Page 225 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics Pavitar Parkash Singh, Lovely Professional University

Notes Unit 14: Pricing Decisions

CONTENTS

Objectives
Introduction
14.1 Cost-based Pricing
14.1.1 Cost-plus or Full-cost Pricing
14.1.2 Target Return Pricing

14.1.3 Marginal Cost Pricing
14.2 Pricing-based on Firm’s Objectives
14.2.1 New Product Pricing
14.2.2 Psychological Pricing

14.2.3 Promotional Pricing
14.3 Competition-based Pricing
14.3.1 Going-rate Pricing
14.3.2 Customary Prices
14.4 Summary

14.5 Keywords
14.6 Self Assessment
14.7 Review Questions
14.8 Further Readings

Objectives

After studying this unit, you will be able to:
Realise cost-based pricing
Discuss the pricing-based on fi rm’s objectives
Explain the competition-based pricing

Compare different types of pricings strategies
Introduction

You have learnt so far that the microeconomic principle of profit maximisation suggests pricing
by the marginal analysis that is by equating MR to MC. However, in the pricing methods
followed in practice, firms rarely follow this process. Uncertainty with regard to demand and

cost functions and the deviation from the objective of short run profit maximisation are the two

main reasons for this.

Determination of profit maximisation requires an accurate knowledge of the demand and cost

conditions facing the firm. It is not easy to get a good estimate of the true demand function,
for; one faces difficulties with regard to the specification of the function, data availability and

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