Overview of Optimal Pricing Strategies, Essay Example

The intricacies of effective price strategizing are essential to obtaining the maximum profits for a company. Price determination is aided by the basic laws of supply and demand. By raising the price of a product, the demand should fall slightly; companies that offer a product high in demand will often test the effect of raising the price. Sometimes demand will not be affected; the product may be so coveted, that the consumer is willing to demand the same quantity despite the price. This occurs most often in markets that are monopolistic in nature. When the consumer has no alternative, the pricing can be raised in a monopolistic market until the consumer would rather forego the product altogether rather than pay the excessive price.

Pricing has to be very carefully managed. If the price becomes too high on a product, consumers may seek a substitution good or similar product at a competing business or may forego the expenditure altogether. This is only possible in a perfect competition market structure, which bases its pricing on the prices of the competition as well as the marginal cost of production. For effective price management, the manager must take the prices offered by competing firms for similar products and substitute goods.

Optimal Pricing Strategies: Monopolistic Market Structure

Definition of Monopolistic Market Structure

Monopolistic Market Structures have a unique set of stratagems for optimal pricing and optimal profits. In a monopolistic market structure, the competition is between firms selling similar but not entirely-substitutable products. It is open to all firms that want to earn profits. The firms within a monopolistic market structure are profit maximizers and all of the firms have some market power.

Monopolistic Example

The Los Angeles Dodgers and the Anaheim Angels derive financial profitability even though they are so close in proximity. Although the Dodgers experience greater revenues due to the comparable team success, both baseball teams generate healthy profits. The population forms an allegiance with one team or the other for a multitude of reasons; therefore, although both are baseball teams in the same city, fans have specific players and specific loyalties that keep the demand for tickets to each team’s games profitably stable.

The Los Angeles Dodgers had an average sale of 51,396 fans per game in 2009 (sportsnetwork.com, 2010). The Los Angeles Angels of Anaheim’s mean ticket sales was 40,005 in 2009 (sportsnetwork.com, 2010). The Los Angeles Dodgers have annual revenue is about $211 million (forbes.com, 2007). The Los Angeles Angels of Anaheim have an annual revenue of $187 million (forbes.com, 2007).

The Los Angeles Dodgers and the Los Angeles Angels of Anaheim are affected marginally if one team is losing more games than the other. This could cause a change in the  number of consumers buying tickets. A winning streak that could lead to future playoff games and a potential spot in the World Series will cause the ticket sales to increase for that particular team.

The factors that might increase the demand for tickets can include a winning-streak by the performing team. When the team is successful and providing quality entertainment for the fans, the demand for tickets increases. Another factor that would increase demand could be the presence of a famous rival team playing or a holiday weekend event. Either event would prompt more consumers to get tickets.

There are many factors that can  decrease the number of tickets purchased by fans, (i.e. decreasing the demand for tickets). Climate conditions have a definite impact on the sales number for the tickets demanded by consumers at any particular game. One example of this is rainy weather or extreme temperatures – cold or hot. If the weather conditions are unfavorable during a particular game, this will deter ticket purchases; the consumers may forego seeing the game and watch it at home. Another factor that can negatively affect is a poor performance season by the team. If the team is facing a losing streak, the fans may become disheartened and refuse to pay money to see a poor performance by the team.

Optimal Pricing Strategies: Perfect Competition Market Structure

Definition of Perfect Competition

In a market structure that employs perfect competition, all competing businesses sell identical products. The essence of their pricing strategies is through price taking, and each business has a small share of the existing market. Perfect competition involves an ideal situation in which several firms sell identical products with no other influences than the laws of supply and demand and the basic laws which govern a capitalist market. Perfect competition is elastic.

Perfect Competition Example

PepsiCo Inc distributes soft drinks and several types of snack food internationally. In this industry has  achieved positive returns consistently, even despite the faltering economy. This company has diversified to include grain-based snacks and drinks made available worldwide. PepsiCo Inc. includes the famous products of Quaker Oats, Tropicana, Frito Lay, Pepsi Cola, and Gatorade. Along with a promise of generating new products to keep consumers buying, the company has successfully kept its pledge for steady growth to all of its stockholders (pepsico.com). It has differentiated itself enough from the Coca Cola Company to gain consumers in spite of the fact that both companies offer soda pops that are almost indistinct from one another.

Pepsi’s has toppled the rival company of Coca-Cola in terms of profitability and globalized success. The relative success can be attributed to the fact that PepsiCo has differentiated its products and provided nutritional snack foods all over the world. It has grain-based foods, carbonated, and noncarbonated products. 50% of the total revenue for PepsiCo come from noncarbonated Gatorade and Tropicana drinks (ameritrade.com). The majority of this company’s costs come from the purchase of raw materials such as aluminum, PET plastic, corn, sugar, and juice concentrates (ameritrade.com). 29% percent of the revenue generated comes from Frito-Lay of North America, 4% comes from Quaker Foods, 14% comes from Latin American Foods, 25% comes from PepsiCo Americas Beverages, 15% comes from Europe, and 13% comes from Asia and Africa (ameritrade.com). In the 4th quarter of 2009, PepsiCo had revenues of 13.3 billion dollars and the net income was 2 billion dollars. This consistent rise makes PepsiCo stock very popular amongst investors wanting a reliable investment that guarantees a return almost every quarter since the company’s inception.

References

“2010 Los Angeles Dodgers Regular Season Attendance”. (2010). Retrieved on May 14, 2010 from sportsnetwork.com:

“2010 LA Angels of Anaheim Regular Season Attendance”. (2010).  Retrieved on May 14, 2010 from sportsnetwork.com:

“#4 Los Angeles Dodgers”. (2007). Retrieved on May 14, 2010 from forbes.com: http://www.forbes.com/lists/2007/33/07mlb_Los-Angeles-Dodgers_338671.html

“#13 Los Angeles Angels of Anaheim”. (2007). Retrieved on May 14, 2010 from forbes.com: http://www.forbes.com/lists/2007/33/07mlb_Los-Angeles-Angels-of-Anaheim_338666.html

“To Our Stockholders”. 2010. Retrieved on March 30, 2010 from pepsico.com: http://www.pepsico.com/annual09/performance.html

“PepsiCo”. 2010. Retrieved on March 30, 2010 from tdameritrade.com