Chapter 20—Setting the Right Price
TRUE/FALSE
1. The first step in setting the right price for a new product is to estimate demand, costs, and profits.
2. All pricing objectives have trade-offs that managers must weigh.
3. Once he compiles information on pricing objectives, market demand, quantity supplied, and the price
elasticity of demand, the owner/operator of a home cleaning service will be ready to determine the
optimal price for a new service offering.
4. Most companies do a very good job of doing research to create a price strategy.
5. It makes the most sense to use price skimming as a pricing policy when supply is greater than demand.
6. Penetration pricing means higher profit per unit.
7. Procter & Gamble entered the electric toothbrush market with the Crest SpinBrush at a price
considerably lower than lesser-known competitors. It used penetration to gain market share.
8. Sometimes multinational firms will follow a penetration strategy in developed countries and a
skimming strategy in developing countries.
9. There are two limousine services that drive customers from communities in North Georgia to the
Atlanta airport. Whenever one reduces its fare, its competitor reduces its fares by the same amount.
This is an example of status quo pricing.
10. In the United States, price fixing is only illegal in some instances.
11. Price discrimination can sometimes be justified.
12. A winery that makes a huge profit on merlot wines may lower its price on pinot noir wines to cause
damage to wineries that only produce pinot noir. This is an example of predatory pricing.
13. Manufacturers know the approximate price level they can expect when establishing a product price.
This approximate price is called the base price.
14. An awning manufacturer that is allowed to deduct 3 percent from its total bill if it pays by a specific
date is receiving a promotional discount.
15. Functional discounts are typically calculated as the wholesale price times the accumulated margin
percentages.
16. Sears and John Deere run major sales on their lines of riding lawn mowers every fall. This is an
example of a seasonal discount.
17. Rebates involve a cash refund for the purchase of a product during a specific period.
18. Markdown allowances are illegal.
19. The basic assumption with price skimming is that the firm is customer driven, seeking to understand
the attributes customers want in goods and services they buy and the value of that bundle of attributes
to customers.
20. Evergreen Lighting, a manufacturer of decorative, energy-efficient lighting products, requires its
buyers to pay for the cost of transportation from the manufacturing site to their place of businesses.
Evergreen Lighting uses FOB origin pricing.
21. Uniform delivered pricing is illegal because it discriminates against buyers who are located close to
the point of shipping because they pay the same amount as buyers located far from the point of
shipping pay.
22. Flexible pricing enables a seller to close a sale with price-conscious consumers.
23. A catalog retailer offers three styles of khaki pants at three price levels. The special pricing tactic used
by the catalog retailer is best described as variable psychological pricing.
24. Loss-leader pricing is a tactic that prices products below cost in an attempt to run competitors out of
business.
25. One example of price bundling occurs when Nintendo sells the Wii Fit balance board with the Wii
game system at a lower price than the total price of each if bought separately.
26. Kiddieland Amusement Park charges customers an admission fee of $10. Customers must pay 50 cents
for each ride they want to ride while inside the park. This is an example of two-part pricing.
27. More and more businesses are adopting consumer penalties—extra fees paid by consumers for
violating the terms of a purchase agreement.
28. Rag fibers for paper and cotton seeds for cottonseed oil are two by-products of the cotton textile
industry. Because these products are produced together, they are complementary products.
29. Costs that are shard in the manufacturing and marketing of several products in a product line are called
joint costs.
30. Escalator pricing and price shading are two examples of cost-oriented pricing tactics.
31. Many businesses find recessions to be an excellent time to build market share through the use
of price shading.
MULTIPLE CHOICE
1. The marketing manager of icruise.com (a travel Web site targeted to consumers who want a luxury
vacation) finds that the firm can gain market share and become the industry leader if it slashes prices
by 50 percent during the month of December. However, the vice president of finance is committed to
reporting a 25 percent return on investment at all times. This conflict illustrates:
a.
a need to eliminate low-profit products
b.
a lack of corporate concentration on the marketing concept
c.
how pricing operates in a mature marketplace
d.
the need for trade-offs in pricing objectives
e.
how target markets can be ignored
2. After establishing pricing goals, managers should estimate total revenue at a variety of prices. Next,
they should _____. Only after performing this task are they are ready to estimate how much profit and
how much market share can be earned at each possible price.
a.
choose the ROI target
b.
determine corresponding costs for each price
c.
estimate industry supply
d.
implement pricing segmentation
e.
establish geographic pricing heuristics
3. Which of the following is a pricing policy whereby a firm charges a high introductory price, often
coupled with heavy promotion?
a.
