Theindustry chosen is hotel where the determination of a predominantpricing strategy is price discrimination. The predominant pricingstrategy depends on some factors. Some of those factors include thedegree of power to set prices, customer’s needs and the objectivesthat each hotel intends to achieve. The degree of power to set pricesmay occur when there is one hotel that acts as a market leader. Insuch a time, price discrimination strategy may not be applicable, butrather price leadership strategy is applied. This is because themarket leaders set the price while other small hotels adopt thepredetermined price. Customer’s needs may also determine thepredominant price that the hotel industry should charge. Customersneeds lead to the adoption of price discrimination strategy at theexpense of other strategies. The hotels charge a different price todifferent customers for the same service rendered in the hotel(Hinterhuber, &, Liozu, 2012, pg 72).
Thedegree of powers to set discriminatory price by firms operating inthe hotel depends on the bargaining power of customer and hotelmanager’s knowledge regarding the type customers they receive. Forexample, the knowledge of differentiating between leisure andbusiness travelers is vital when it come to price discrimination. Inmost case, Leisure travelers are flexible because they do not have afixed budget and hence they are willing to pay more. On the contrary,business travelers have a fixed budget and hence it may not bepossible to charge them a higher price than the standard pricebecause they will go away. In hotel industry price leadership haslimited roles as compared to price discrimination because most hotelstarget different customers and offer them different packages. Inconclusion, those powers stand from one another in the sense that,price discrimination relies on the kind of clients visiting thehotel. On the contrary, price leadership depends on the degree ofpower of one hotel to control other by determining the price chargesfor hotel services (Keat, Young, & Erfle, 2013, pg 407).
Thegovernment can be a potent force in the establishing and maintainingof monopolistic conditions in the sense that it regulates and createbarriers of entering the market. A monopolistic market condition is atype of market structure where there is only one large market firmthat provides other companies with all the necessary market supplies.There are entries barriers which make the government become a potentforce in establishing and maintain a monopolistic condition. Some ofthe government barriers that lead to the establishment of amonopolistic condition are when the government becomes a singlesupplier of a given commodity. For example, the government may becomethe only supplier of essential commodities such as electricity, oil,and air transports. In such a situation, the government may establisha monopolistic condition because the capital needs are high and legalrequirements are strict. The government may decide to be a holder ofproduction of patents, excluding all other organizations and hencecreating a monopolistic condition (Keat, Young, & Erfle, 2013, pg424).
Airlinetickets tend to differ in terms of when the ticket was bought, andthe time spent by the passengers on the trip. Such differences are acase of price discrimination because customers tend to be chargeddifferent prices for the same kind of service being rendered. Inaddition, increasing the price of air ticket is an aspect of pricediscrimination because irrespective of whether the price will beincreased, passengers will still travel. Such passengers tend to haveinelastic demand because an increase in price may not reduce thedemand but rather they will still buy the travel tickets (Keat,Young, & Erfle, 2013, pg 400).
a). Transfer pricing may be defined as the process of settingcommodity prices sold between two legal companies within a business.Transfer pricing emerges as a result of increased competition andglobalization. For example, transfer pricing may occur whensubsidiary sells goods to the parent company, the cost of such goodsare paid directly to the subsidiary by the parent firm (Keat, Young,& Erfle, 2013, pg 420).
b). Psychological Pricing is a marketing strategy where marketersutilize odd pricing strategies to market their products. For example,a marketer may use odd prices such as $999, or $777 to market theirproduct. Odd pricing help to attract customers by ensuring that theyperceive they are charged a low price (Keat, Young, & Erfle, 2013pg 422).
c).Price Skimming is defined as a process where the marketer setrelatively high price when introducing a product in the market andeventually reduce the price with time. For example, when introducinga new Soap in the market, the producer may decide to charge a higherprice and reduce the price later after the customer has adopted withthe higher price with an aim of retaining them(Keat, Young, &Erfle, 2013,pg 422).
d).PenetrationPricing is defined as a pricing strategy for setting a relativelylower price when introducing a new product into the market. The aimof penetration pricing is to attract new customer. For example, whenintroducing a new beverage, an organization may use penetrationpricing to attract new customers (Keat, Young, & Erfle, 2013, pg422).
Quantitysold by prestige in the past year is as follows
SellingPrice=$500 per quality Desk
IfPrestige decrease price by $32, another 500 desk could be sold andmaintain the profit. Besides, Price Elasticity of demand is -1.8.
Basedon the information provided, the validity of the consultant can beevaluated by carrying out the following computations. New sellingprice after decrease will be=$500-$32=$468
Newtotal quantity to make a profit of $700,000 while selling eachcommodity at $468 will be as follows Quantity=5000 dest+500=5500desk
PriceElasticity of Demand=(%Percentage change in quantity Demanded) ÷ (%Percentage changein prices)
PercentageChange in Quantity Demanded%=NEWQty Demanded– Old Qty Demand OldQty Demanded
NewQty Demanded=1000 Desk
OldQty Demanded=500 Desk
PercentageChange in Quantity Demanded%=5500– 500 =0.909091 5500
Percentagechange in prices=NewPrice – Old Price
Expectedpercentage change in quantity when the price decrease by $32
PriceElasticity of Demand = -1.8
percentagechange in quantity = -1.8 * – 0.064= 0.1152
Therefore,the Expected change in quantity = 11.52% * 5000
Itmeans that the consultant advice was wrong because the units thatwere supposed to be added to make a profit of $700,000 when the priceis decreased by 32 was not 500 units but rather 576 units as shown inthe calculations above.
Hinterhuber,A., & Liozu, S. (2012). Is it time to rethink your pricingstrategy?. MITSloan Management Review,53(4),69.
Keat,P.G., Young, P.K.Y. & Erfle, S.E. (2013). ManagerialEconomics (7th edition).UpperSaddle River, NJ: Pearson Prentice Hall.