Discuss the main factors that determine product prices in the UK

Résumé du document

Predicting firms; behavior and reactions to events is central for current microeconomics. Economists have put forward many theories to analyze the behavior of firms, main decisions of economic interest related to outputs, investment, and technology and above all prices which are the object of this essay. Price can be defined as "the value of the goods, or the money that must be paid to acquire a good or service" or, more economically by the average revenue, which corresponds to the total revenue / total output. Generally, it corresponds to the intersection point of the demand and the supply curves. The aim of this essay is to analyze and critically discuss the main factors that determine product prices in the UK. I shall argue that the prices depend on the firms' objectives and market structure but more importantly on costs and the firms' strategies.

Extraits

[...] The aim of this essay is to analyse and critically discuss the main factors that determine product prices in the UK. I shall argue that prices depend certainly on firms' objectives and market structure but more importantly on costs and firms' strategies. This essay has been divided into two parts. The first one will analyse theoretical elements such as how firms' objectives determine price or why market structure influence firms' pricing. The second will show that in practice costs and firms' strategies are more crucial. [...]

[...] Though there is a great number of empirical evidence for cost-plus price- setting, there is also evidence that the percentage mark-up on cost varies according to firm strategy, market circumstances and the phase of the product life cycle. Establishing product differentiation and discriminating prices between markets are central aims of marketing. Finally, it must also be mentioned that the producer has less and less freedom to dictate price since, increasingly, retail outlets control the supply chain. Bibliography Griffith and S. Wall, Applied economics, (Tenth edition, Harlow, Prentice Hall, 2004), chapters “Firm objectives and firm behaviour” and chapter “Pricing in practice”. [...]

[...] In practice there are indeed a number of factors other than costs which influence firms' pricing strategy. The first is probably the strategy concerning market share. Prices may be reduced to raise or to defend market share. There are some evidences of that: on large firms (Jobber and Hooler or by the office of foreign trade (OFT)). There is also evidence that firms, notably in the UK retail petrol, have often followed a pattern of parallel pricing, i.e. a situation where prices charged by the various oil companies follow each other with only a very brief lag[5]. [...]

[...] Two crucial factors determine prices: costs and the strategy of the firm. I will first examine the influence of cost on prices and then, I will focus on considerations such as market share, life-cycle strategies or product positioning, which affect the pricing strategy of the firm. The idea that prices are closely related to costs of production is present in three different versions: mark-up pricing, alternative cost-plus theories and post-keynesian pricing theory. The general suggestion of cost- plus pricing is that prices are determined more by the supply side, via costs of production than by the demand side of the market. [...]

[...] Another example of product positioning is the prestige pricing strategy. This kind of pricing practice occurs when products' prices are at a deliberately high level in the belief that consumers equate high prices with high quality. In this unusual case, an increase in price might lead to an increase in demand. It is something common in the sector of luxury. At last, the position of a product in its life cycle has also a great influence on prices. After the introduction of the product, three broad phases can be distinguished: growth, maturity and decline. [...]