Penetration pricing
b.
Price skimming
c.
Price capping
d.
Profit pricing
e.
Price maximization
4. A 16-ounce bottle of Prairie Herb vinegar sells for $4.95, and a 16-ounce bottle of Heinz vinegar costs
$1.05. Prairie Herb vinegar is new to the market, perceived to be of higher quality, and provides a
unique flavor to foods even though it is used in the same way as Heinz vinegar. Prairie Herb vinegar is
most likely using a _____ policy.
a.
penetration pricing
b.
status quo pricing
c.
price-skimming
d.
bundling cost pricing
e.
geodemographic pricing
5. A shortage of blood for transfusions for injured animals has resulted in the introduction of a
synthesized product called Oxyglobin, which can be used effectively as a blood replacement. The
manufacturer of the product has put a high price on the product in order to recoup its research and
development costs. The manufacturer of Oxyglobin is using a _____ policy.
a.
price-banding
b.
penetration pricing
c.
price-lining
d.
bundling costs
e.
price-skimming
6. The price skimming strategy is sometimes called a “market-plus” approach to pricing because it
denotes a high price relative to the prices of competing products. This strategy works best when:
a.
competition is abundant
b.
revenues are equal to expenses
c.
supply is greater than demand
d.
production capacity is large and flexible
e.
demand is greater than supply
7. When the Mosquito Magnet was introduced, it was designed to rid the immediate area of mosquitoes
and other annoying insects. The technology for the Mosquito Magnet had taken years to develop. It is
a patented grill-like apparatus that emits carbon dioxide to attract bugs to a fan that draws them into
the device where they die. What type of pricing policy would you recommend the company use to
introduce this product to the market?
a.
Status quo pricing
b.
Penetration pricing
c.
Price-skimming
d.
Flexible pricing
e.
Leader pricing
8. For which of the following situations would a price-skimming strategy be most appropriate?
a.
the addition of a new comic book series with an obviously gay hero
b.
the introduction of a new brand of bottled water
c.
the elimination of demand for low wattage light bulbs
d.
the introduction of a unique, roomy automobile model that has extremely low energy and
fuel costs
e.
the introduction of a Barbie Olympic champion doll by Mattel and the International
Olympic Committee
9. The DCS Stainless Steel Gas Grill for outside cooking costs $3,995. The market for a grill that could
easily replace a kitchen range is limited even though a lot of people have seen articles about this grill
in cooking magazines and in the cooking section of newspapers. There is no potential competitor for
this grill. The _____ strategy is probably best.
a.
price-skimming
b.
penetration pricing
c.
status quo
d.
cost bundling
e.
price-lining
10. When a firm introduces a new product at a relatively low price because it hopes to reach the mass
market, it is following a _____ strategy. The low price is designed to capture a large share of a
substantial market and produce lower production costs.
a.
penetration pricing
b.
price-insensitive demand
c.
price-skimming
d.
price elasticity
e.
cost bundling
11. Marketers must take care when using _____ since a lower price often signals to consumers that
product quality is also low.
a.
price skimming
b.
status quo pricing
c.
penetration pricing
d.
unbundling
e.
cost sharing
12. The market for turkey products is large. If a major producer of turkeys were to introduce a boneless
fresh turkey wrapped around savory dressing, most of the large market for this new product would be
aware of its existence. The market is price sensitive, and there is some potential competition. The
appropriate strategy would be:
a.
price skimming
b.
penetration pricing
c.
status quo
d.
cost bundling
e.
price lining
13. Jones Soda Company and Big Sky Brands have introduced Jones Soda Carbonated Candy, a candy
that delivers a blast of the most popular Jones Soda flavors along with an oddly enjoyable
tongue-tingling sensation. Which pricing strategy would be appropriate if the company wants to
convince price-sensitive consumers to try it and not buy some other brand?
