Question

Explain the key difference among the three different pricing methods a firm might choose.

Answer 1

There are different pricing methods to be used by the firm and each method has its own characteristics. The first pricing method is cost plus or cost based pricing method where a markup to the cost is added to achieve the final price. Here, the basis of pricing is cost of production. In contrast to it, value based pricing is based upon the value to be perceived by the consumers. It has not much to do with the cost. Here, value perceived by the consumers, is the basis of pricing. For example, Apple does it for the pricing of iPhones and other products. The third pricing strategy is competitor based pricing where the basis of pricing is the competitors' price of their products. Here, firm sets its price on the basis of what price is set by the competitors. It happens mostly in oligopoly based market structure. So, the key difference is the basis of pricing to be chosen by the firm.

The second key difference is the market structure where the pricing strategy deemed suitable. The cost based pricing is most suitable for perfect competition, whereas value based pricing is more suitable in the monopolistic competition where the firm delivers quality with differentiation and put higher price to the product. The competitor based pricing is applied when there is an oligopoly based market.