Page 622 - Encyclopedia of Business and Finance

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Pricing

Act empowers the U.S. Attorney General’s Office to chal- pany. Four pricing objectives are competitive, prestige,
lenge a perceived monopoly and to petition the federal profitability, and volume pricing.
courts to break up a company in order to promote com-
petition. Competitive Pricing. The concept behind this frequently
Another significant piece of legislation that has a used pricing objective is to simply match the price estab-
major effect on determining price is the Clayton Antitrust lished by an industry leader for a particular product. Since
Act of 1914, passed by Congress in order to prevent prac- price difference is minimized with this strategy, a com-
tices such as price discrimination and the exclusive or
pany focuses its efforts on other ways to attract new cus-
nearly exclusive dealing between and among only a few
tomers. Some examples of what a company might do in
companies. Like the Sherman Antitrust Act, this act pre- order to obtain new customers include producing high-
vented practices that would reduce competition. The quality and reliable products, providing superior customer
Robinson-Patman Act of 1936, which is technically an service, and engaging in creative marketing.
extension of the Clayton Act, further prohibits a company
from selling its product at an unreasonably low price in
order to eliminate its competitors. The purpose of this act Prestige Pricing. A company may chose to promote,
was to prohibit national chain stores from unfairly using maintain, and enhance the image of its product through
volume discounts to drive smaller firms out of business. the use of prestige pricing, which involves pricing a prod-
To defend against charges of violating the Robinson- uct high so as to make it available only to the higher-end
Patman Act, a company would have to prove that price consumer. This limited availability enhances the product’s
differentials were based on the competitive free market, image, causing it to be viewed as prestigious. Although a
and not an attempt to reduce or eliminate competition. company that uses this strategy expects to have limited
Because regulations of the Robinson-Patman Act do not sales, a profit is still possible because of the higher markup
apply to exported products, a company can offer products on each item. Examples of companies that use prestige
for sale at significantly lower prices in foreign markets pricing are Mercedes Benz and Rolls-Royce.
than in U.S. markets.
Another set of laws influencing the price of a com- Profitability Pricing. The main idea behind profitability
pany’s product are referred to as the unfair-trade laws. pricing is to maximize profit. The basic formula for this
Passed in the 1930s, these laws were designed to protect objective is that profits equal revenue minus expenses (P =
special markets, such as the dairy industry, and their main R – E). Revenue is determined by a product’s selling price
focus is to set minimum retail prices for a product (e.g., and the number of units sold. A company must be careful
milk), allowing for a slight markup. Theoretically, these not to increase the price of the product too much, or the
laws would protect a specialty business from larger busi- quantity sold will be reduced and total profits may be
nesses that could sell the same products below cost and
lower than desired. Therefore, a company is always mon-
drive smaller, specialty stores out of business.
itoring the price of its products in order to make sure it is
Fair-trade laws are a different set of statutes that were
competitive while at the same time providing for an
enacted by many state legislatures in the early 1930s.
acceptable profit margin.
These laws allow a producer to set a minimum price for
its product; hence, retailers signing pricing agreements
with manufacturers are required to list the minimum price Volume Pricing. When a company uses a volume-pricing
for which a product can be sold. These acts prevent the objective, it is seeking sales maximization within predeter-
use of interstate pricing agreements between manufactur- mined profit guidelines. A company using this objective
ers and retailers, grounded in the belief that this would prices a product lower than normal but expects to make
promote more competition and, as a result, lower prices. up the difference with a higher sales volume. Volume pric-
An important aspect of these acts is that they do not apply ing can be beneficial to a company because its products
to intrastate product prices. are being purchased on a large scale, and large-scale prod-
uct distribution helps to reinforce a company’s name as
PRICING OBJECTIVES well as to increase its customer loyalty. A subset of volume
A critical part of a company’s overall strategic planning pricing is the market-share objective, the purpose of
includes the establishment of pricing objectives for the which is to obtain a specific percentage of sales for a given
products it sells. A company has several pricing objectives product. A company can determine an acceptable profit
from which to choose, and the objective chosen will margin by obtaining a specific percentage of the market
depend on the goals and type of product sold by a com- with a specific price for a product.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 599