Price point
Encyclopedia
Price points are price
s at which demand
for a given product
is supposed to stay relatively high.
depicts a demand curve
as downward-sloping to the right and either linear or gently convex to the origin. The downwards slope generally holds, but the model of the curve is only piecewise
true, as price surveys indicate that demand for a product is not a linear function
of its price and not even a smooth function
. Demand curves resemble a series of waves rather than a straight line.
The diagram shows price points at the points labeled A, B, and C. When a vendor increases a price beyond a price point (say to a price slightly above price point B), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity-demanded more than offsets the additional revenue from the increased unit-price. As a result, total revenue (price multiplied by quantity-demanded), decreases when a firm raises its price beyond a price point. Technically, the price elasticity of demand
is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). Firms commonly set prices at existing price-points as a marketing strategy
.
, but as an emergent
property of oligopolies: when all firms sell at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally); on the other hand, any firm in an oligopoly which lowers its prices will mostly likely be matched by competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand-curve where the kink lies at the point of the current price-level in the market.
These results depend on the elasticity of the demand curve and on the properties of each market.
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
s at which demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
for a given product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
is supposed to stay relatively high.
Characteristics
Introductory microeconomicsMicroeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
depicts a demand curve
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
as downward-sloping to the right and either linear or gently convex to the origin. The downwards slope generally holds, but the model of the curve is only piecewise
Piecewise
On mathematics, a piecewise-defined function is a function whose definition changes depending on the value of the independent variable...
true, as price surveys indicate that demand for a product is not a linear function
Linear function
In mathematics, the term linear function can refer to either of two different but related concepts:* a first-degree polynomial function of one variable;* a map between two vector spaces that preserves vector addition and scalar multiplication....
of its price and not even a smooth function
Smooth function
In mathematical analysis, a differentiability class is a classification of functions according to the properties of their derivatives. Higher order differentiability classes correspond to the existence of more derivatives. Functions that have derivatives of all orders are called smooth.Most of...
. Demand curves resemble a series of waves rather than a straight line.
The diagram shows price points at the points labeled A, B, and C. When a vendor increases a price beyond a price point (say to a price slightly above price point B), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity-demanded more than offsets the additional revenue from the increased unit-price. As a result, total revenue (price multiplied by quantity-demanded), decreases when a firm raises its price beyond a price point. Technically, the price elasticity of demand
Price elasticity of demand
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). Firms commonly set prices at existing price-points as a marketing strategy
Marketing strategy
Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.-Developing a marketing strategy:...
.
Causes
Three main reasons exist to have price points:- Substitution price points
- price points occur at the price of a close substitute
- when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply
- Customary price points
- the marketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
grows accustomed to paying a certain amount for a type of product - increasing the price beyond this amount will cause sales to drop dramatically
- the market
- Perceptual price points (also referred to as "psychological pricingPsychological pricingPsychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. The theory is this drives demand greater than would be...
" or as "odd-number pricing")- raising a price above 99 cents will cause demand to fall disproportionally because people perceive $1.00 as a significantly higher price
Oligopoly pricing
In relation to customary price points, oligopolies can also generate price points. Such price points do not necessarily result from collusionCollusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...
, but as an emergent
Emergence
In philosophy, systems theory, science, and art, emergence is the way complex systems and patterns arise out of a multiplicity of relatively simple interactions. Emergence is central to the theories of integrative levels and of complex systems....
property of oligopolies: when all firms sell at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally); on the other hand, any firm in an oligopoly which lowers its prices will mostly likely be matched by competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand-curve where the kink lies at the point of the current price-level in the market.
These results depend on the elasticity of the demand curve and on the properties of each market.
See also
- PricingPricingPricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...
- List of topics in industrial organization
- Convex preferencesConvex preferencesIn economics, convex preferences refer to a property of an individual's ordering of various outcomes which roughly corresponds to the idea that "averages are better than the extremes"...
- Cost the limit of priceCost the limit of priceCost the limit of price was a maxim coined by Josiah Warren, indicating a version of the labor theory of value. Warren maintained that the just compensation for labor could only be an equivalent amount of labor . Thus, profit, rent, and interest were considered unjust economic arrangements...