Page 235 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 14.3 Competition-based Pricing

There are two types of competition-based pricing strategies, as discussed in following
subsections.

14.3.1 Going-rate Pricing

Instead of the cost, the emphasis here is on the market and market situation. The firm adjusts its

own pricing policy to the general pricing structure in the industry. Where costs are particularly

difficult to measure, this may seem to be the logical first step in a rational pricing policy. It may

also reflect the collective wisdom of the industry.
This type of situation leads to price leadership. Where price leadership is well established,
charging according to what competitors are charging may be the only safe policy. It may simply

be a way in which firms try to escape the hazards of price in an oligopolistic market. It may be
less costly and troublesome to the business than the exact calculation of costs and demand and
has a practical advantage over a highly individualistic pricing policy.
Many big Indian companies have adopted a policy of following competitors, which implies that
they follow a price set either by the market or by a price leader. It must be noted that ‘going-rate
pricing’ is not quite the same as accepting a price impersonally set by a near perfect market.
Rather, it would seem that the firm has some power to set its own price and could be a price

maker if it chooses to face all the consequences. It prefers, however, to take the safe course and
conform to the policy of others.

14.3.2 Customary Prices

Prices of certain goods become more or less fixed, not by deliberate action on the sellers’ part

but as a result of their having prevailed for a considerable period of time. For such goods,

changes in costs are usually reflected in changes in quality or quantity. Only when the costs

change significantly, are the customary prices of these goods changed. Customary prices may be
maintained even when products are changed.

Example: The new model of an electric fan may be priced at the same level as the
discontinued model. This is usually so even in the face of lower costs. A lower price may cause
an adverse reaction on the competitors, leading them to a price war, as also on the consumers
who may think that the quality of the new model is inferior. Going along with the old price is the
easiest thing to do. Whatever be the reason, the maintenance of existing price as long as possible
is a factor in the pricing of many products.
If a change in customary prices is intended, the firm must study the pricing policies and practices

of competing firms; behavior and emotional make-up of the people of similar designations as
him in those firms. Another possible way out, especially when an upward move is sought, is to

test the new price in a limited market to determine the consumer reactions.

Task Analyse the pricing strategy used by any two Indian firms and any two inter

national fi rms.

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