Quiz 18: Pricing Concepts

Business

Distinguish between fair-trade and unfair-trade laws. As a consumer, would you support either fair-trade or unfair-trade laws? Would your answer change if you were the owner of a small store?

Free

Essay

Fair-Trade laws: Fair-trade laws allow a manufacturer to stipulate minimum retail prices for their products and require dealers of signature contracts to abide by these prices. The law asserts that it is the manufacturer's right to determine the product's price. Hence, the manufacturer possesses authority to protect its asset by maintaining the minimum price as per the retailer's requirement. The importance of fair trade laws declined over the years as price competition and discounters emerged to strengthen the component of marketing strategy. Unfair trade laws: Unfair trade laws require sellers to maintain the minimum price for comparative merchandise. According to the Act of 1930, the laws propose the protection of small specialty shops and dairy stores from loss leader strategy of attracting consumers through least prices. However, state laws set the retail price at cost plus markup prices. The unfair trade laws have been in practice since the time when lawsuits were brought against warehouse clubs for practicing loss leader strategy for gasoline prices. Consumers support fair trade practices as they are legalized practices that benefit both consumers and government. Consumers support unfair trade practices as they provide short-term benefits such as price reduction of the products through discounts. "A small store owner will not support unfair trade practices as they exploit their business." • A large-scale wholesaler can provide discounts on bulk purchases; but when a small store owner tries to be a loss leader it will be difficult for him to manage the financial position. • In regard to that situation, the Act of 1930 proposes the protection of small specialty shops and dairy stores from loss leader strategy of attracting consumers through least prices.

Q 2

The Cash for Clunkers Program During a recent summer, the federal government undertook the temporary Car Allowance Rebate System, abbreviated CARS but popularly known as the Cash for Clunkers program. Under the plan, drivers of qualifying cars from the years 1984 through 2002 with an EPA-rated efficiency of 18 miles per gallon or less received a voucher worth $3,500 to $4,500 for trading those cars in to purchase a new car with an EPA rating of 22 miles per gallon or better. (The voucher amount varied depending on the difference in miles per gallon between the trade-in and the new purchase.) In other words, the government wanted to encourage the purchase of efficient new cars by, in effect, temporarily reducing the price to qualified buyers. The purpose of the plan was twofold: one goal, motivated by the recession-weakened economy, was to "shift expenditures by households, businesses, and governments from future periods when the economy is likely to be stronger, to the present when the economy has an abundance of unemployed resources that can be put to work at low net economic cost," as stated by Christopher Carroll. The second goal was to reduce harmful emissions by getting a large number of older, gas-guzzling vehicles offthe road. While some critics said the plan would simply pull future sales into the rebate period, resulting in no net increase in sales, several studies have shown that Cash for Clunkers was a success. More than 130,000 cars were traded in, and the budgeted allocation of $1 billion for the rebates was gone within a week. Congress had to quickly authorize the release of an additional $2 billion to keep the program going for the announced time period. More than half the cars traded in were at least ten years old and about eight in ten had been driven more than 100,000 miles. In an even more striking result, another quarter-million cars were sold during the Clunkers period to buyers who wanted to cash in, didn't qualify, and decided to purchase a new car anyway. Many of these "halo sales" were of fuel-efficient hybrids, further contributing to what the U.S. Department of Transportation says was a mileage gain of nearly ten miles per gallon overall on vehicles purchased during the plan, compared to the goal of increasing efficiency by four miles per gallon. "Our findings not only provide strong evidence that many more vehicles were sold as a direct result of the incentive program than were previously estimated," said the vice president of an auto industry research group. "They also largely debunk the myth that 'cash for clunkers' mortgaged future car and truck sales. In fact, the program resulted in sales of vehicles to people who don't normally buy them." Some estimate that more than 540,000 of the purchases made during the plan were to buyers and lessees who wouldn't have made a purchase without the cash incentive. And with car sales continuing to rise, the research group concludes, "the program did not [mortgage] the future of the industry by stealing sales that would have occurred otherwise." And according to the National Highway Traffic Safety Administration, the CARS program saved or created nearly 60,000 jobs. Who really pays the cost of a government price-incentive plan like Cash for Clunkers? Why? What other ways can you think of to distribute such costs?

Free

Essay

Introduction of CARS program: The government introduced a special program called Car Allowance Rebate System (CARS) for encouraging drivers to buy efficient new cars. The government gave a rebate of $3,500-$4,500 on new cars to all qualified drivers. The program was initiated with a vision to get rid of old cars that emitted volumes of hazardous gases and that spoiled the environment. The program became a huge success and resulted in sales of more than 540,000 cars in that year. Price-incentive plan is given below: The government must bear the cost of the price-incentive plan initiated to replace old cars with new efficient cars. It would majorly make use of the taxes paid by the citizens to cover the cost incurred by this plan. The cost must be completely paid by the government since no other individual or company will prefer to bear such a huge cost. The other way to distribute the cost would be to ask the automobile companies to be socially responsible and contribute to the economy by providing rebates on new efficient cars. This would improve the sales and perception of that company. In addition, the company will also gain tax rebates from government. This would be a win-win situation to the environment, drivers, automobile company and the government. Thus, encouraging companies to contribute more to the economy under Corporate Social Responsibility would help the government to minimize the cost and safeguard the environment, guaranteeing the satisfaction of the drivers and that of the company.

