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Chapter 10 Managing Pricing Decisions True/False Questions 1. Regardless of whether the setting is B2C or B2B, the vast majority of costs are associated with the purchase price. Answer: True Rationale: Apart from the purchase price, there are other costs such as time invested in the purchase process or the opportunity costs. But regardless of whether the setting is B2C or B2B, the vast majority of costs are associated with the purchase price. 2. Pricing decisions can be made by the accounting department and do not need to consider the whole of the firm's offering. Answer: False Rationale: Pricing decisions must consider the whole of the firm's offering, especially the concurrent decisions the firm is making about branding and products, service approaches, supply chain, and marketing communication. 3. Since a product's price tends to be so visible and definitive, customers rarely have trouble moving past price to consider other critical benefits the product affords. Answer: False Rationale: Customers do have trouble moving past price to consider other critical benefits the product affords. 4. Customers always find it more agreeable when a firm raises a price than when it reduces a price. Answer: False Rationale: Customers always find it more agreeable to have the price lowered rather than raised. 5. A competitor's price is one of the most visible elements of its marketing strategy, and you can often infer the pricing objective by carefully analyzing historical and current pricing patterns. Answer: True Rationale: One can often tell what a competitor is trying to do by viewing their pricing over time. 6. Effectively communicating a product's differential advantages is at the heart of positioning strategy, and exposure to these elements spurs the customer to develop perceptions of value and a subsequent understanding of the value proposition. Answer: True Rationale: Positioning of a product should effectively communicate the product's differential advantages because differential advantages help customers in developing perceptions of value of the product. 7. Marketers should over promise benefits instead of communicating and delivering a realistic level of benefits for a price. Answer: False Rationale: Marketers should communicate and deliver a realistic level of benefits for a price because overpromising and underdelivering is one of the quickest ways to create poor value perceptions and thus alienate customers. 8. Firms and brands that continually attempt to operate in the high-price/low-benefits environment do not survive over the long run as customer trust is damaged. Answer: True Rationale: Operating in the high-price/low-benefits environment can be extremely damaging to the value proposition and to the brand and it can damage customer trust. 9. Firms frequently rely on combinations of pricing tactics in the marketplace rather than putting all their eggs in one basket. Answer: True Rationale: Firms typically use a combination of pricing tactics. 10. In price lining, the escalation of product prices up the product line no longer have to consider factors such as real cost differences among the various features offered, customer assessments of the value added by the increasing level of benefits, and prices competitors are charging for similar products. Answer: False Rationale: In price lining, price points established for the various items in the line need to reflect the differences in benefits offered as the customer moves up and down the product line. So the escalation of product prices up the product line should consider factors such as real cost differences among the various features offered, customer assessments of the value added by the increasing level of benefits, and prices competitors are charging for similar products. 11. Captive pricing is not common in the service sector. Answer: False Rationale: Captive pricing is common in the service sector and it is sometimes called two-part pricing. 12. With prestige pricing, some of the traditional price/demand curves cannot properly predict sales or market response because it violates the common assumption that increasing price decreases volume. Answer: True Rationale: Prestige pricing plays on psychological principles that attach quality attributions to higher-priced goods and thus lends prestige to a product or brand by virtue of a price that is relatively higher than the competition. 13. Odd pricing can backfire if misapplied, specifically to service industries. Answer: True Rationale: It does not make sense to use odd pricing in a service setting in many cases. For example a physician or a management consultant wouldn't want to charge a client $193 instead of simply $200 for services rendered. 14. A variable pricing strategy makes planning and forecasting infinitely easier than the alternative approach, one-price. Answer: False Rationale: A one-price strategy makes planning and forecasting infinitely easier than the alternative approach, variable pricing. With variable pricing, the price is different to various customers making forecasting difficult. 15. Pricing objectives are independent of other marketing-related objectives such as positioning and branding. Answer: False Rationale: Pricing objectives should be consistent with other marketing-related objectives as well as with the firm's overall objectives for doing business. 16. Price skimming is used for market share maximization. Answer: False Rationale: Price skimming is used for market entry at the highest possible initial price. 17. Among the marketing mix variables, price is the easiest and quickest to alter, so sometimes firms over rely on price changes to stimulate additional sales or gain market share. Answer: True Rationale: Sometimes firms over rely on price changes to achieve their goals. But changing the price can impact the effectiveness of the overall marketing mix variables. 18. Odd pricing means that the price is relatively higher than the competition. Answer: False Rationale: Odd pricing simply means that the price is not expressed in whole dollars. 19. When formulating a response to a competitor's price reduction, a firm should consider its offering from the perspective of its overall value proposition to customers. Answer: True Rationale: Price wars are the quickest way to destroy margins and bottom-line profit. So before formulating a response to a competitor's price reduction, the firm should consider the overall value proposition of the offering. 