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Basic pricing principle

by:CNS     2021-07-13
Basic pricing principle 2021-06-20 22:38:391. The role of pricing and target pricing (pricing) is a method of resource allocation. There is no so-called 'correct' price, only an optimized pricing strategy that can achieve the desired goal. For example, the optimal price to maximize profit may be different from the price required to maximize welfare or guarantee the highest sales revenue. In some cases, setting prices is not an attempt to maximize or minimize something, but only to achieve a lower level of goals (safety, minimum market share, etc.). Further, pricing may be to achieve certain welfare goals of transportation providers (this is the case of private transportation companies); but in other cases, pricing may be to improve the welfare of consumers (this is the case for some state-owned transportation companies). The situation of the enterprise). The difference is very subtle, and even many companies believe that the use of pricing mechanisms to achieve their goals will automatically conform to the interests of customers. Therefore, one of the first issues in discussing actual pricing policy is to determine what the 'target' is. For example, with regard to the issue of port pricing, there has been a big difference between the 'Europe' pricing theory and the 'UK' pricing method. The former aims to promote economic growth in the inland behind the port, while the latter tries to ensure that the port can recover its own price. Cost, and profit if possible, regardless of the impact on the broader local economy. But no matter what kind of goal, the enterprise theory assumes that the supplier intends to maximize its own welfare, regardless of the definition of welfare as profit or higher-level pursuit. 2. The equilibrium of price and market. According to the theory of western economics, the core of market operation is the price mechanism, that is, in what Adam Smith called the free market, there is an invisible hand directing the operation of the market. As shown in Figure ⒎1, D is the market demand curve, and S is the market supply or cost curve. When the price is pl, the corresponding price is greater than the cost. A higher pricing Pl can attract more companies and stimulate production at the same time; when the market satisfies When there is demand, there is a situation of oversupply, and the price begins to decrease again, down to P2, and repeats itself. Finally, due to the game between the price and the market, the price will be stable at the P pass. This process of price stabilization can be represented by the spider web model in Figure 1. However, if the absolute value of the elasticity coefficient of the market supply curve or the cost curve is smaller than the absolute value of the elasticity coefficient of the market demand, the market price presents a state of instability. Of course, this situation occurs more in monopolistic industries, and in competitive industries, production is highly sensitive to prices, and prices will eventually stabilize in the game with the market. The market supply or cost curve in this figure can be the long-term/short-term production cost curve, the long-term/short-term marginal cost curve or the variable cost curve, etc. The type of choice is different, and the pricing decision is different. 3. The standard status of corporate pricing The maximization of profit is the traditional motivation of private companies. The actual price level in this case depends on the degree of competition in the market. In places where competition is fierce, no single company can manipulate the price level, which depends on the interaction of supply and demand in the entire market. In this completely competitive environment, it is impossible for any transportation supplier to obtain excessive profits for a long time, because this kind of profit stimulus will allow new enterprises to enter the market and increase the total supply. Therefore, in the long run, the price will be equal to the marginal and average cost of each supplier. On the contrary, a truly monopolistic supplier can freely set prices or stipulate the level of services it provides, without worrying about new entrants increasing the total supply of transportation services. The effective constraint on the monopolist is demand, which can organize output and determine prices. However, given the assumption that there is no competition and the degree of freedom enjoyed by monopolists, it is almost certain that the profit-maximizing price will cause the charge to exceed the marginal cost and the average cost (the only exception is the emergence of a fully elastic market demand curve, but this situation is almost Impossible to happen). This is one of the reasons why the government always tends to manage railways, ports and other transportation enterprises with monopolistic characteristics. However, this simple description of the standard situation does conceal some uniqueness of the transportation market. Because the actual supply unit, the means of transportation, is active, the transportation market may appear to be basically competitive, but when each supplier sets prices, it seems to be a monopolist, or it seems to be able to exert some kind of monopoly power (not The regulated city taxi market is an example of this).
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