Here we discuss the main factors that determine the level of prices for the company’s products in a market economy.
Factor 1: Demand for the Product
The market is the oldest reality of humankind, which not only does not become obsolete over time but also allows the best way to combine individual and public interests in the conditions of any social system.
Most clearly in the market are two groups of interests – sellers and buyers that determine supply and demand. Demand is the solvent desire of consumers to purchase a product at a certain price. The following factors determine the demand for a product:
Dx \u003d (T x, PHP x, P y, P, W, F)
Where D x is the demand for goods; T x – is the buyer’s need for this product; Y is the consumer’s income; P x – the price of this product; P – the price of a substitute product; P is the price of the complementary product; W is the level of well-being, i.e., purchasing power of the consumer; F is the opinion of the consumer regarding the prospects for his well-being.
Factor 2: Production Costs
Demand usually determines the maximum price a firm can charge for its product. The firm’s average variable cost per output unit determines the minimum fee. There are two types of the expenses for a firm: fixed and variable. Fixed prices do not vary when output rises or falls. As a result, the company must pay monthly rent, heat, interest, and personnel compensation, among other things. Regardless of the degree of output, fixed expenses are always present.
Variable costs vary with the level of production. They are called variables because their total amount varies depending on the number of units of goods produced. Per unit of output, variable costs can remain unchanged.
Factor 3: Competitor Prices
You can achieve it in several ways. Although the maximum price may be determined by demand and the minimum by the production cost structure, a firm’s setting of an average price range is influenced by competitors’ prices and market reactions. The firm may instruct its representatives to make comparative purchases to compare the prices and quality of goods with each other.
Factor 4: Types of Competition in the Market
The price policy of the seller depends on the type of market. Economists distinguish four types of markets, each of which poses problems in pricing.
Pure competition. The pure competition market consists of many sellers and buyers of similar products, such as wheat, copper, and securities. No individual buyer or seller has much influence on a commodity’s current market price level.
This type of competition is not typical for airlines due to the limited number of manufacturers and the heterogeneity of products.
Monopolistic competition. The monopolistic competition market consists of many buyers and sellers who transact not at a single market price but over a wide range of prices.
Factor 5: Price Validity Period
The price validity period depends on the pricing strategy. Still, in any case, the price cannot remain constant for a long time since there are many competitors on the market and changes in the external environment occur, which, of course, leads to a price decrease or increase on the goods and consequently, to reduce the period of action of the price.
Factor 6: Product Marketing Costs
Marketing is a human activity that satisfies needs and requirements through an exchange. Anyone who wants to sell needs to find buyers, identify their needs, design appropriate products, market them, transport them, negotiate prices, etc. The exchange process requires work.
Factor 7: The Novelty of the Product
A firm’s strategic approach to pricing depends partly on the stages of a product’s life cycle. According to the nature of the appearance on the market in terms of novelty and modernity of the embedded consumer properties, goods can be classified as follows.
- Pioneer goods are designed to satisfy non-traditional consumer demand, new needs that have arisen or deliberately modeled by the producer or the state in the consumer community.
- Market novelty products arise from further research to improve pioneer products because of systematic discoveries, continuous invention, rationalization, and current technology improvement.
- New goods mean such a modification of an existing product (product, product, service) of market novelty or its technical modernization, which the consumer considers significant
Thus, the main factors determining the price level are:
- Price elasticity of demand.
- Level and structure of production costs.
- The pricing policy of competitors.
- Type of competition.
- Costs associated with services and transportation of goods.
- Purpose and plan for setting the market price.
- Availability of funds for competitive struggle.
- Additional costs are not included in the price to attract a buyer.
- Deciding on how much to raise the cost of goods.
- Changes in the environment may affect the entity’s ability to determine pricing policy without the intervention of a third party.