or on a separate sheet of paper.

181) Pricing and price competition account for the number-one problem facing many marketing executives. What
are some of the frequent problems that companies encounter?
Answer: The pricing environment changes at a fast pace, and value-seeking customers have put increased pricing
pressure on many companies. However, companies are often too quick to reduce prices in order to get a
sale rather than convincing buyers that their products are worth a higher price. A companyʹs pricing, in
addition, is often too cost-oriented rather than customer-value oriented. Companies have prices that are
not revised often enough to reflect market changes. Another common problem is pricing that does not
take the rest of the marketing mix into account.
Diff: 2 Page Ref: 267
AACSB: Analytic Skills
Skill: Application
Objective: 10-1

182) Discuss the importance of consumer perceptions of value and costs to setting prices.
Answer: Customer perceptions of value set the upper limit for prices, and costs set the lower limit. However, in
setting prices within these limits the company must then consider other internal and external factors.
Internal factors affecting pricing include the companyʹs overall marketing strategy, objectives, and
marketing mix, as well as other organizational considerations. External factors include the nature of the
market and demand, competitorsʹ strategies and prices, and other environmental factors.
Diff: 1 Page Ref: 269-271
AACSB: Analytic Skills
Skill: Application
Objective: 10-1

183) Explain how break-even analysis can be used for target profit pricing.
Answer: The firm determines the price at which it will break even. The firm can also add the target profit to the
fixed costs and then determine the new, ʺbreak‐even point,ʺ which now includes the target profit. Pricing
decisions can be made by examining where the total revenue and total cost curves intersect on a
break-even chart at different price points and sales volume.
Diff: 2 Page Ref: 275
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

184) Identify and define the internal factors affecting a firmʹs pricing decisions.
Answer: Costs are an important consideration in setting prices. However, cost-based pricing is product-driven
rather than customer-driven. The company designs what it considers to be a good product and sets a
price that covers costs plus a target profit. If the price turns out to be too high, the company must settle
for lower markups or lower sales, both resulting in disappointing profits. Other internal factors that
influence pricing decisions include the company’s overall marketing strategy, objectives, mix, and
organization for pricing. Common pricing objectives might include survival, current profit
maximization, market share leadership, or customer retention and relationship building. Price decisions
must be co-ordinated with product design, distribution, and promotion decisions to form a consistent
and effective marketing program.
Diff: 2 Page Ref: 276-277
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

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185) Compare pure competition with oligopolistic competition.
Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform
commodity. No single buyer or seller has much effect on the going market price. Under oligopolistic
competition, the market consists of few sellers who are highly sensitive to each otherʹs pricing and
marketing strategies. The product can be uniform or nonuniform. There are few sellers because it is
difficult for new sellers to enter the market. Each seller is alert to competitorsʹ strategies and moves.
Diff: 3 Page Ref: 277-279
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

186) Compare oligopolistic competition with a pure monopoly.

Answer: Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each
otherʹs pricing and marketing strategies. There are few sellers because it is difficult for new sellers to
enter the market. Under a pure monopoly, the market consists of one seller. Pricing is handled
differently in each case. The seller may be a government monopoly, a private nonregulated monopoly,
or a private regulated monopoly.
Diff: 3 Page Ref: 279
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

187) Describe what a demand curve is and explain how it helps businesses.
Answer: It estimates consumer demand at different prices. In a monopoly, the demand curve shows the total
market demand resulting from different prices. If the company faces competition, its demand at different
prices will depend on whether competitorsʹ prices stay constant or change with the companyʹs own
prices.
Diff: 2 Page Ref: 279
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

188) Explain price elasticity.

Answer: Price elasticity is a measure of the sensitivity of demand to changes in price. If demand for a product
hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly,
we say the demand is elastic.
Diff: 1 Page Ref: 280
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

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189) When setting prices, the company must consider its external environment. Describe four parts of the external
environment and how they affect businesses.
Answer: Economic conditions affect both the costs of producing a product and consumer perceptions of the
productʹs price and value. The company should also encourage and support resellers and help them to
sell the product effectively. The government, in the form of local, state, and federal laws, is another
important influence on pricing decisions. Finally, social concerns impact pricing, especially when a
companyʹs short-term sales, market share, and profit goals may have to be tempered by broader societal
considerations.
Diff: 1 Page Ref: 282
AACSB: Analytic Skills
Skill: Application
Objective: 10-2

