When products are identical or highly similar (as is widely the case in retail industries), it is often simpler to copy competitors’ prices rather than implement another pricing strategy. This method is simple because competitors’ prices are most often publically displayed and it is therefore easy to copy them. This method is simple in terms of economic theory and also entails a low risk of setting an inefficient price, allowing a company to move towards an economic equilibrium. This is due to the assumption that the equilibrium level of price is already reached in this type of market, meaning that competitors are setting their prices at the equilibrium price. Moreover, this pricing method is often used within well-established and highly competitive markets. On the contrary, if a firm wants to create a successful brand image, it would be more effective to sell higher-priced products In order to communicate a signal of quality to its consumers. For example, if a firm wants to gain market share, then its objective is to have one of the lowest prices on the market. According to a company’s objectives in terms of brand, penetration tactics or market aggressiveness, the exact price level can somewhat vary. Moreover, this pricing method can also be used in combination with other methods such as penetration pricing for example, which consists of setting the price below that of its competition (for instance, in this example, setting the price of the coffee maker at $23).Īs previously mentioned, competitive pricing consists of using competitors’ prices to set one’s own. It decides to set this very price on their own product. The firm’s competitors sell it at $25, and the company considers that the best price for the new coffee maker is $25. As a result, this pricing method can potentially be inefficient and lead to reduced profits.įor example, a firm needs to price a new coffee maker. Considering this, the main limit of the competitive pricing method is that it fails to account for the differences in costs (production, purchasing, sales force, etc.) of individual companies. However, every company is different and so are its costs. Therefore, by setting the same price as its competitors, a newly-launched firm can avoid the trial and error costs of the price-setting process. In any market, many firms sell the same or very similar products, and according to classical economics, the price for these products should, in theory, already be at an equilibrium (or at least at a local equilibrium). This method relies on the idea that competitors have already thoroughly worked on their pricing. Competitive pricing consists of setting the price at the same level as one’s competitors.
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