Pricing Methods

The most common pricing methodsadopted by firms are:

1. Cost-plus pricing is a very simple pricing method and is perhaps the most common. A firm may calculate its average costsof producing a product and then simply add a profit 'mark-up',say 10%, on to average costs. This mark-up could 1 be changed to allow forthe effects of competition and economic conditions, e.g. where there is a lot of competition this : mark-up may be lowered or when business is good the markup could be raised.

2. Marginal-cost pricing differs from the above in that the firm looks not at its average costs but at marginal costs, i.e. the firm calculates the additional cost of producing the

next unit or set of units of output and the firm charges a price(plus a 'mark-up') according to the marginal cost. A typical example is found in the shoe repair business. There appear to be no standard pricesfor repairing shoes. What tends to happen is that the cobbler examines the shoes and makes aquick estimateof how much material and time it will take to repair them. Larger shoes, those made of leather-and those in greater disrepair have a higher marginal cost and therefore a higher price is charged for their repair.

3. Price discrimination: several firms are able to charge different prices for a similar product. This is known as price discrimination. British Rail (BR), for example, charges different consumers such as businessmen and women, children, senior citizens and students different prices and also charges different prices according to the time of the journey, e.g. peak, off-peak, weekly and weekend. British Telephones (ВТ) price discriminates according to the time of day, week and distance of the call. The price charged to the consumer is made up of two elements: a fixed charge or quarterly rental, which is designed to cover BT's fixed costs, and a variable charge related to the use of the phone. The ability of a firm to price discriminates on whether it can split or segment its market. In the case of ВТ and BR this is quite straightforward. Other industries and firms also price discriminate, e.g. the breweries charge different prices in the different regions of the country, cinemas offer cheap tickets for afternoon and late shows, and the Electricity Boards operate an Economy 7 system where consumers pay less for nighttime electricity.

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