Q 3

Prices at amusement parks might rise if operators such as Disney and Universal Studios add new attractions. The parks also have to deal with high fuel prices. List as many things as you can think of that such parks offer patrons in return for their money. Which of these do you think are directly reflected in the price of admission?

Free

Essay

Price determination is explained below: The researchers evaluate prices by applying the concept of demand and supply and by implementation of cost-oriented analysis. This economic theory technique helps to correct equilibrium prices in the marketplace by equating supply and demand. Prices at amusement parks: The entrance fee at amusement parks may increase or decrease, depending on entertainment, number of games, attractions, and rides that are offered to public. List of things offered by the amusement park are given below: • Roller coasters • Water rides • Flat rides • Dark rides • Food availability When the amusement park planned to add new rides due to rising price of fuel, it may indirectly increase the entrance prices at amusement parks. The following is the list of things that directly increase the entrance prices at amusement parks : • Introduction of new games • Usage of advanced technology • Introduction of recreation facilities • Enhanced security and support service Amusement parks need not increase the entrance prices with the support of patron, or by going public; they can ask the marketers to invest. They can also approach other companies to operate shows and thus decrease operating expenses.

Q 4

You work for a major restaurant in your town. The manager is facing cost pressures from rising food prices and says she needs to raise revenues. She decides to reduce the size of the meal portions and use cheaper cuts of meat and fish in some entrées while holding the menu prices constant. She tells you and other staff members not to mention the changes to customers and to deflect any questions or complaints you hear. The descriptions in the menu will not be changed, she says, "because the printing costs would be too high." You know the restaurant advertises the quality of its ingredients in the local media. The menu changes are not advertised, and it bothers you. What course of action would you take?

Essay

Q 5

Price competition. Using a popular travel site, look up airfares for each of the following pairs of cities: New York to Los Angeles Atlanta to Detroit Jacksonville, Florida, to Dallas Chicago to Omaha Denver to Albuquerque Do some fares appear higher (on a per-mile basis) than others? Do these differences reflect how many airlines provide nonstop service between each pair of cities? What about the impact on fares of so-called discount airlines (such as JetBlue)? www.expedia.com www.kayak.com

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Q 6

In small teams, categorize each of the following as a specific type of pricing objective. Suggest a company or product likely to use each pricing objective. Compare your findings. a. 5 percent increase in profits over the previous year b. prices no more than 6 percent higher than prices quoted by independent dealers c. 5 percent increase in market share d. 25 percent return on investment (before taxes) e. setting the highest prices in the product category to maintain favorable brand image

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Q 7

Give an example of each of the major categories of pricing objectives.

Essay

Q 8

The Cash for Clunkers Program During a recent summer, the federal government undertook the temporary Car Allowance Rebate System, abbreviated CARS but popularly known as the Cash for Clunkers program. Under the plan, drivers of qualifying cars from the years 1984 through 2002 with an EPA-rated efficiency of 18 miles per gallon or less received a voucher worth $3,500 to $4,500 for trading those cars in to purchase a new car with an EPA rating of 22 miles per gallon or better. (The voucher amount varied depending on the difference in miles per gallon between the trade-in and the new purchase.) In other words, the government wanted to encourage the purchase of efficient new cars by, in effect, temporarily reducing the price to qualified buyers. The purpose of the plan was twofold: one goal, motivated by the recession-weakened economy, was to "shift expenditures by households, businesses, and governments from future periods when the economy is likely to be stronger, to the present when the economy has an abundance of unemployed resources that can be put to work at low net economic cost," as stated by Christopher Carroll. The second goal was to reduce harmful emissions by getting a large number of older, gas-guzzling vehicles offthe road. While some critics said the plan would simply pull future sales into the rebate period, resulting in no net increase in sales, several studies have shown that Cash for Clunkers was a success. More than 130,000 cars were traded in, and the budgeted allocation of $1 billion for the rebates was gone within a week. Congress had to quickly authorize the release of an additional $2 billion to keep the program going for the announced time period. More than half the cars traded in were at least ten years old and about eight in ten had been driven more than 100,000 miles. In an even more striking result, another quarter-million cars were sold during the Clunkers period to buyers who wanted to cash in, didn't qualify, and decided to purchase a new car anyway. Many of these "halo sales" were of fuel-efficient hybrids, further contributing to what the U.S. Department of Transportation says was a mileage gain of nearly ten miles per gallon overall on vehicles purchased during the plan, compared to the goal of increasing efficiency by four miles per gallon. "Our findings not only provide strong evidence that many more vehicles were sold as a direct result of the incentive program than were previously estimated," said the vice president of an auto industry research group. "They also largely debunk the myth that 'cash for clunkers' mortgaged future car and truck sales. In fact, the program resulted in sales of vehicles to people who don't normally buy them." Some estimate that more than 540,000 of the purchases made during the plan were to buyers and lessees who wouldn't have made a purchase without the cash incentive. And with car sales continuing to rise, the research group concludes, "the program did not [mortgage] the future of the industry by stealing sales that would have occurred otherwise." And according to the National Highway Traffic Safety Administration, the CARS program saved or created nearly 60,000 jobs. The cash incentive in the CARS plan appears to have succeeded in its goal of reducing harmful emissions. What lessons do you think that success offers for other efforts to safeguard the environment?

