Lesson 3 of 7 · 14 min
Pricing: power, premiums and price discrimination
Where a firm can price depends on competition and differentiation: commodity sellers take the market price and compete on cost, differentiated sellers enjoy pricing power, and most firms use price discrimination through tiered, dynamic, value-based or auction pricing to charge different customers different amounts.
In short
- The model should state whether the firm prices at a premium, at parity or at a discount to competitors, and how prices compare with costs.
- Many competitors and little differentiation make a firm a price taker (a commodity producer); few competitors or strong differentiation give pricing power.
- Firms without pricing power usually pursue cost leadership: being the lowest-cost producer.
- Premium prices are justified by a lower total cost of ownership, extra services, or simply a strong brand that customers value.
- Price discrimination charges different prices to different customers to maximise profit when willingness to pay differs; it is often done through discounts and promotions, giving net prices.
- Common pricing models: tiered, dynamic, value-based and auction / reverse auction.
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