Question

Edward Entra Manure has developed a new product that he is convinced will really do well in the marketplace—and make him rich. While there will be a few competitors—considering that there will be some goods out there that are somewhat similar, but (in his opinion) nowhere near as good and desirable as his product—he is confident his new product will fare extremely well, meaning that it will generate strong sales and high profits for him.

As he introduces his product to the market Joe surveys what his “competitors” are charging for their product, but remember, he thinks his is much better than the others are and will therefore find greater acceptance in the marketplace. Since there is no great graph in the sky that will show him where two lines cross (as we find in textbooks and on lecture chalk boards), (a) how will Edward know whether he has priced his product too high, too low, or just right? Also (b) explain the adjustment process if it turns out that he has initially priced his product too high or too low.

Answer 1

Neither Edward or any other firm would be able to exactly say whether the pricing is accurate keeping in mind the objectives of the producer.The pricing strategies can change as the product goes through the life cycle .The initial pricing for the product is quite significant .The economics suggests pricing strategies like skimming pricing,peneterating pricing strategy, cost plus pricing and a competatative pricing depend upon the nature of the product Edward has made.

For the skimming price strategy he would charge a high price to skim the profit layer by layer from those who are willing to pay the high price provided the product match with the quality and uniqueness .Under this strategy sales will be less but profit margins will be more.On the other hand he can follow market penetration strategies, where a low price is kept for the product initially so that larger volumes and a reasonable market share can be won.

He can also follow the cost plus pricing by keeping the price above the marginal cost of production and in the case of competitive pricing the price can be fixed at average cost in the long run and equal to the margnal cost in the short run.