190) Companies bringing out a new product can choose between two broad strategies: market -skimming pricing
and market-penetration pricing. Distinguish between the two.
Answer: Market skimming is used to skim revenues layer by layer from the market by entering the market with
high initial prices. The productʹs quality and image must support its higher price, and enough buyers
must want the product at that price. The costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more. Competitors should not be able to enter the market easily and
undercut the high price. Market penetration is used to penetrate the market quickly and deeply to attract
a large number of buyers quickly and win a large market share by setting a low price initially when it
enters the market. The market must be highly price sensitive so that a low price produces more market
growth. Production and distribution costs must fall as sales volume increases. Also, the low price must
help keep out competition and be maintained over time.
Diff: 2 Page Ref: 283
AACSB: Analytic Skills
Skill: Application
Objective: 10-3

191) Explain product line pricing.

Answer: With this option, management must decide on the price steps to set between the various products in a
line. The price steps should take into account cost differences between the products in a line, customer
evaluations of their different features, and competitorsʹ prices. The sellerʹs task is to establish perceived
quality differences that support the price differences between various price points.
Diff: 1 Page Ref: 284-285
AACSB: Analytic Skills
Skill: Application
Objective: 10-4

192) Why do businesses use cash discounts when they are in essence losing some money on the sale?
Answer: Such discounts are customary in many industries in order to reward a customer who pays their bill
promptly. The practice encourages customers to pay early, giving the firm quicker and more reliable
access to cash. A cash discount can also help to build customer loyalty to the firm.
Diff: 2 Page Ref: 286
AACSB: Analytic Skills
Skill: Application
Objective: 10-5

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193) Describe the differences between dynamic and fixed pricing.
Answer: Throughout most of history, prices were set by negotiation between buyers and sellers.The fixed price
policysetting one price for all buyersis a relatively modern idea that arose with the development of
large-scale retailing at the end of the nineteenth century. Today most prices are set this way. However,
some companies are now reversing the fixed pricing trend. They are using dynamic pricing, adjusting
prices continually to meet the characteristics and needs of individual customers and situations. Dynamic
pricing makes sense in many contexts, as it adjusts prices according to market forces, and it often works
to the benefit of the customer.
Diff: 1 Page Ref: 290-291
AACSB: Analytic Skills
Skill: Application
Objective: 10-5

194) Explain the factors involved in setting international pricing.

Answer: In some cases, a company can set a uniform worldwide price. However, most companies adjust their
prices to reflect local market conditions and cost considerations. A firm must consider economic
conditions, competitive situations, laws and regulations, and development of the wholesale and retail
system. Consumer perceptions and preferences also may vary from country to country, calling for
different prices. The company may have different marketing objectives in various world markets. Costs
play an important role in setting international prices. Management must prepare for price escalation that
may result from the differences in selling strategies or market conditions. The additional costs of product
modifications, shipping and insurance, import tariffs and taxes, exchange-rate fluctuations, and physical
distributions must all be factored into the ʺprice.ʺ
Diff: 2 Page Ref: 291-292
AACSB: Multicultural and Diversity
Skill: Application
Objective: 10-5

195) When would price cuts and price increases be necessary?

Answer: Price cuts may be necessary when there is excess capacity. Another time to cut prices is when market
share is falling in the face of strong price competition. A company may also cut prices in a drive to
dominate the market through lower costs. A major factor in price increases is cost inflation. Rising costs
squeeze profit margins and lead companies to pass cost increases along to customers. Another factor
leading to price increases is over-demand. When a company cannot supply all its customersʹ needs, it
can raise its prices, ration products to customers, or both.
Diff: 3 Page Ref: 292
AACSB: Analytic Skills
Skill: Application
Objective: 10-6

196) When are competitors most likely to react to price changes? How can a firm anticipate the likely reactions of its
competitors?
Answer: Competitors are most likely to react when the number of firms involved is small, when the product is
uniform, and when the buyers are well informed. If the firm faces one large competitor, and if the
competitor tends to react in a set way to price changes, that reaction can be easily anticipated. But if the
competitor treats each price change as a fresh challenge and reacts according to its self-interest, the
company will have to figure out just what makes up the competitorʹs self -interest at the time.
Diff: 2 Page Ref: 293
AACSB: Analytic Skills
Skill: Application
Objective: 10-6

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