a.
price-lining
b.
price-fixing
c.
status quo pricing
d.
penetration pricing
e.
price-skimming
14. Pharmacies are a new addition to Sam’s Clubs. They could exert a greater influence on the marketplace
for prescription drugs than their newness indicates. Sam’s has a stated philosophy of marking up
merchandise a maximum of 14 percent. When that philosophy is applied to prescription drugs,
especially generics, warehouse club prices can be dramatically lower than those of conventional
drugstores, supermarkets, or discount store pharmacies. Sam’s is using a _____ strategy to convince
consumers to use its pharmacies rather than its competitors.
a.
penetration pricing
b.
price-insensitive demand
c.
price-skimming
d.
price elasticity
e.
cost bundling
15. A penetration strategy tends to be effective in a price-sensitive market. Thus, one of the purposes of
penetration pricing is to:
a.
recoup product development costs quickly
b.
discourage competitors from entering the market
c.
produce a large margin of profit per unit
d.
develop exclusive distribution
e.
attract the price-insensitive buyer who demands the latest in technology
16. A penetration pricing strategy tends to be most effective:
a.
when demand is relatively inelastic
b.
under unitary conditions
c.
in price-sensitive markets
d.
when the company can only perform small production runs
e.
if unit costs are high
17. One form of extreme penetration pricing that has dramatically increased sales during the recent
economic downturn is _____ grocers.
a.
black market
b.
scratch-and-dent
c.
elastic
d.
break-even
e.
salvage
18. In which of the following countries is Procter & Gamble MOST likely to sell razor blades using a
penetration pricing strategy?
a.
the United States
b.
France
c.
Bangladesh
d.
Japan
e.
Canada
19. A firm charging a price identical to or very close to the competition’s price is using a _____ strategy.
a.
differentiation pricing
b.
penetration pricing
c.
preemptive pricing
d.
status quo pricing
e.
leader pricing
20. JCPenney sends representatives to shop at similar retailers to make sure it is charging comparable
prices for its products. JCPenney probably uses a _____ strategy.
a.
leader pricing
b.
preemptive pricing
c.
status quo pricing
d.
flexible pricing
e.
functional pricing
21. State laws that put a lower limit on wholesale and retail prices are called _____. In states that have
these laws, selling below cost is illegal.
a.
unfair trade practice acts
b.
price floor laws
c.
protectionism acts
d.
transparency laws
e.
price edicts
22. States developed unfair trade practice acts to
a.
enforce the Sherman Act that makes bait pricing illegal
b.
prevent oligopoly leaders from getting together and fixing prices at the highest the market
will bear
c.
establish penalties for companies that break the Clayton Act by engaging in predatory
pricing
d.
make sure that all pricing policies are equitable
e.
protect small, local firms from giant companies that operate efficiently on razor-thin profit
margins
23. In 2008 United Airlines and American Airlines disclosed settlements in a class-action lawsuit over
allegations of airfreight price fixing. This means the companies:
a.
tried to charge fees for air fright that were below costs
b.
charged customers different amounts for the same shipments
c.
agreed on the price they would charge customers for air freight
d.
used uniform geographic pricing
e.
created an artificial demand for shipping
24. South Africa’s Competition Commission accused South African Airways of conspiring with its partner,
Germany’s Lufthansa, to set prices on flights between Cape Town, Johannesburg, and Frankfurt. As a
result, the two airlines were charged with:
a.
price discrimination
b.
price fixing
c.
bait pricing
d.
unfair trade practices
e.
channel control pricing tactics
25. A situation in which a manufacturer, and its distributors agree that the retailers will sell the
manufacturer’s products at a certain price, at or above the price floor, is called:
a.
decoy pricing
b.
resale price maintenance
c.
functional pricing
d.
bait pricing
e.
price pressuring
26. If Dunn’s Best Jams and its distributors agree that the retailers will sell Dunn’s jams at a certain price,
at or above the price floor, Dunn’s and its distributors probably practice:
a.
unfair pricing
b.
resale price maintenance
c.
deceptive pricing
d.
price escalation
e.
price depression
27. For over 100 years, resale price maintenance has been illegal under the:
a.
Sherman Act
b.
