Price point
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Price points A, B, and C, along a framed
In economics, a price point is a point along the demand curve at which demand for a given product is supposed to stay relatively high.
Characteristics
Introductory microeconomics depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origin. The downward slope generally holds, but the model of the curve is only piecewise true, as price surveys indicate that demand for a product is not a linear function of its price and not even a smooth function. Demand curves resemble a series of waves rather than a straight line. [1]
Causes
There are three main reasons for price points to appear:
- Substitution price points
- price points occur at the price of a close substitute
- when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply[2]
- Customary price points
- the market grows accustomed to paying a certain amount for a type of product
- Perceptual price points (also referred to as "psychological pricing" or as "odd-number pricing")
- raising a price above 99 cents will cause demand to fall disproportionately because people perceive $1.00 as a significantly higher price[3]
Oligopoly pricing
In relation to customary price points, oligopolies can also generate price points. Such price points do not necessarily result from collusion, but as an emergent property of oligopolies: when all firms sell at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally); on the other hand, any firm in an oligopoly which lowers its prices will most likely be matched by competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand-curve where the kink lies at the point of the current price-level in the market. These results depend on the elasticity of the demand curve[4] and on the properties of each market.
See also
- Convex preferences
- Cost the limit of price
- List of topics in industrial organization
- Pricing
References
- ↑ "Non Linear Demand Curve Microeconomics Analysis" (in en-US). https://priceo.in/non-linear-demand-curve/.
- ↑ "Price Reform" (in en-US). https://kokqa.com/price-reform/.
- ↑ Schindler, Robert M.; Kibarian, Thomas M. (1996). "Increased Consumer Sales Response Through Use of 99-Ending Prices". Journal of Retailing 72 (2): 187–199. doi:10.1016/S0022-4359(96)90013-5.
- ↑ "Elasticity of the Demand Curve - Xpdea". https://xpdea.com/demand-curve-elasticity/.
Further reading
- Bner, Alexander (2011). "Price-Dependent Demand". Retail Category Management: Decision Support Systems for Assortment, Shelf Space, Inventory and Price Planning. Springer. ISBN 978-3-642-22476-8. https://books.google.com/books?id=s-DLW44VvZMC&pg=PA117.
- Veeramani, Venkat; Maynard, Leigh (2008). Price Points and Thresholds in Retail Food Demand. VDM Verlag. ISBN 978-3-639-08445-0. https://books.google.com/books?id=WfkaPQAACAAJ.
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