Essay

Q 9

Music artists earn only about 9 percent in royalties per CD, using a royalty base of retail price less 25 percent for packaging costs. The rest goes to the producer and to cover recording costs, promotion, copies given away to radio stations and reviewers, and other costs such as videos. What do you think happens to the artist's royalties when a CD is marked down to sell faster? Consider two cases: (a) the marked-down CD sells more copies, and (b) it sells the same number of copies as before.

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Q 10

You work for a major restaurant in your town. The manager is facing cost pressures from rising food prices and says she needs to raise revenues. She decides to reduce the size of the meal portions and use cheaper cuts of meat and fish in some entrées while holding the menu prices constant. She tells you and other staff members not to mention the changes to customers and to deflect any questions or complaints you hear. The descriptions in the menu will not be changed, she says, "because the printing costs would be too high." A customer mentions that the chicken in the sandwich he ordered is "tough and dry" and the order seems smaller than before. What would you do?

Essay

Q 11

Yield management. You are planning a trip to Walt Disney World. Visit the website to price week-long stays at various times of the year. Be sure to choose similar hotels. Which weeks are the most and least expensive? Do the days of arrival and departure make any difference? Prepare a summary of your findings and bring it to class so you can participate in a discussion on yield management.http://disneyworld.disney.go.com/vacation-packages

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Q 12

How are the following prices determined and what do they have in common? a. ticket to a local museum b. college tuition c. local sales tax rate d. printing of business cards e. lawn mowers

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Q 13

What are the major price implications of the PIMS studies? Suggest possible explanations for the relationships the PIMS studies reveal.

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Q 14

Some finance experts advise consumers not to worry about rising gasoline prices, the cost of which can easily be covered by forgoing one takeout meal a month, but to worry about how high energy prices will affect the rest of the economy. For example, each dollar-a-barrel price increase is equivalent to a $20 million-a-day "tax" on the economy. Explain what this means.

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Q 15

Airbus and Boeing subsidies. The United States and European Union have had a long-running dispute over allegations of improper government subsidies to commercial aircraft manufacturers (the U.S. about Airbus and the EU about Boeing). Government subsidies may give the manufacturer a price advantage over its competition. Both sides have filed complaints with the World Trade Organization. Go to the WTO website and see the article link listed below. Write a report outlining the trade dispute and its current status. www.wto.org http://www.reuters.com/article/2014/05/19/us-trade-aircraft-subsidies-exclusive-idUSBREA4I03W20140519

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Q 16

WebTech Development of Nashville, Tennessee, is considering the possible introduction of a new product proposed by its research and development staff. The firm's marketing director estimates the product can be marketed at a price of $70. Total fixed cost is $278,000, and average variable cost is calculated at $48. a. What is the breakeven point in units for the proposed product? b. The firm's CEO has suggested a target profit return of $214,000 for the proposed product. How many units must be sold to both break even and achieve this target return?

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Q 17

Identify each factor influencing elasticity and give a specific example of how it affects the degree of elasticity in a good or service.

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Q 18

Ajax Motor Company recently announced that it will rely less on high-volume strategies such as discounts and rebates to improve its profitability. Another strategy it will employ is to sell fewer cars to rental fleets, which eventually return the cars to Ajax for sale at low auction prices. How do these types of sales affect Ajax's profitability?

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Q 19

Research the price schedule at your local movie theater multiplex. Which pricing strategy accounts for any price differentials you discover? Why don't matinee prices constitute price discrimination against those who don't qualify for the discounts?

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Q 20

What are the practical problems in applying price theory concepts to actual pricing decisions?

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Q 21

How do cell phone companies make money by charging a flat rate per month for a set number of minutes, such as $35 for 300 minutes? Can you think of a more profitable plan? Would it appeal to consumers?

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