The Strategy of Setting Price for Products and Services

The Strategy of Setting terms for Products and ServicesIntroduction determine is a basic and interesting topic in the business. This paper leave behind be described the strategy of setting tolls for crossings and services especially it pass on focus on wiz specific strategy called equipment casualty variety, which is to press different monetary values to different customers for the same or similar product and service. Price distinction is one of the around potent strategy to maximize a companys usefulnesss when compared with a iodin pricing. However, it represents a wobble of value from consumers to companies and bulk whitethorn argue it wellbeings little to customers than to companies. In the following, ternion tokens of damage discrimination pass on be described, and real examples will be apply to illustrate them. The advantages and disadvantages of terms discrimination as well as its benefit to consumers and society will be discussed.The first type of mon etary value discriminationThe first type of bell discrimination is based on deuce concepts reservation outlay and consumer surplus. For a product and service, the reservation impairment is defined as the maximum value that a customer is involuntary to pay (Pindyck Rubinfeld, 2001, p.371), and the consumer surplus is difference between the reservation harm and the cost the consumer actually pays (Hubbard OBrien, 2012, p.98). The goal of the first type of bell discrimination is to get hold of the consumer surplus and turn it into its profit for a company.For example, a tea denounce sells a good brand of tea. For a cup of the tea, the competitive price (offered by many other(prenominal) competitive suppliers) and the monopoly price (offered by some(prenominal) predominate suppliers) are $3.50 and $4 respectively. It is supposed that there are three customers to pervert the tea, and the reservation price of these three customers are $6, $5 and $3.5 respectively. Based on the competitive market price ($3.5), their consumer surplus would be $2.5, $1.5 and $0 respectively. By using the first type of discrimination, the tea shop can request different prices to these three customers which is $6, $5 and $3.5. By doing so the shop will sell three cups of the tea, and all consumer surplus ($4) would be captured. However, if the shop sets a single price $4, thence it can only sell twain cups of tea, and the third customer would be eliminated from service. therefore, not only the profit is minify but also the number of customers served is reduced as well.Although it sounds great that a company can increase their profits and the quantity of products exchange as well as the number of customers serviced, in dedicate it is hard to conduct. There are two reasons first, it is difficult to know each customers reservation price second, in order to know customers reservation price, companies need a lot of efforts in marketing investigate and investigation, w hich adds extra cost to the product and then reduces the products profit. Therefore, it is to a greater extent suitable for some professional people much(prenominal) as dentists, lawyers and accountants, as they know their customers relatively well. For example, a lawyer whitethorn offer a reduced service fee to low-income client, but may charge a higher service fee to upper-income clients as they have the ability to pay. The attainable problem is some customers who pay higher price may inclination price discrimination and argue that it represents a transfer of consumer surplus from customers to companies, which benefits less to customers than to companies such resulting an unfairness to rich people.The second type of price discriminationA company can discriminate prices according to the quantity purchased. The practice of setting different prices per unit for different quantities is called the second type of price discrimination or block pricing (Pindyck Rubinfeld, 2001, p.374 ).There are many companies who use this type of price discrimination such as mart stores, suppliers of electricity, water and natural gas. For example, for electric motive, consumers are charged different price per kilowatt depending on the quantity consumed. Its usual, as an instance, the first nose candy kilowatts of electricity consumed are charged at a higher rate, and later the first 100 kilowatts, consumers are charged at a disgrace rate per kilowatt.This price strategy allows a company to convert fall in of consumer surplus into producers profit, and at mean time it increases the products quantities sold and the number of consumers served. Even though it has greater benefit to the company, it cannot be widely used in some business regions or areas. For examples, in China, it has huge population but limited water and power resources, so single pricing for power and water would be to a greater extent suitable than price discrimination. The price discrimination may encoura ge people to use more power and water such may result in resources shortage and air pollution, and eventually may damage the environment. Therefore, price discrimination should be applied under conditions, and only if it is used correctly, then it would create exacting impact on the environment and society.The third type of price discriminationThird-degree price discrimination is based on two steps dividing consumers into two or more stems and charging different prices to each group (Pindyck Rubinfeld, 2001, p.376). One group may have the ability to pay a higher price such as upper-income customers another group may only be able to pay a dismantle price such as students and seniors. Companies also would charge customers a higher price if the customers demand for it is inelastic such as a service is pressing and it must be done immediately, and charge other customers a lower price if their demand for the service is elastic. This strategy may cause price competition among supplier s to offer discount to different groups, such competition may result in lower price for products. If it is used by few suppliers in some bound of time, then it may encourage consumers to deal more products. However, if it is used from wide range of suppliers over long period of time, then it may make the product permanently reduce price, and some companies may have difficulty to get profits.To practice this type of price discrimination companies often set prices based on the consumers barter, age, income, preference, time of use. several(prenominal) of them will be discussed in the following(a) Based on occupation and income Hubbard and OBrien (2012) noted, In mid-2009, Apple was selling an iMac desktop with a 24-inch display for $1,499 to popular frequent, but university students and faculty members could buy the same computer from Apple for $1,399 (p.498). In this example, apple assumed the manufacturing cost of a computer is $400, so selling one iMac to university user woul d get profit $999, and selling one iMac to ecumenical user would get profit $1,099. In that period Apple sold 20,000 iMac to university users and 30,500 computers to general public users. The total profit from these sales is $53,499,500 ($999*20,000 + $1,099*30,500). However, if Apple used a single pricing, and if it also charged $1,399 in the general public market, it would sell 32,500 iMac (Hubbard OBrien, 2012, p.499), and then the profit from these sales would become $52,447,500 ($999*20,000 + $999*32,500). The difference of the profit made between using price discrimination and setting single pricing is $1,052,000 ($53,499,500 $52,447,500). This example shows this strategy increased Apples profit. However, from another point of view that the total iMac sold was reduced from 52,500 (single price) to 50,500 (price discrimination), price discrimination reduced the number of products made/sold, and in turn it may knead the number of people employed and also may generate negativ e effect on the society.(b) Based on preference and time one example is that early adopters of new products would pay a higher price, such as new type cell phones, new books, new released medication DVDs. Airlines usually charge ticket differently according to time. During the holiday such as Christmas and New Year, the tickets price is normally higher than other times. Customers sometimes are argue that the airline gets extra profit by exaction of customers surplus and leaves very little to customers.ConclusionsThis paper provides analysis on three types of price discrimination. Price discrimination is one of the most effective strategy to maximize a companys profit when it is compared with a single pricing for the products and services. All three types of price discrimination tog up a companys profit, and they all have both positive and negative effect on the society. I personally think that price discrimination is a reality and it is acceptable to many customers in most situati ons. It exists in our daily life, and it is used widely in various industries.ReferencesAguirre, I., Cowan, S., Vickers, J. (2010, September). Monopoly price discrimination and demand curvature. The American Economic Review, 100(4), 1601-1615. doi 10.1257/aer.100.4.1601Armstrong, M. (2006, October). Price discrimination. Retrieved from http//else.econ.ucl.ac.uk/ paper/uploaded/222.pdfHubbard, R. G., OBrien, A. P. (2012). Microeconomics (4th edition). Prentice Hall.Pettinger, T. (2013, March 6). Examples of price discrimination. 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