Discuss the main factors which influence the prices Which firms set for their products.
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Discuss the main factors which influence the prices Which firms set for their products The objective of the firm is very important in determining how they are to set their prices. Their objective could be, for example, to either maximise profit or to raise market share. Whatever their objective there are many factors which can influence the firms when setting their prices for their products. Some of these methods of pricing can have their advantages on the consumer, however there are many occasions where pricing decisions can have negative effects. In what follows, you will be able to see examples of both of these. Market structure as well as the firm's objective is very important and often influences firms pricing. For a monopolist, prices will be higher relative to costs than for perfectly competitive markets. In perfect competition prices would be determined by the forces of demand and supply, however in reality a totally perfect market does not exist therefore this pricing level is most often never met, A monopolist can choose to set their own price and output levels, usually being set at a low output level and at a high price, as there is no competition to influence what they should set, thus creating an imperfect market.
If one company was to drop their prices, they would attract many customers away from their competitors, unless these competitors also lowered their prices. The position of the product in its life cycle will also influence the price a firm sets for its product. The three main stages of the product life cycle are: growth, maturity and decline. In the growth stage the total market size is increasing. Firms have various choices in how to set their prices. They could adopt a 'skimming' strategy charging a high price, which gets rid of a small but lucrative part of the market. Alternatively they can adopt a 'penetration' strategy, charging a lower price and raising market expenditure in order to establish a much larger market presence. How much of a role cost plays in the determination of price during the growth phase will depend on the individual firm. In the maturity phase the pricing decisions will largely depend on the market share which the company has already established during its growth phase and also on the quality of the product maintained. High quality and high market share would suggest that their policy would be to charge relatively high prices. In the decline phase, manufacturers will try to maintain their high price, however in reality they are often forced to lower their prices or bring out newer designs, otherwise sales might fall drastically, forcing the firm to reduce price, also dramatically.
An example of a product with a low price elasticity is toothpaste, if the price of toothpaste went up, the demand for it would not change much, if at all, as people will still need it. If the price of toothpaste falls, this does not mean that the demand will rise as people will not start using more of it. If however a product has a high elasticity of demand, then this will mean, even a small change in the price charged for the product will result in a much larger change in the demand. An example of a product with a high elasticity of demand is high street clothing. If the prices rise, the demand will fall as people will start to buy fewer clothes. If the price falls, the demand will increase as people can now afford to buy more clothes. Many points have been discussed now about the factors which influence the price which a firm charges. As we can see many different situations take place regarding the environment a firm is set in, the main ones being the differing firm objectives and the different market structures. There are many different combinations of these for any given product, therefore the pricing decision made by the firm is often complicated and their decisions are often individual and different to those even in the same market as them.
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