Federal Trade Commission Act
c.
Food and Drug Administration Act
d.
Anti-Discrimination Act
e.
Robinson-Patman Act
28. Which of the following prohibits any firm from selling to two or more different buyers, within a
reasonably short time, commodities (not services) of like grade and quality at different prices where
the result would be to substantially lessen competition?
a.
Sherman Act
b.
Federal Trade Commission Act
c.
Food and Drug Administration Act
d.
Anti-Discrimination Act
e.
Robinson-Patman Act
29. Acme Lawnmowers sells its mowers to retailers at different prices, depending on whether they are
independent stores or members of a national chain. It uses _____.
a.
unfair trade practices
b.
price fixing
c.
price discrimination
d.
predatory pricing
e.
bait pricing
30. All of the following elements must be present for a pricing practice to be considered discriminatory
under the Robinson-Patman Act EXCEPT:
a.
The seller must charge different prices to different customers for the same product.
b.
The seller must make two or more actual sales within a reasonably short time.
c.
The transaction must occur in interstate commerce.
d.
The products sold must not be commodities.
e.
There must be significant competitive injury.
31. The practice of charging a very low price for a product with the intent of driving competitors out of
business or out of a market is called:
a.
price discrimination
b.
predatory pricing
c.
price fixing
d.
price manipulation
e.
anti-competitive pricing
32. When Microsoft introduced its Zune MP3 player, many people thought it would capture the MP3
player market by pricing its product so low that a smaller competitor, like the Apple iPod, would be
unable to compete. If Microsoft had used this approach it have been would be guilty of _____.
a.
predatory pricing
b.
unfair trade practices
c.
channel manipulation pricing
d.
price fixing
e.
price discrimination
33. After managers understand both the legal and the marketing consequences of price strategies, they
should set a _____ price—the general level at which a company expects to sell a good or service.
a.
functional
b.
zone
c.
demand
d.
leader
e.
base
34. All of the following are tactics for fine-tuning the base price EXCEPT:
a.
functional discounts
b.
markdown money
c.
rebates
d.
quality discounts
e.
quantity discounts
35. Last year, a single infield box ticket for an Atlanta Braves baseball game cost $40, but fans who
bought a season pass for the same seat got a reduced price. This $40 price was a _____ price.
a.
base
b.
zone
c.
demand
d.
channel leader
e.
functional
36. When a buyer pays a lower price for buying multiple units or above a specified dollar amount for a
single order, the buyer is receiving a _____ discount.
a.
promotional
b.
quantity
c.
frequent buyer
d.
functional
e.
cumulative
37. Redline Editorial Services sent a $1,000 invoice to a customer for copyediting a booklet. According to
the terms of the invoice, the customer would receive a 3 percent discount on the invoice price if the
invoice was paid within 15 days. This is an example of a:
a.
quantity discount
b.
cash discount
c.
rebate
d.
functional discount
e.
promotional allowance
38. When the salesperson from Affiliated Food Inc., a grocery distributor, calls on a grocery store, she is
authorized to offer a 15 percent discount from the list price in recognition of activities (such as
unpacking items and stocking shelves) that retailers perform for the distributor. This 15 percent
discount is a:
a.
quantity discount
b.
promotional allowance
c.
functional discount
d.
seasonal discount
e.
channel allowance
39. Ace Hardware’s spring snowblower sale is an example of which of the following pricing tactics?
a.
Quantity discount
b.
Seasonal discount
c.
Temporal discount
d.
Promotional allowance
e.
Functional discount
40. A(n) _____ discount is a deduction from list prices that applies to the buyer’s total purchases made
during a specific period and intended to encourage customer loyalty.
a.
cumulative quantity
b.
noncumulative quantitative
c.
functional
d.
cash
e.
integrated
41. Which type of quantity discount is a deduction from the list price that applies to a single order?
a.
Base discount
b.
Cumulative discount
c.
Noncumulative discount
d.
Cash discount
e.
