Price discrimination strategies are where different prices are charges for the same product in different markets. This is possible due to barriers such as time and distance of competitors as this prevents consumers from alternating. For example, the European Commission found that a Land Rover Discovery was 55% and the Nissan Micra was 37.1% more expensive in the UK than abroad (European Commission 2000). However, for price discrimination to be profitable, there must be different price elasticity of demand in different markets. This strategy is often used by firms who operate through e-commerce and firms who physically trade in person.
Another factor is product line pricing, which is where the pricing of related products is influenced by none cost factors. Microsoft (Xbox) and Sony (Playstation 2) both sold their consoles for £60-£80 below production costs during 2000-2003 to increase market share and power, and to make profit in the long run from software such as games as consumers are can only buy certain highly priced games which are compatible with the loss leading consoles. Evidentially this shows that in oligopolistic markets, the factors that affect product pricing are mainly market share stimulated.
The position of the product in its life cycle will also affect price. This is known as life-cycle strategies. As most products fail during the introduction phase, it would be obvious to use price penetration during this period. However when products enter the growth phase, firms may adopt price skimming in order to increase profit levels, depending on the firms objectives and the market structure. Overall, penetration is likely to give the firm a larger market share and more sales revenue whereas skimming would give firms higher margins of profit and the appearance of higher quality. The pricing strategy used by firms is ultimately determined by the market structure and firms objectives.
Market segmentation strategy may also affect product pricing. This is where price of goods and services may be related to demand characteristics of the market segment rather than to the actual costs of production. An example of this is the beer market in 2000. The Office of Fair Trading concluded in its report that the price of lager was significantly higher than ale despite production costs were similar. Being an inelastic good, firms were able to charge a much higher price for lager.
Product differentiation strategies provide consumers with products that are unique against competitors. This is achieved by research and development to change product characteristics to meet consumer needs. In theory, a differentiated product would give a firm a USP and therefore they are able to control the price.
However, product differentiation does not work in all industries. For example, petrol cannot be differentiated therefore in this case, product pricing is limited to the market value.
Cost plus pricing is another factor that affects product pricing. Cost plus pricing is determined by the cost of production rather than elasticity of the product and market structure. Generally, firms who use this strategy sell as many products as possible at a price which takes into account a certain percentage of profit. Demand does not determine the price that firms set.
Fig.2
Market structure is a very important factor when determining product price. For example, a monopoly, in theory operates to achieve profit maximisation. Since there is no competition, monopolistic firms are able to set a very high price due to no substitutes - this is shown in Fig.2 at P1. Monopolies tend to price products so that they earn supernormal profit. The incentive to earn supernormal profit, in the case of monopolies, affects the way they price their products.
To conclude, all factors affect the product pricing in the UK. Most factors are determined by market structure and firms objectives, but all factors do contribute towards the pricing of products in the UK. Market structures such as oligopolies may want to maintain high market share therefore use predatory pricing whereas monopolies use price skimming as they control the market.