Discuss the main factors affecting product pricing in the UK

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Discuss the main factors affecting product pricing in the UK

        In theory, prices of products are determined by many different factors within a firm. This will depend on the market structure and the firms objectives, whether this is to maximise profits, maximise sales revenue, increase market share or to provide public services. The market structure normally determines the firms objectives, for example a monopoly has the power to set a high price level to maximise profits whereas perfect competition must compete on none price factors therefore will sell at the given market price. Oligolopolies such as leading supermarkets (e.g. ASDA, Tesco, Sainsbury) do not normally compete on price as a decrease in one firms price will be followed by other competing firms therefore all firms lose out and only the consumer gains, therefore prices are set to increase market share.

        

Fig.1

In oligopolistic markets, there are forms of price wars. This is shown by the kinked demand curve in Fig.1. This leads to firms changing prices in order to raise and defend market share, due to this being one of their objectives as opposed to profit maximisation. For example, the UK’s largest petrol retailer Esso announced price cuts to earn just 1p per litre in order to maintain a high market share and market power. This is known as market share strategy, a short run strategy as it little relation to the costs of production meaning that firms may even make a loss (shown by MC and MC1). This was confirmed by Hall et al (1996) as a survey of 654 UK companies concluded that 65% of firms used ‘market-led pricing’. This relates to predatory pricing which sees firms sell products at minimal prices to maximise market share, maintain dominance and eliminate rivals.

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        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.

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