Functional discount
42. Quantity discounts are most often used to:
a.
reward the buyer who pays in cash
b.
encourage large orders
c.
increase supply for a specific raw material
d.
reward a channel intermediary for performing some service
e.
shift the storage function backward to the supplier
43. An Internet picture frame manufacturer offers retailers reduced prices on any combination of size or
style frames purchased. The discount is shown as they shop and adjusted as the quantity of frames
purchased increases. What common form of purchase discount is the frame manufacturer using?
a.
rebate
b.
cash discount
c.
quantity discount
d.
promotional allowance
e.
functional discount
44. A discount off the base price to customers who pay immediately, or within a specified time period, is
called a:
a.
functional discount
b.
quantity discount
c.
base discount
d.
cash discount
e.
promotional allowance
45. When a channel intermediary is compensated for the ordinary services and tasks performed within the
channel of distribution, the compensation usually comes in the form of a discount from base price.
This discount is called a:
a.
seasonal discount
b.
promotional allowance
c.
cumulative or noncumulative quantity discount
d.
functional (or trade) discount
e.
rebate or refund
46. A _____ is a price reduction that shifts the storage function forward to the purchaser and enables
manufacturers to maintain steady production year-round.
a.
functional discount
b.
base allowance
c.
promotional allowance
d.
quantity discount
e.
seasonal discount
47. Apple’s “Back to School” program offered students who purchased an iMac computer and an iPod
Touch MP3 player a $250 refund. The $250 check was essentially a:
a.
rebate
b.
reciprocal allowance
c.
cash discount
d.
functional discount
e.
trade promotion
48. Hunter’s Alley is a chain of stores targeted to people who are proud of their NRA membership. It has
agreed to set up a special display of Swartklip ammunition near its rifle and shotgun aisles and also to
run an advertisement in newspapers in communities where its stores are located. Swartklip has agreed
to supply the display material free and to pay for half the cost of the advertisement. This is an example
of a:
a.
bundled pricing tactic
b.
functional discount
c.
promotional allowance
d.
quantity discount
e.
direct allowance
49. _____ are cash refunds given for the purchase of a product during a specific period.
a.
Rebates
b.
Loss leaders
c.
Reciprocal allowances
d.
Demand discounts
e.
Promotional allowances
50. Each fall, ABC Men’s Wear holds a major sale, reducing the prices of suits that didn’t sell. ABC
Men’s Wear expects the suit manufacturers to absorb some of the cost of the price reduction through:
a.
promotional allowances
b.
leader pricing reductions
c.
manufacturer price skimming
d.
markdown money
e.
make-up allowances
51. Toyota periodically offers customers _____, allowing purchasers to borrow money to pay for new cars
without incurring an interest charge.
a.
markdown money
b.
zero percent financing
c.
promotional allowances
d.
make-up allowances
e.
leader pricing reductions
52. _____ occurs when a firm is customer-driven and seeks to understand the attributes customers want in
the goods and services they buy and the value of those attributes to customers. Thus, the price of the
product is set at a level that seems to the customer to be a good price compared with the prices of other
options.
a.
Value-based pricing
b.
Noncumulative pricing
c.
CRM pricing
d.
Market concept pricing
e.
Price bundling
53. The basic assumption behind value-based pricing is that:
a.
the firm is sales-driven
b.
the firm is both customer-driven and competitor-driven
c.
increased profitability for wholesalers will increase the number of services they are willing
to perform
d.
consumers are more concerned about price than quality
e.
additional long-term costs to manufacturers will increase
54. One pharmaceutical manufacturer did not price a new antiulcer drug by adding up the costs of
developing and manufacturing the medication and tacking on the amount of profit it wanted to make.
Instead, the company justified a higher price than it might otherwise have been able to get from
medical insurers by using studies that showed the new drug could help patients avoid expensive
surgery and save the insurance companies money. The pharmaceutical company used:
a.
value-based pricing
b.
noncumulative pricing
c.
CRM pricing
d.
price bundling
e.
market concept pricing
55. Sometimes managers price their products too low, resulting in a loss of company profits. One reason
this happens is that:
a.
managers attempt to buy market share through aggressive pricing, but the cuts are quickly
met by competitors, which wipe out any gain in market share
b.
consumers tend to equate lower prices with low-quality goods, and they are never able to
regain that lost market share
c.
price-skimming strategies only work in the short-term, and always eventually result in
lower profits
d.
most managers simply lack good business sense, especially in regard to finances