Chapter 14 Learning Review

What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm's resources used in obtaining the profit?

target return-on-investment pricing

Why would a seller choose a dynamic pricing policy over a fixed-price policy?

A dynamic pricing policy sets different prices for products and services in real time in response to supply and demand conditions. Sellers have considerable discretion in setting the final price in light of demand, cost, and competitive factors. Moreover, sellers can continually adjust prices due to the implementation of sophisticated information technology that gives them the ability to customize a price on the basis of customer purchasing patterns, product preferences, and price sensitivity. A fixed-price policy sets one price for all buyers of a product or service. Consumers can choose to buy or not buy, but there is no variation in the price from the seller.

If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or a noncumulative quantity discount be a better strategy?

Cumulative quantity discounts apply to the accumulation of purchases of a product over a given time period (typically a year) and encourage repeat buying by a single customer to a far greater degree than do noncumulative quantity discounts.

What is the purpose of loss-leader pricing when used by a retail firm?

Loss-leader pricing involves deliberately selling a product below its customary price not to increase sales but to attract customers in hopes they will buy other products as well, such as discretionary items with large markups.

What is odd-even pricing?

Odd-even pricing involves setting prices a few dollars or cents under an even number. Psychologically, a $499.99 price feels lower than $500.00, even though the difference is just 1 cent.

In pricing a new product, what circumstances might support skimming or penetration pricing?

Skimming pricing is an effective strategy when: (1) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable because they are not very price-sensitive; (2) the high initial price will not attract competitors; (3) lowering the price has only a minor effect on increasing the sales volume and reducing the unit costs; and (4) customers interpret the high price as signifying high quality. These conditions are most likely to exist when the new product is protected by patents or copyrights or its uniqueness is understood and valued by consumers. Penetration pricing is an effective strategy when: (1) used after a skimming strategy to appeal to a broader segment of the population and increase market share; (2) many segments of the market are price sensitive; (3) a low initial price discourages competitors from entering the market; (4) unit production and marketing costs fall dramatically as production volumes increase; (5) a firm wants to maintain the initial price for a time to gain profit lost from its low introductory level; and (6) a firm wants to lower the price further, counting on the new volume to generate the necessary profit.

What is standard markup pricing?

Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class. The price varies based on the type of product and the retail store within which it is sold.

Which pricing practices are covered by the Sherman Act?

The Sherman Act prohibits (1) horizontal price fixing, which is when two or more competitors explicitly or implicitly set prices and (2) predatory pricing, which is the practice of charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices.