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Dr. Gonzalez, Trinity University, Fall 2012

B

1) When consumers examine products, they often compare an observed price to an internal price they remember. This is known as a(n) ________ price.
A) markup
B) reference
C) market-skimming
D) accumulated
E) target

A

2) ________ price refers to what the consumers feel the product should cost.
A) Fair
B) Typical
C) Usual discounted
D) List
E) Maximum retail

B

3) While shopping at the mall, Jane was asked by one of the sales representatives at the cosmetics counter to try out a new lipstick that her company was test marketing. The company representative asks her how much she would be willing to pay for the lipstick. After trying it out, Jane is of the opinion that $5 is just the right price for it. What type of a reference price is Jane using?
A) usual discounted price
B) fair price
C) maximum retail price
D) last price paid
E) historical competitor price

C

4) The reservation price or the maximum that most consumers would pay for a given product is known as the ________ price.
A) expected future
B) usual discounted
C) upper-bound
D) typical
E) historical competitor

D

5) A company decided to conduct a market survey for its new MP3 player which it had priced at $150. However, in the survey, 95 percent of the participants said that the maximum they would pay for the MP3 player is $100. This is an example of which of the following possible consumer reference prices?
A) historical competitor price
B) expected future price
C) usual discounted price
D) upper-bound price
E) last price paid

E

6) The minimum price that most consumers would pay for a given product is known as the ________ price.
A) everyday low
B) usual discounted
C) fair
D) typical
E) lower-bound

C

7) A company has developed the prototype of a mobile phone which it plans to launch in the next few months. The phone comes equipped with the most advanced technological features. As part of its test marketing efforts, it allows customers to examine and use the prototype and also gathers feedback regarding product features and price. The results of this test marketing effort show that customers are willing to pay at least $500, considering the phone's various features. As such, the company has found out about the customers' ________.
A) last paid price
B) expected future price
C) lower-bound price
D) upper-bound price
E) typical price

B

8) Many consumers are willing to pay $100 for a perfume that contains $10 worth of scent because the perfume is from a well-known brand. What kind of a pricing is the company depending on?
A) going-rate pricing
B) image pricing
C) market-skimming pricing
D) target pricing
E) markup pricing

D

9) Pricing cues such as sale signs and prices that end in 9 are more influential ________.
A) when customers have substantial knowledge about prices
B) when customers purchase the particular item regularly
C) when product quality is standardized
D) when product designs vary over time
E) when prices do not vary from time to time

B

10) Which of the following is the first step in setting a pricing policy?
A) selecting a pricing method
B) selecting the pricing objective
C) determining demand
D) estimating cost
E) analyzing competitors' costs, prices, and offers

D

11) After determining its pricing objectives, what is the next logical step a firm should take in setting its pricing policy?
A) It should analyze its competitors' costs, prices, and offers.
B) It should select its pricing method.
C) It should select its final price.
D) It should determine the demand for its product.
E) It should estimate the cost of its product.

C

12) A firm that is plagued with overcapacity, intense competition, or changing wants would do better if it pursues ________ as its major objective.
A) market skimming
B) product-quality leadership
C) survival
D) profit maximization
E) market penetration

E

13) After estimating the demand and costs associated with alternative prices, a company has chosen to price its product in such a way that it gains the highest rate of return on its investment. The company is looking to ________.
A) maximize its market share
B) skim the market
C) become a product-quality leader
D) survive in the market
E) maximize its current profit

A

14) Companies who believe that a higher sales volume leads to lower unit costs and higher long-run profits are attempting to ________.
A) maximize their market share
B) skim the market
C) become a product-quality leader
D) merely survive in the market
E) maximize their current profits

B

15) A company that is looking to maximize its market share would do well to follow ________ pricing.
A) markup
B) market-penetration
C) market-skimming
D) survival
E) target-return

B

16) A market-penetration pricing strategy is most suitable when _______.
A) a low price slows down market growth
B) production and distribution costs fall with accumulated production experience
C) a high price dissuades potential competitors from entering the market
D) the market is characterized by inelastic demand
E) a low price encourages actual competition

B

17) When a company introduces a product at a very high price and then gradually drops the price over time, it is pursuing a ________ strategy.
A) market-penetration pricing
B) market-skimming pricing
C) value-pricing
D) switching cost
E) loss-leader pricing

C

18) When Apple introduced its iPhone, it was priced at $599. This allowed Apple to earn the maximum amount of revenue from the various segments of the market. Two months after the introduction, the price has come down to $399. What kind of a pricing did Apple adopt?
A) loss-leader pricing
B) market-penetration pricing
C) market-skimming pricing
D) target-return pricing
E) value pricing

D

19) Market skimming pricing makes sense under all the following conditions, EXCEPT ________.
A) if a sufficient number of buyers have a high current demand
B) if the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear
C) if the high initial price does not attract more competitors to the market
D) if consumers are likely to delay buying the product until its price drops
E) if the high price communicates the image of a superior product

E

20) Companies that aim to ________ strive to be affordable luxuries.
A) survive in the market
B) partially recover their costs
C) maximize their market share
D) pursue value pricing
E) be product-quality leaders

E

21) Starbucks, Aveda, and BMW have been able to position themselves within their categories by combining quality, luxury, and premium prices with an intensely loyal customer base. These companies are employing a ________ strategy.
A) market-skimming
B) market-penetration
C) survival
D) market share maximization
E) product-quality leadership

C

22) The first step in estimating demand is to ________.
A) analyze competitors' cost
B) select a pricing method
C) understand what affects price sensitivity
D) calculate fixed costs
E) decipher the experience curve

E

23) Consumers are less price sensitive ________.
A) to high cost items
B) when they frequently change their buying habits
C) when there are more substitutes
D) when there are more competitors
E) when they do not readily notice higher prices

A

24) Consumers are less price sensitive when ________.
A) price is only a small part of the total cost spent on the product over its lifetime
B) they perceive the higher prices to be unjustified
C) they change their buying habits regularly
D) there are many substitutes and competitors in the market
E) they are buying high-cost items

C

25) If demand hardly changes with a small change in price, the demand is said to be ________.
A) strained
B) marginal
C) inelastic
D) flexible
E) unit elastic

B

26) If demand changes considerably, with a small change in price, the demand is said to be ________.
A) unit elastic
B) elastic
C) inelastic
D) marginal
E) strained

A

27) If consumers were largely indifferent to a $0.5 increase in the price of a gallon of milk, the price rise is said to fall within customers' ________.
A) price indifference band
B) experience curve
C) arm's-length price
D) learning curve
E) net price index

B

28) Which of the following is true regarding price elasticity?
A) The higher the elasticity, the lesser is the volume growth resulting from a 1 percent price reduction.
B) Within the price indifference band, price changes have little or no effect on demand.
C) If demand is elastic, sellers will consider increasing the price.
D) Price elasticity does not depend on magnitude and direction of the contemplated price change.
E) When demand is inelastic, sellers should lower prices in order to increase total revenue.

A

29) Costs that do not vary with production levels or sales revenue are known as ________.
A) overhead costs
B) variable costs
C) average costs
D) opportunity costs
E) total costs

B

30) A company must make payments each month for rent, heat, interest, and salaries. These are ________.
A) total costs
B) fixed costs
C) variable costs
D) opportunity costs
E) target costs

E

31) Costs that differ directly with the level of production are known as ________.
A) fixed costs
B) overhead costs
C) opportunity costs
D) target costs
E) variable costs

A

32) ________ consist of the sum of the fixed and variable costs for any given level of production.
A) Total costs
B) Average costs
C) Opportunity costs
D) Learning costs
E) Target costs

B

33) ________ is the cost per unit at that level of production.
A) Target cost
B) Average cost
C) Marginal cost
D) Opportunity cost
E) Fixed cost

C

34) The decline in the average cost of production with accumulated production experience is called the ________.
A) demand curve
B) supply chain
C) learning curve
D) value chain
E) indifference curve

A

35) Experience-curve pricing ________.
A) assumes competitors are weak followers
B) allows products to project a high quality image
C) is applicable only to manufacturing costs
D) focuses on reducing fixed costs
E) is generally risk-free

B

36) Deducting the desired profit margin from the price at which a product will sell, given its appeal and competitors' prices, is known as ________.
A) overhead costing
B) target costing
C) activity based costing
D) benefit analysis
E) estimate costing

C

37) Competitors are most likely to react to a price change, when ________.
A) the firm has a weak value proposition
B) the firm enjoys a monopoly
C) there are few competing firms
D) the product is heterogeneous
E) buyers have limited information

C

38) Which of the following is the most elementary pricing method?
A) value pricing
B) going-rate pricing
C) markup pricing
D) target-return pricing
E) perceived-value pricing

E

39) Despite its weaknesses, markup pricing remains popular for which of the following reasons?
A) Sellers can determine demand much more easily than they can estimate costs.
B) By tying the price to cost, the pricing task becomes more sophisticated.
C) When all firms in the industry use markup pricing, price competition flourishes.
D) Sellers take advantage of buyers when the latter's demand becomes acute.
E) Many people feel that cost-plus pricing is fairer to both buyers and sellers.

A

40) A manufacturer has invested $750,000 in a new product and wants to set a price to earn a 15 percent ROI. The cost per unit is $18 and the company expects to sell 50,000 units in the first year. Calculate the company's target-return price for this product.
A) $20.25
B) $18.23
C) $18.10
D) $20.70
E) $25.50

D

41) An umbrella manufacturing company's fixed costs are $275,000. The variable cost per unit is $5 and each umbrella is sold at $10. How many units should the firm sell in order to break even?
A) 18000
B) 5500
C) 27500
D) 55000
E) 1819

A

42) ________ pricing takes into account a host of inputs, such as the buyer's image of the product performance, the channel deliverables, the warranty quality, customer support, and attributes such as the supplier's reputation, trustworthiness, and esteem.
A) Perceived-value
B) Value
C) Going-rate
D) Auction-type
E) Markup

B

43) The key to perceived-value pricing is to ________.
A) reengineer the company's operations
B) deliver more unique value than competitors
C) adopt subtle marketing tactics compared to competitors
D) deliver more value but at a lower cost
E) invest heavily in advertising in order to convey superior value

A

44) ________ pricing is a matter of reengineering the company's operations to become a low-cost producer without sacrificing quality.
A) Value
B) Going-rate
C) Auction-type
D) Markup
E) Perceived-value

A

45) A retailer who holds on to a(n) ________ policy charges a constant low price with little or no price promotions and special sales.
A) everyday low pricing
B) high-low pricing
C) low cost
D) going-rate pricing
E) auction-type pricing

C

46) Matt's retail store offers all its products at $2 lesser than its competitors throughout the year. The store never runs any promotional campaigns or offers any additional special discounts. Matt's retail store is following a(n) ________.
A) auction-type pricing policy
B) target-plus pricing policy
C) everyday low pricing policy
D) high-low pricing policy
E) going-rate pricing policy

D

47) Everyday low pricing is most suitable if ________.
A) consumers are willing to perform activities such as clip coupons to avail of discounts
B) consumers tend to associate price with quality
C) customers are insensitive to changes in price
D) the cost of conducting frequent sales and promotions is high
E) consumers have sufficient time to find the best prices

A

48) In ________, the firm bases its price largely on competitor's prices.
A) going-rate pricing
B) auction-type pricing
C) markup pricing
D) target-return pricing
E) perceived-value pricing

B

49) Which of the following auctions is characterized by one seller and many buyers?
A) Walrasian auctions
B) ascending bid auctions
C) closed auctions
D) sealed-bid auctions
E) reverse auctions

E

50) In which of the following auctions does the auctioneer first announce a high price for a product and then slowly decreases the price until a bidder accepts?
A) a Dutch auction with one buyer and many sellers
B) an English auction with one seller and many buyers
C) an ascending bid auction
D) a sealed-bid auction
E) a Dutch auction with one seller and many buyers

A

51) In a(n) ________, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price.
A) Dutch auction with one buyer and many sellers
B) English auction with one buyer and many sellers
C) English auction with one seller and many buyers
D) sealed-bid auction
E) ascending auction

B

52) ________ let would-be suppliers submit only one bid; they cannot know the other bids.
A) Descending bid auctions
B) Sealed-bid auctions
C) English auctions
D) Dutch auctions
E) Reverse auctions

C

53) In which of the following forms of countertrade do buyers and sellers directly exchange goods, with no money and no third party is involved?
A) buyback arrangements
B) offsets
C) barter
D) sealed bids
E) compensation deals

B

54) A Japanese firm is ready to sell its recent technological innovation to the U.S. government. But it has asked for 80 percent in cash and the rest in mica. The Japanese firm is looking to enter into a(n) ________ with the U.S. government.
A) functional discount
B) compensation deal
C) buyback arrangement
D) offset agreement
E) barter deal

A

55) Armac Ltd., is a sluice-box manufacturer based in China. A sluice-box is used for gold prospecting. Armac is interested in selling a few of its machines to an American mining company, but it wants 95 percent of the machines' price in gold and the rest in ores recovered by using the machines. This is an example of a ________.
A) buyback arrangement
B) functional discount
C) barter deal
D) compensation deal
E) sealed bid

B

56) ROC Engineering, a Chinese shipbuilding company, agrees to build a fleet of submarines for the Sri Lankan navy, for which it will be paid in the local Sri Lankan currency. As per the agreement, ROC must also spend a substantial amount of the money it generates through this deal within the country. In accordance with the contract, ROC buys Sri Lankan tea at a reduced rate. This is an example of which of the following forms of countertrade?
A) descending bid
B) offset
C) barter
D) compensation deal
E) buyback arrangement

C

57) ________ are offered by a manufacturer to trade-channel members if they will perform certain functions, such as selling, storing, and record keeping.
A) Consumer promotions
B) Quantity discounts
C) Functional discounts
D) Seasonal discounts
E) Trade-in allowances

D

58) When hotels, motels, and airlines offer discounts in slow selling periods, they are said to be offering ________.
A) trade discounts
B) quantity discounts
C) functional discounts
D) seasonal discounts
E) trade-in allowances

B

59) A(n) ________ is an extra payment designed to gain reseller participation in special programs.
A) seasonal discount
B) allowance
C) discount
D) quantity discount
E) functional discount

E

60) ________ are granted for turning in old item when buying a new one.
A) Promotional allowances
B) Quantity discounts
C) Functional discounts
D) Seasonal discounts
E) Trade-in allowances

C

61) ________ reward dealers for participating in advertising and sales support programs.
A) Functional discounts
B) Trade discounts
C) Promotional allowances
D) Rebates
E) Quantity discounts

B

62) When supermarkets and department stores drop the price on well-known brands to stimulate store traffic, they are said to be following ________.
A) value pricing
B) loss-leader pricing
C) special event pricing
D) high-low pricing
E) everyday low pricing

A

63) When Alan bought his car, the bank gave him 24 months to repay his car loan. But when Alan made a request to increase the time frame to 36 months, the bank granted the extension. The bank was willing to offer Alan a ________.
A) longer payment term
B) warranty contract
C) service contract
D) special customer price
E) special event price

E

64) In ________, the seller charges a separate price to each customer depending on the intensity of his or her demand.
A) second-degree price discrimination
B) third-degree price discrimination
C) psychological discounting
D) special-customer pricing
E) first-degree price discrimination

A

65) In second-degree price discrimination, the seller charges ________.
A) less to buyers of larger volumes
B) different prices depending on the season, day, or hour
C) a separate price to each customer depending on the intensity of his or her demand
D) different prices for different versions of the same product
E) different prices for the same product depending on the channel through which it is sold

B

66) In ________, the seller charges different amounts to different classes of buyers.
A) perceived value pricing
B) third-degree price discrimination
C) first-degree price discrimination
D) second-degree price discrimination
E) psychological discounting

C

67) When museums charge a lower admission fee to students and senior citizens, then this form of price discrimination is known as ________.
A) location pricing
B) channel pricing
C) customer-segment pricing
D) special-customer pricing
E) loss-leader pricing

A

68) Madame Tussaud's wax museum is a popular tourist attraction in London. The museum charges higher entry rates for tourists compared to locals. This form of price discrimination is known as ________.
A) customer-segment pricing
B) image pricing
C) location pricing
D) special customer pricing
E) special event pricing

D

69) When Coca-Cola carries a different price depending on whether the consumer purchases it in a fine restaurant, a fast-food restaurant, or a vending machine, then this form of price discrimination is known as ________.
A) product-form pricing
B) loss-leader pricing
C) special event pricing
D) channel pricing
E) location pricing

E

70) The price of tickets to the opera vary depending on where the person would like to be seated-in the gallery or in the stalls. This is an example of ________.
A) channel pricing
B) time pricing
C) image pricing
D) product-form pricing
E) location pricing

D

71) When hotels drop their rates on the weekends, then this form of price discrimination is known as ________.
A) channel pricing
B) image pricing
C) product-form pricing
D) time pricing
E) location pricing

B

72) The airline and hospitality industries use ________, by which they offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires.
A) special-customer pricing
B) yield pricing
C) cash rebates
D) location pricing
E) customer-segment pricing

C

73) ________ refers to selling below cost with the intention of destroying competition.
A) Bid rigging
B) Loss-leader pricing
C) Predatory pricing
D) Price discrimination
E) Price penetration

D

74) For price discrimination to work ________.
A) the market must be segmentable and the segments must show similar intensities of demand
B) members in the lower-price segment must be able to resell the product to the higher-price segment
C) competitors must be able to undersell the firm in the higher-price segment
D) the practice must not breed customer resentment and ill will
E) the extra revenue derived from price discrimination must not exceed the cost of segmenting and policing the market

E

75) A low price buys market share but not market loyalty. The same customers will shift to any lower-priced product that may come along. This is called the ________.
A) low-price trap
B) relative-market-share trap
C) shallow-pockets trap
D) target-market-share trap
E) fragile-market-share trap

E

76) When higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves, it leads to a(n) ________.
A) low-quality trap
B) fragile-market-share trap
C) price war trap
D) escalator trap
E) shallow-pockets trap

A

77) A company does not set a final price until the product is finished or delivered. This is known as ________.
A) delayed quotation pricing
B) an escalator clause
C) special-event pricing
D) time pricing
E) the shallow-pockets trap

B

78) When a company requires the customers to pay today's price and all or part of any inflation increase that takes place before delivery, it is known as ________.
A) special-customer pricing
B) an escalator clause
C) delayed quotation pricing
D) unbundling
E) time pricing

C

79) When a company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation, it is known as ________.
A) escalating
B) differentiation
C) unbundling
D) reverse discounting
E) delayed quotation pricing

E

80) In markets that are characterized by products that are highly homogeneous, how should a firm react to a competitor's reduction in price?
A) shrink the amount of the product available
B) substitute expensive materials or ingredients
C) reduce product features
D) reduce product services
E) augment the product

false

81) Price is one of the two elements of the marketing mix that produces revenue.

false

82) Traditionally, price was never a major determinant of buyer choice.

false

83) Today, consumers are price takers and accept prices at face value or as given.

true

84) Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be-not the marketer's stated price.

true

85) Customers usually have a lower price threshold below which prices signal inferior or unacceptable
quality, as well as an upper price threshold above which prices are prohibitive and the product appears not worth the money.

true

86) Although consumers may have fairly good knowledge of the range of prices involved, very few can accurately recall specific prices of products.

true

87) When examining products, consumers compare an observed price to an internal reference price they remember or an external frame of reference.

true

88) Many consumers use price as an indicator of quality and value.

false

89) Companies strive to maximize their current profits if they are plagued with overcapacity, intense competition, or changing consumer wants.

false

90) In reality, it is very easy for firms to estimate their demand and cost functions.

false

91) If firms wish to maximize their market share, they should opt for market-skimming pricing.

true

92) A firm is said to be following a market-skimming pricing strategy, if it introduces a product into the market at a high price and slowly drops the price over time.

true

93) In the case of prestige goods, the demand curve sometimes slopes upward.

true

94) Companies prefer customers who are less price sensitive.

true

95) Price elasticity depends upon the magnitude and direction of the contemplated price change.

false

96) A small change in price of a product within the price indifference band causes a substantial change in the demand of that product.

true

97) Total costs consist of the sum of the fixed and variable costs for any given level of production.

false

98) In target-return pricing, the firm adds a standard markup to the product's cost.

false

99) The key to effectively using perceived-value pricing is to deliver value that is on par with your competitors.

true

100) Value pricing requires a company to reengineer its operations to become a low-cost producer.

false

101) In high-low pricing, retailers charge low prices on an everyday basis with occasional price increases.

false

102) The U.S. government often uses Dutch auctions to procure supplies.

false

103) In a compensation deal, the seller sells a plant, equipment, or technology to another country and agrees
to accept as partial payment products manufactured with the supplied equipment.

true

104) Offset is a form of countertrade where sellers receive full payment in cash and agree to spend a substantial amount of the money in the country where they are trading within a stated time period.

false

105) A quantity discount is a price reduction given to those who pay their bills promptly.

false

106) Trade-in allowances reward dealers for participating in advertising and sales support programs.

true

107) Psychological discounting involves setting an artificially high price and then offering the product at substantial savings.

true

108) Loss leader pricing dilutes a company's brand image.

false

109) In first-degree price discrimination, the seller charges less to buyers of larger volumes.

false

110) When firms charge different prices to different customer groups for the same product or service, it is a case of second-degree price discrimination.

true

111) The airline industries implement yield pricing by offering discounted but limited early purchases,
higher-priced late purchases, and the lowest rates on unsold inventory just before it expires.

false

112) Price discrimination in all forms is illegal in the United States.

false

113) Predatory pricing, which refers to the concept of selling below cost with the intention of destroying competition, is lawful under certain conditions.

true

114) Companies sometimes initiate price cuts in an attempt to dominate the market through lower costs.

true

115) Cost inflation provokes price increases.

false

116) In a price-war trap, higher-priced competitors match the firm's lower prices but have longer staying power because of deeper cash reserves.

true

117) Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building.

true

118) Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases.

true

119) Shrinking the amount of product instead of raising the price is a good way to counteract consumer
resistances to price increases.

true

120) A company must consider the product's stage in the life cycle and its importance in the company's portfolio before responding to a competitor's price cut.

Answer: The Internet helps buyers to:
• Get instant price comparisons from thousands of vendors
• Name their price and have it met
• Get products free
The Internet helps sellers to:
• Monitor customer behavior and tailor offers to individuals
• Give certain customer access to special prices
The Internet helps both buyers and sellers to negotiate prices in online auctions and exchanges or even in person.

121) How does the Internet help sellers discriminate between buyers and vice-versa?

Answer: Although consumers have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices. When examining prices, consumers often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted "regular retail price."
These reference prices include:
• Fair price - what consumers feels the product should cost
• Typical price
• Last price paid
• Upper-bound price - reservation price or the maximum most consumers would pay
• Lower-bound price - lower threshold price or the minimum most consumers would pay
• Historical competitor price
• Expected future price
• Usual discounted price

122) What are the different possible consumer reference prices?

Answer: When a company is preparing to sets its price, first of all it has to select its pricing objectives. The five major objectives available to a company are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership.
• Survival - Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable
costs and some fixed costs, the company stays in business.
• Maximum current profit - Companies who try to maximize their current profit, estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions, but in reality, these are difficult to estimate.
• Maximum market share - Companies that want to maximize their market share believe that a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. This is a market-penetration pricing strategy.
• Maximum market skimming - Companies unveiling a new technology favor setting high prices to maximize market skimming. Companies that use this, introduce their products at a high price and slowly drop the price over time.
• Product-quality leadership - Companies that aim to be product quality leaders strive to be affordable luxuries, i.e., they want their products and services to be characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of the consumer's reach.

123) Briefly describe the different types of pricing objectives.

Answer: The six major price-setting methods are: markup pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and auction-type pricing.
• Markup pricing - This is the most elementary pricing method wherein a standard markup is added to the product's cost.
• Target-return pricing - Here, the firm determines the price that yields its target rate of return on investment.
• Perceived-value pricing - Perceived value is made up of a host of inputs, such as the buyer's image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier's reputation, trustworthiness, and esteem. Companies must deliver the value promised by their value proposition, and the customer must perceive this value.
• Value pricing - Companies win loyal customers by charging a fairly low price for a highly-quality offering. Value price is just not a matter of lowering the prices but also it is a matter of reengineering the company's operations to become a low-cost producer without sacrificing quality, to attract a large number of value conscious customers.
• Going-rate pricing - Here, the firm bases its price largely on competitors' prices.
• Auction-type pricing - There are three major types of auctions and their separate pricing procedures:
i. English auctions - These have one seller and many buyers. The highest bidder gets the item.
ii. Dutch auctions - This features one seller and many buyers, or one buyer and many sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he wants to buy, and potential sellers compete to offer the lowest price.
iii. Sealed-bid auction - This lets would-be suppliers submit only one bid. The suppliers have no knowledge about the other bids.

124) What are the different price-setting methods? Briefly describe each of them.

Answer: Countertrade can take the following forms:
• Barter - The buyer and seller directly exchange goods, with no money and no third party involved.
• Compensation deal - The seller receives some percentage of the payment in cash and the rest in products.
• Buyback arrangement - The seller sells a plant, equipment, or technology to another country
and agrees to accept as partial payment products manufactured with the supplied equipment.
• Offset - The seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period.

125) What are the different forms of countertrade?

Answer: The different types of price discounts and allowances are:
• Discount - This is a price reduction given to buyers who pay their bills promptly.
• Quantity discount - This is a price reduction offered to those who buy in large volumes.
• Functional discount - This is offered by a manufacturer to trade-channel members if they perform certain functions like selling, storing, and record keeping.
• Seasonal discount - This is a price reduction given to those who buy merchandise or services out of season.
• Allowance - This is an extra payment designed to gain reseller participation in special programs. These are of two types:
i. Trade-in allowances - These are granted for turning in an old item when buying a new one.
ii. Promotional allowances - These reward dealers for participating in advertising and sales support programs.

126) What are the different types of price discounts and allowances?

Answer: Companies can use any of the following pricing techniques to stimulate early purchase:
• Loss-leader pricing - Supermarkets and department stores often drop the price on well-known
brands to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items.
• Special event pricing - Sellers can establish special prices in certain seasons to draw in more
customers.
• Special customer pricing - Sellers can offer special prices exclusively to certain customers.
• Cash rebates - Auto companies and other consumer-goods companies offer cash rebates to
encourage purchase of the manufacturers' products within a specified time period. Rebates
can help clear inventories without cutting the stated list price.
• Low-interest financing - Instead of cutting its price, the company can offer customers low-interest financing.
• Longer payment terms - Sellers stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the interest rate of a loan, and more about whether they can afford the monthly payment.
• Warranties and service contracts - Companies can promote sales by adding a free or low-cost
warranty or service contract.
• Psychological discounting - This strategy sets an artificially high price and then offers the
product at substantial savings.

127) What are the different types of promotional pricing?

Answer: In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases:
• Customer-segment pricing - Different customer groups pay different prices for the same
product or service. For example, museums often charge a lower admission fee to students and
senior citizens.
• Product-form pricing - Different versions of the product are priced differently, but not
proportionately to their costs.
• Image pricing - Some companies price the same product at two different levels based on image
differences. A perfume manufacturer can put the perfume in one bottle, give it a name and image,
and price it at $10 an ounce. The same perfume in another bottle with a different name
and image and price can sell for $30 an ounce.
• Channel pricing - Coca-Cola carries a different price depending on whether the consumer
purchases it in a fine restaurant, a fast-food restaurant, or a vending machine.
• Location pricing - The same product is priced differently at different locations even though
the cost of offering it at each location is the same. A theater varies its seat prices according to
audience preferences for different locations.
• Time pricing - Prices are varied by season, day, or hour. Public utilities vary energy rates to
commercial users by time of day and weekend versus weekday.

128) What is third-degree price discrimination?

Answer: Several circumstances prompt a firm to cut its prices. One is excess plant capacity: The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs.
Cutting prices to keep customers or beat competitors often encourages customers to demand
price concessions. Other than this, a price-cutting strategy can also lead to the following possible traps:
• Low-quality trap - Consumers assume quality is low.
• Fragile-market-share trap - A low price buys market share but not market loyalty. The same
customers will shift to any lower-priced firm that comes along.
• Shallow-pockets trap - Higher-priced competitors match the lower prices but have longer
staying power because of deeper cash reserves.
• Price-war trap - Competitors respond by lowering their prices even more, triggering a price war.
Customers often question the motivation behind price changes. They may assume the item is about to be replaced by a new model; the item is faulty and is not selling well; the firm is in financial trouble; the price will come down even further; or the quality has been reduced. The firm must monitor these attributions carefully while initiating a price cut.

129) How can companies initiate price cuts and what are the traps that companies can fall into because of this?

Answer: One of the factors that prompts a firm to increase its prices is overdemand. When a company cannot supply all its customers, it can raise its prices, ration supplies, or both. It can increase its price in the following ways:
• Delayed quotation pricing - The company does not set a final price until the product is finished or delivered. This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment.
• Escalator clauses - The company requires the customer to pay today's price and all or part of any inflation increase that takes place before delivery. Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building.
• Unbundling - The company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation. Car companies sometimes add higher-end audio entertainment systems or GPS navigation systems as extras to their vehicles.
• Reduction of discounts - The company instructs its sales force not to offer its normal cash and quantity discounts.

130) Explain the concept of overdemand.

$20 is what Abe perceives to be the "fair price" for the product.

131) When Abe goes shopping, he comes across a T-shirt that is priced at $35. Although he wants to buy it, judging from the material used, he feels that the T-shirt should only cost $20. What reference price is Abe using here?

Answer: The consumers are using the upper-bound price. Upper-bound price refers to the reservation price or the maximum that most consumers would pay.

132) NV Inc. has launched a touch sensitive handset in the Indian market and priced the same at INR 9500. Although many people are checking it out and showing interest about purchasing it, majority of them are holding themselves back because they feel that it is not worth INR 9500. They compare the handsets' feature with that of its other competitors offering the same features and come to a conclusion that it is worth INR 8500 and nothing more than that. What kind of a reference price are the consumers using?

Answer: Cathy was using the price as an indicator of quality. She was using image pricing. This kind of pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.

133) When Cathy went shopping, she paid a lot to buy a jacket that had a well-known designer's tag attached to it. After a few days, she came across a jacket which was undistinguishable from the one she had bought but was priced 5 times lesser than the earlier one. She didn't give this a second thought because she was convinced that the designer label she had bought was worth it. What can be deduced from this?

