978-1337407588 Chapter 19 Solution Manual Part 1

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Chapter 19: Pricing Concepts

Review and Assignments for Chapter 19

Review Quesons

1. Why is pricing so important to the marketing manager?

2. How does price allocate goods and services?

Price sets the image of the good. In conjunction with quality, price is part of the formula for

value. Even though price is part of the determination of value, the two factors do not

3. Why do many firms not maximize profits?

One reason that firms do not maximize value is that they can only charge a price that equates

to a perceived value. As mentioned in solution 2, when customers do not perceive a value,

4. Explain the role of supply and demand in determining price.

The price that is set depends on pricing goals and the demand for the good or service, the cost

Supply is the quantity of product that will be offered to the market by suppliers at various

Chapter 19: Pricing Concepts

5. Explain the concepts of elastic and inelastic demand. Why should managers understand

these concepts?

Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price.

Elastic demand occurs when consumers are sensitive to price changes, whereas inelastic

6. Explain the relationship between supply and demand and yield management systems.

7. Why are so many companies adopting yield management systems?

A yield management system (YMS) is a technique for adjusting prices so that unused capacity

is filled. YMSs are very popular with industries that have high fixed costs, such as the

8. Why is it important for managers to understand the concept of break-even points? Are

there any drawbacks?

The advantage of break-even analysis is that a firm can quickly discover how much it must sell

to cover costs and how much profit can be earned if higher sales volume is obtained. It is a

9. Give an example of each major type of pricing objective.

Pricing objectives are commonly classified into three categories, and students are to come up

with one example of each:

Profit-oriented pricing aims for profit maximization, satisfactory level of profit, or

Sales-oriented pricing aims to attain or maintain a certain market share or to

Chapter 19: Pricing Concepts

10. What are the three basic defenses that a seller can use if accused under the

Robinson-Patman Act?

The Robinson-Patman Act provides three defenses for the seller charged with price

Applicaon Quesons

1. If a firm can increase its total revenue by raising its price, shouldn’t it?

It may increase revenue only in the short run. In the long run, buyers may find substitutes for

2. Your firm has based its pricing strictly on cost in the past. As the newly hired marketing

manager, you believe this policy should change. Write the president a memo

explaining your reasons.

Although students’ answers will vary, they should address some of these points: Prices

determined strictly on the basis of costs may be too high for the target market, thereby

3. Divide the class into teams of five. Each team will be assigned a different grocery store

from a different chain (an independent store is fine, too). Appoint a group leader. The

group leaders should meet as a group and pick fifteen nationally branded grocery

items. Each item should be specifically described as to brand name and size of the

package. Each team will then proceed to its assigned store and collect price data on

the fifteen items. The team should also gather price data on fifteen similar store

brands and fifteen generics, if possible. Each team should present its results to the

class and discuss why there are price variations between stores, national brands, store

brands, and generics.

Chapter 19: Pricing Concepts

As a next step, go back to your assigned store and share the overall results with the store

manager. Bring back the manager’s comments and share them with the class.

4. How does the stage of a product’s life cycle affect price? Give some examples.

Demand factors and competitive conditions tend to change as a product moves through the

different stages of its life cycle. In the introduction stage, prices are typically set high

5. Go to Priceline.com. Can you research a ticket’s price before purchasing it? What

products and services are available for purchase? How comfortable are you with

naming your own price? Relate the supply and demand curves to

customer-determined pricing.

Students’ answers will vary as to their comfort with naming their own price. Periodically,

6. You are contemplating a price change for an established product sold by your firm.

Write a memo analyzing the factors you need to consider in your decision.

Although students’ answers will vary, they should address some of these points: Before

instituting a price change, managers should estimate demand, costs, and profits at several

Chapter 19: Pricing Concepts

7. Develop a price line strategy for each of these firms: (a) a college bookstore, (b) a

restaurant, (c) a video-rental firm.

Product line pricing is setting prices for an entire line of products, which is a broader concern

than setting the right price on a single item. The college bookstore textbooks have a neutral

8. The U.S. Postal Service regularly raises the price of a first-class stamp but continues to

operate in the red year after year. Is uniform delivered pricing the best choice for

first-class mail?

