The Demand Curve and Pricing

Overview

Pricing refers to the activity of a firm deciding what prices to charge for its products/services in order to maximize its objectives. Objectives in this case does not necessarily mean profits. Firms may have other objectives such as market share or community benefit.

The theory of pricing is based fundamentally on the economic models of supply and demand.

Topics

• Market Structure and Prices
• Optimal Profit - typically considered to be the main objective of most firms
• A differentiated pricing strategy is a pricing plan which charges different prices for the same product. This can be done based on customer type (for example, senior discounts), or for quantity of product sold. (i.e. the more bought the less charged).
  
  Differentiated pricing requires a more complex analysis than the basic demand curve, and often requires a more complete picture of the customer, such as may be achieved through modeling the customer. (see below)
• Bayesianism and Marketing

Modeling Techniques

• Break Even Analysis is the amount of lost units sold that exactly negates the positive benefit of higher prices. That is, it asks the question, by how much would sales have to fall in order for the price increase have no effect on profit.
• The Price Response Function is a function that specifies the level of consumer demand for a given product at a given price. It may be referred to by other names, such as the demand function. An estimate of the price response function, or at least in an area around the actual price, is often the starting point of any pricing analysis.
• Time Series - standard time series techniques can be used to forecast changes in demand over time.
• Modeling the Customer In order to get deeper insight in a firms price curves, marketers often try to model the customer that drives the demand curve. Understanding the customer helps to create additional flexibility in pricing, such as using a differentiated pricing strategy.