Answer: The main objective for Agatha's Inc. should be survival. As long as prices cover variable costs and some fixed costs, the company will stay in business. But, it is worthwhile to remember that survival is a short-run objective. In the long run, the company has to add value to its product or face extinction.

134) Agatha's Inc. is about to introduce a new product in the market, but is not sure as to how it should price the product. The company is facing intense competition from 5 other companies. In the past, it has also failed to keep up with the changing consumer wants. In such a situation, what should be its main objective?

Answer: It can be deduced that the company's main objective is to maximize its maximum current profit.

135) Bella's Inc. has estimated the demand and costs associated with alternative prices. It has finally chosen to price its new offering in such a way that it will maximize the rate of return on investment. What can be deduced about the company's objective?

Answer: The company's objective is to maximize its market share.

136) When Carl's company introduced its new product in the market, it introduced it at the lowest possible price assuming that the demand for the product is going to be highly responsive to the price it is being introduced at. It also believes that a higher sales volume will lead to lower unit costs and higher long-run profit. What can be said about the company's objective?

Answer: Sony used a market-skimming pricing strategy. This is a favorite for companies unveiling a new technology. Companies using this introduce their product at a high price and slowly drop the price over time.

137) When Sony introduced the world's first high-definition television to the Japanese market in 1990, it was priced at $43,000. This helped Sony to scoop the maximum amount of revenue from the various segments of the market. The price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $600 in 2010. What pricing strategy did Sony use here?

Answer: Daryl convinced his customer that Car A offers him the lowest total cost of ownership.

138) Daryl convinced his prospective client that Car A was the best for him. But, the client insisted that the car cost him a good $10,000 more than Car B, the one which he was thinking of buying. Daryl told him that the amount he would have to spend on the fuel, insurance, repairs, and maintenance for Car B would be 5 times more than what he would have to spend on Car A. Finally convinced, the client consented to buy Car A. What technique did Daryl use to convince his customer?

Answer: These are said to be a company's fixed costs.

139) A company that pays its bills each month for its rent, heat, interest, and salaries regardless of its output is said to be incurring what type of costs?

Answer: Ellie will have to ask the marketing research department to establish the new product's desired functions and the price at which the product will sell, given its appeal and competitors' prices. Deducting the desired profit margin from this price leaves the target cost that must be achieved. Her company will then have to examine each cost element like the design, engineering, manufacturing, and sales and bring down costs so that the final cost projections are in the target range.

140) Ellie's manager has asked her to come up with ways to reduce costs of their new product by utilizing a process called "target costing." What should Ellie do?

Answer: In such a situation, the company should subtract the value of those features from the price of its product.

141) What should a company do if its competitor's product contains some features that are not available in its product?

Answer: The toaster manufacture should go for a target-return pricing. While using this pricing method, companies determine the price that yield its target rate of return on investment.

142) A toaster manufacturer who has invested $1 million in the business wants to set a price to earn a 20 percent return on investment, specifically $200,000. What pricing method should it choose?

Answer: Oligopolistic industries follow going-rate pricing. Firms following this pricing method, base their prices largely on competitors' prices.

143) In oligopolistic industries, all firms normally charge the same price. What kind of a pricing method are they said to be following?

Answer: eBay and Amazon.com are perfect examples of English auctions. Such auctions have one seller and many buyers and the highest bidder gets the item.

144) On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise the offer price until the top price is reached. What kind of auctions are these?

Answer: This is an example of a compensation deal. In such deals, the seller receives some percentage of the payment in cash and the rest in products.

145) A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee. This is an example of what kind of a countertrade?

Answer: This is an example of a buyback arrangement. In such arrangements, the seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment.

146) Fred's company has recently sold its resin-producing plant to a local concern in India. As part of the sales price, his company agrees to accept as partial payment the production of the resin at an agreed upon price for six years. This is an example of what type of countertrade?

Answer: Both the parties indulged in an offset. In such countertrade, the seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period.

147) Pepsi Co. sold its cola syrup to Russia and agreed to buy Russian vodka at a certain rate for sale in the United States for the next 5 years. What kind of a countertrade did both the parties indulge in?

Answer: Gina's company used psychological discounting. This strategy sets an artificially high price and then offers the product at substantial savings.

148) When Gina's company printed the ad for their Perfume in the newspapers, the caption read, "WAS $100, NOW $75". What kind of a promotional pricing did her company use?

Answer: These are examples of time pricing or price discrimination based on time.

149) Movie matinees are priced lower than the evening shows; television advertising costs less when run after midnight. These are examples of what type of price discrimination?

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