Students’ responses will vary. In general, it would seem more lucrative for the United States

Applicaon Exercise

Reliance on price as a predictor of quality seems to occur for all products. Does this mean that

high-priced products are superior? Well, sometimes. Price can be a good predictor of quality for

some products, but for others, price is not always the best way to determine the quality of a

product or service before buying it. This exercise (and worksheet) will help you examine the

price–quality relationship for a simple product: canned goods.

Activities

1. Take a trip to a local supermarket where you are certain to find multiple brands of canned

fruits and vegetables. Pick a single type of vegetable or fruit you like, such as cream corn

or peach halves, and list five or six brands in the worksheet on the following page.

Price

1 2 3 4 5 6 7

Brand Quality

Rank

Price/W

eight

Price per

Ounce

Price Rank

(x)

(y-x)

Chapter 19: Pricing Concepts

(y)

TOTAL

2. Before going any further, rank the brands according to which you think is the highest quality

(1) to the lowest quality (5 or 6, depending on how many brands you find). This ranking

will be y.

3. Record the price and the volume of each brand. For example, if a 14-ounce can costs $.89,

you would list $.89/14 oz.

Purpose: To have students investigate the relationship between price and quality and perceptions

of quality

Setting It Up: This exercise requires algebra to calculate the price–quality coefficient. You can

assign this as an individual or group project.

Chapter 19: Pricing Concepts

This exercise was inspired by the following Great Idea in Teaching Marketing:

Vaughn C. Judd, Auburn University Montgomery

Analyzing the Price–Quality Relationship

The relationship between product price and quality is more relevant to students when they

An Example of the Process

Step 1: Students are grouped in teams of two or three. Each team is given a reprint of a different

Step 2: The example, Table 1, is based on ratings of six brands of canned red kidney beans.

Step 3: Students then list the price and volume of each brand in column 3. Since the cans contain

different volumes, the prices from column 3 are converted to per ounce equivalents in column 4.

Step 4: Students next calculate the coefficient of correlation between the quality and price

Step 5: Each group is asked to draw conclusions regarding the relationship between price and

quality for the brands analyzed and to report the conclusions to the class. The conclusions, based

Chapter 19: Pricing Concepts

Also, out of the six brands evaluated, the highest-priced brand ranked last in quality.

Table 1 Canned Red Kidney Beans

(1)

Brand

(2)

Quality

Rank

Price (6)

(y–x)

(7)

(3)

Price/Wt.

(4)

*Price per

(5)

Price Rank

Green

Giant

1 $.59/15.5

oz.

$.038 5.5 –4.5 20.25

Source: Cook’s Illustrated (September/October 1997)

*Converted to a per/ounce basis

Where rs= Spearman rank order correlation, d = difference in rank in the paired rankings, n =

number of items ranked, and 6 = a constant in the formula.

Conclusion

Discovering on one’s own is an important element of learning. This exercise provides that

opportunity. Students sharing their discoveries with their fellow classmates further complement

Chapter 19: Pricing Concepts

Ethics Exercise

Advanced Bio Medics (ABM) has invented a new stem cell–based drug that will arrest even

advanced forms of lung cancer. Development costs were actually quite low because the drug was

an accidental discovery by scientists working on a different project. To stop the disease requires a

regimen of one pill per week for 20 weeks. There is no substitute offered by competitors. ABM is

thinking that it could maximize its profits by charging $10,000 per pill. Of course, many people

will die because they can’t afford the medicine at this price.

1. Should ABM maximize its profits?

Profit maximization entails setting prices so that total revenue is as large as possible

relative to total costs. It is not unethical on the face, but since ABM is in a monopoly

2. Does the AMA Statement of Ethics address this issue? Go to

http://www.marketingpower.com and review the Statement. Then write a brief

paragraph on what the AMA Statement of Ethics contains that relates to ABM’s

dilemma.

The AMA Statement of Ethics does not specifically address profit maximization in its

pricing section. The Statement does prohibit marketers from engaging in predatory pricing,