14-1: Substitution Effect Discuss the case of Pete and how the income and
substitution effects alter his buying behavior.
As a college student, he prefers a less expensive
substitute deodorant, because it demands less of
his total income.
Ask students: When Pete graduates and gets a
high-paying job, will he worry as much about the
cost of deodorant?
Do you expect him to switch back to Old Spice?
Why or why not?
14-2: Cross-Price Elasticity Just like Kendra, many people buy products
without considering the price of necessary
peripherals.
Kendra is caught in a cross-elasticity trap,
because her demand for one product generated
demand for the other.
Group activity: Brainstorm a list of other
products that exhibit cross-price elasticity.
14-3: Check Yourself 1 Elastic demand is when relatively small
changes in price will generate fairly large
changes in the quantity demanded, so if a firm
is trying to increase its sales, it can do so by
lowering prices. The market for a product is
generally viewed as inelastic when lowering
prices will not appreciably increase demand;
customers just don’t notice or care about the
lower price.
2 Price elasticity is influenced by income effect,
substitution effect, and cross-price elasticity.
14-4: 3rd C: Costs No discussion of price would be complete
without a discussion of cost.
The price must at least cover the cost of the item.
However, as students may have learned in their
finance courses, understanding costs is rarely
easy.
14-5: Break-Even Analysis and Decision
Making
Students might have discussed break-even in
previous classes—ask them what it is. In many
cases, it is hard for students to define.
14-6: Break Even Analysis Although profit, which represents the difference
between the total cost and the total revenue (total
revenue or sales = selling price of each unit sold
number of units sold), can indicate how much
money the firm is making or losing at a single
period of time, it cannot tell managers how many
units a firm must produce and sell before it stops
losing money and at least breaks even.
14-7: Check Yourself 1 Fixed costs are those costs that remain
essentially at the same level, regardless of any
changes in the volume of production. While
variable costs are those costs, primarily labor
and materials, that vary with production
volume.
2 To determine the break-even point in units
mathematically, we must introduce one more
variable, the contribution per unit, which is
the price less the variable cost per unit.
Therefore, the break-even point becomes:
Break-even point (units) = fixed
costs/contribution per unit.
14-8: 4th C: Competition Group activity: List a product or service market
that demonstrates each type of competition.
Monopoly: Microsoft software products.
Oligopolistic: Cable TV firms.
Monopolistic Comp.: Electricity providers.
Pure: Most frequently purchased consumer goods
such as soft drinks.
14-9: Wal-Mart vs. Target Note: Please make sure that the video file is
located in the same folder as the PowerPoint
slides.
14-10: Check Yourself 1 There are four levels of competition—
monopoly, oligopolistic competition,
monopolistic competition, and pure
competition.
14-11: 5th C: Channel Members Ask students: Have you ever bought books
marked “Instructor Copy: Not for Resale,” or
“International Student Edition?”
Is the bookstore engaging in unethical behavior?
Whom does this gray market benefit? Whom
does it hurt?
Answer: The purchase of gray market textbooks
hurts the publisher and authors.
These books do not help recover the costs of all
the ancillary packages that are provided to
instructors.
14-12: Everyday Low Pricing vs.
High/Low Pricing
Group activity: Imagine you need an outfit for
an upcoming party.
You can visit TJMaxx, where you know you will
find an EDLP pricing strategy.
However, Nordstrom is having its semi-annual
sale, during which it drastically marks down its
usually high prices.
Where do you think you will find a better price?
Which offers better value? Why?
14-13: New Product Pricing Strategies Group activity: Develop a list of products that
might use price skimming versus penetration
pricing.
What qualities should a product possess to use a
price skimming strategy?
For example, Godiva introduced its hot chocolate
mix at a price point that was double that of other
hot cocoa mixes.
How was it able to achieve success with this
product?
Penetration pricing helps firms build market
share for their new products quickly, but
consumers must be price elastic for this strategy
to work.
14-14: Check Yourself 1 EDLP saves search costs of finding lowest
overall prices, and High/low provides the
thrill of the chase for the lowest price.
2 Price skimming and penetration pricing.
14-15: Legal Aspects and Ethics of
Pricing
A host of laws and regulations at both the federal
and state levels attempt to prevent unfair pricing
practices, but some are poorly enforced, and
others are difficult to prove.
14-16: Deceptive or Illegal Price
Advertising
Ask students: When is a sale not really a sale?
Answer:
If the merchandise is placed on the retail floor
and almost immediately put on sale, then it is
considered to be deceptive because the
merchandise was never really sold at the higher
price, but consumers are expected to believe that
they are receiving a significant discount.
Ask students: Have you ever been involved in a
bait and switch?
14-17: Predatory Pricing Ask students: How would a company prove
predatory pricing?
They would need records, which show intent or
have interviews of those who can verify the intent
to drive competition out of business.
In addition, they must show that the company
charged prices lower than its average costs.
To date, no one has been able to prove that
Walmart engages in predatory pricing.
14-18: Price Discrimination Price discrimination in a B2B setting isn’t always
illegal.
It is legal to give quantity discounts, to meet
competition, and in barter situations.
Ask Students: Why are quantity discounts legal?
Because it costs less on a per unit basis to sell to
customers that buy larger quantities
14-19: Price Fixing Ask students: How many products list a
manufacturer’s suggested retail price? How many
indicate a retail price instead?
Note that MSRPs are a form of vertical price
fixing; the manufacturer sets the price, and
wherever the consumer shops, the price will be
the same.
However, some retailers argue that this form of
price fixing prevents them from passing lower
costs on to consumers.
Ask students: What do you think?
14-20: Fraud on eBay EBay offers great prices but there is some risk to
consumers. What was the fraud here?
Note: Please make sure that the video file is
located in the same folder as the PowerPoint
slides.
14-21: Check Yourself Deceptive reference prices, loss leader pricing,
bait and switch
Additional Teaching Tips
This chapter introduces students to the economic influence of setting prices. Students often find
these concepts difficult to grasp. Also introduced are the five Cs of pricing, company objectives
and strategy implications, and break-even point calculations.
The five Cs of pricing are critical for students to understand. Students often don’t realize that
other factors other than cost factors influence the pricing strategy. Reviewing the five Cs of
pricing and having students come up with examples will help to enhance understanding of these
concepts.
It is important for students to also understand that there may be other objectives other than
maximizing profit margin. Amazon.com in its first years purposely used a competitor–oriented
approach and sacrificed profit loss. The company was ridiculed by other dot-coms until
Amazon.com revealed their strategy: To have households identify with the brand name. By
pricing products and shipping low, it would increase usage of the site. Thus, the strategy was to
sacrifice profits to have Amazon.com become the market leader and the household brand name
recognition for online purchases.
The break-even point graph is often difficult for students to understand unless they have had an
economics course. Instructors will need to weigh the importance of teaching the graph, the BEP
formula, or both. Some time will need to be spent by the instructor explaining the graph. It is
wise to give students a BEP problem such as the one listed in the application problems and have
them graph it if the instructor chooses to also teach the dynamics of the graph.
Should students need additional help in pricing, turn to the testing materials, select some multiple
choice BEP and pricing concept (equilibrium, profit, loss, fixed cost, variable costs) types of
problems, and create a worksheet where students can work on it either independently or in small
groups in the class. Often, students can help each other in understanding these concepts and
small groups are recommended. Online Tip: Have students develop a marketing related word
problem using BEP analysis. Have them post it to the discussion board. Have other learners solve
the problem. Have the student that created the word problem come back and give feedback. You
may want to pair students up as partners in the online environment.