20. In 1975, the Federal Consumer Goods Pricing Act repealed all state fair trade laws and minimum markup laws. Answer: True Rationale: In 1975, the federal Consumer Goods Pricing Act repealed all state fair trade laws and minimum markup laws. Multiple Choice Questions 21. _______________ is (are) considered by the customer when making a purchase decision. A. Time invested in the purchasing process B. Costs incurred by the customer in acquiring that bundle of benefits C. Opportunity costs of choosing one offering over another D. A & C E. A, B & C Answer: E. A, B & C Rationale: Time invested in the purchasing process, the price of the offering, and opportunity costs are taken into consideration by customers when making a purchase decision. 22. Michael Porter has consistently advocated that firms that are able to compete based on some extraordinary efficiency in one or more internal processes bring to the market a competitive advantage based on _______________. A. Price perception B. Cost leadership C. Value ratio D. Service E. Quality Answer: B. Cost leadership Rationale: Michael Porter advocates that extraordinary efficiency in one or more internal processes leads to cost leadership. 23. A company's core cost advantages translate directly to an edge over its competitors based on much more flexibility in its _______________ as well as its ability to translate some of the cost savings to the bottom line. A. Pricing strategies B. Cost leadership C. Value ratio D. Service E. Quality Answer: A. Pricing strategies Rationale: Core cost advantages give a company greater flexibility in its pricing strategies and allow it to translate cost savings to the bottom line. 24. _______________ occurs when a seller offers different prices to different customers without a substantive basis, such that competition is reduced. A. Price fixing B. Price discrimination C. Deceptive pricing D. Bait & switch E. Predatory pricing Answer: B. Price discrimination Rationale: Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In general, the practice of charging different customers different prices is called price discrimination. 25. _______________ is the percentage of total category sales accounted for by a firm. A. Market share B. Value Ratio C. Cost D. Value pricing E. Product adoption Answer: A. Market share Rationale: Market share is the percentage of total category sales accounted for by a firm. 26. When a firm's objective is to gain as much market share as possible, a likely pricing strategy is _______________, sometimes also referred to as pricing for maximum marketing share. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: A. Penetration pricing Rationale: Penetration pricing is used for maximizing market share. 27. One should be careful with a _______________ strategy. Because price is a cue for developing customer perceptions of product quality, the value proposition may be reduced if a low price belies the product's actual quality attributes. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: A. Penetration pricing Rationale: One should be careful with penetration pricing so that the image of the brand is not tarnished by a low price. 28. Amelie is the marketing manager at a café in Charleston, South Carolina. The chef/owner is about to introduce a new dish and Amelie is planning on pricing the dish low at the beginning, but slowly raising the price over time. Amelie is applying _______________. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: A. Penetration pricing Rationale: In penetration pricing, prices are set low initially to ward off competition and then creep up over time. Amelie is applying penetration pricing as a short term pricing policy. 29. A strategy of _______________ addresses the objective of entering a market at a relatively high price point. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: B. Price skimming Rationale: A strategy of price skimming addresses the objective of entering a market at a relatively high price point. In proposing price skimming, the marketing manager usually is convinced that a strong price-quality relationship exists for the product. 30. In proposing _______________, the marketing manager usually is convinced that a strong price-quality relationship exists for the product. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: B. Price skimming Rationale: Price skimming is generally used when a strong price-quality relationship exists. Price skimming may be done to lend prestige to the brand. 31. Jean Claude has just completed a new line of designer handbags. He wants the price to communicate to the customer that the handbags are high quality, so he sets it high. He knows that after this season, the price will lower. Jean Claude is using _______________. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: B. Price skimming Rationale: A strategy of price skimming addresses the objective of entering a market at a relatively high price point and it may be used to lend prestige to the brand. Since Jean Claude is introducing the handbags at a high price, he is using price skimming. 32. The _______________ strategy is used for profit maximization. A. Penetration pricing B. Price skimming C. Target return on investment (ROI) D. Competitor based pricing E. Value pricing Answer: C. Target return on investment (ROI) Rationale: A target return on investment (ROI) pricing strategy is used for profit maximization. Here, a bottom-line profit is established first and then pricing is set to achieve the target. 33. When using _______________ a bottom line profit is established first and then pricing is set to achieve the target. A. Penetration pricing B. Price skimming C. Target return on investment (ROI) D. Competitor based pricing E. Value pricing Answer: C. Target return on investment (ROI) Rationale: A target return on investment (ROI) pricing strategy is used for profit maximization. Here, a bottom-line profit is established first and then pricing is set to achieve the target. 34. _______________ could lead the marketing manager to decide to price at some market average price, or perhaps above or below it in the context of penetration or skimming objectives. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: D. Competitor based pricing Rationale: By analyzing the historical and current pricing patterns of competitors, a marketing manager may decide to price an offering at some market average price, or perhaps above or below it. This is known as competitor-based pricing. 35. Gaining a thorough understanding of competitors' marketing practices is a key element of successful marketing planning and execution and utilizing that information to determine your pricing is an example of _______________. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: D. Competitor based pricing Rationale: Firms can often infer the pricing objectives of competitors by carefully analyzing their historical and current pricing patterns. Based on such analysis, a marketing manager may decide to price an offering at some market average price, or perhaps above or below it. This is known as competitor-based pricing. 36. Mark runs a driving range in New York City. He has noticed that within a 15-minute walk you can get to three competitors. Mark decides to look at his competitors' pricing and then determine the best price based on all of the information. Mark is utilizing _______________. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: D. Competitor based pricing Rationale: Since Mark wants to price his offering based on an evaluation of competitors' prices, he is utilizing competitor-based pricing. 37. When a company purposefully makes pricing decisions to undercut one or more competitors and gain sales and net market share they are demonstrating a(n) _______________. A. Cost plus pricing strategy B. Price war C. Markup on sales price strategy D. Average-cost pricing strategy E. Target return pricing strategy Answer: B. Price war Rationale: A price war occurs when a company purposefully makes pricing decisions to undercut one or more competitors and gain sales and net market share. 38. The measure of customers' price sensitivity, estimated by dividing relative changes in quantity sold by relative changes in price is known as _______________. A. Price elasticity of demand B. Stability pricing C. Pricing tactics D. Auction pricing E. Reverse auction Answer: A. Price elasticity of demand Rationale: Price elasticity of demand is the measure of customers' price sensitivity. It is determined by dividing relative changes in quantity sold by relative changes in price. 39. _______________ overtly attempts to consider the role of price as it reflects the bundle of benefits sought by the customer. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: E. Value pricing Rationale: Firms that have an objective of utilizing pricing to communicate positioning use a value pricing strategy. Value pricing overtly attempts to consider the role of price as it reflects the bundle of benefits sought by the customer. 40. Juan is researching new cars. He would like to buy a car that is both good quality and a good price. After much consideration, Juan purchases a car from a manufacturer where the initial price paid is high, but the cars are known to have much lower maintenance costs. The pricing strategy employed by the dealership where Juan bought his car is _______________. A. Penetration pricing B. Price skimming C. Target ROI D. Competitor based pricing E. Value pricing Answer: E. Value pricing Rationale: Juan has paid a higher price for the car because he feels that the investment would provide sufficient benefits to justify the cost as the cars are known to have much lower maintenance costs. This becomes an example of value pricing. 41. In markets where customers typically witness rapidly changing prices, _______________ can provide a source of competitive advantage. A. Price elasticity of demand B. Stability pricing C. Pricing tactics D. Auction pricing E. Reverse auction Answer: B. Stability pricing Rationale: Stability pricing can provide a source of competitive advantage in markets where customers typically witness rapidly changing prices. In case of stability pricing, a firm attempts to find a neutral set point for price that is neither low enough to raise the ire of competition nor high enough to put the value proposition at risk with customers. 42. For most products, as long as the customer perceives the ratio of price and benefit to be at least at equilibrium, perceptions of _______________ will likely be favorable. A. Market share B. Quality C. Value D. A & B E. A & C Answer: C. Value Rationale: Perceptions of value will likely be favorable as long as the customer perceives the ratio of price and benefit to be at least at equilibrium. Thus, a poor-quality product at a super-low price can be perceived as a good value just as a higher-quality product at a high price can be. 43. Operating with _______________ price/_______________ benefits can be problematic. Some firms use price skimming strategies, especially on product introductions, even when all the bugs have yet to be worked out of the product. A. High, high B. High, low C. Low, high D. Low, low E. None of the above Answer: B. High, low Rationale: Firms and brands that continually attempt to operate in the high price/ low benefits quadrant do not survive over the long run as customer trust is damaged. 44. _______________ affords the marketing manager an opportunity to develop a rational pricing strategy across a complete line of related items. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: A. Product line pricing Rationale: With the help of product line pricing, a marketing manager can develop a rational pricing strategy across a complete line of related items. Prices of various items in the line reflect the differences in benefits offered as the customer moves up and down the product line. 45. Carol Ann is trying to explain to one of her ticket counter associates the differences in price associated with concert tickets. She explains that the lowest priced tickets are for the least desirable seats and the highest priced tickets are for the most desirable seats, with the rest of the ticket prices falling somewhere in-between. Carol Ann is describing _______________. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: A. Product line pricing Rationale: In product line pricing, prices of various items in the line reflect the differences in benefits offered as the customer moves up and down the product line. Since Carol Ann is explaining a pricing method that makes sense for all of the seats, she is describing product line pricing. 46. As the sugar price has gone up, a good portion of the profit margin of a candy bar has been preserved by simply reducing the size of the bar. The candy manufacturers are utilizing the principle of _______________. A. Price fixing B. Price discrimination C. Deceptive pricing D. Just noticeable difference (JND) E. Predatory pricing Answer: D. Just noticeable difference (JND) Rationale: Just noticeable difference (JND) in a price, is the amount of price increase that can be taken without affecting customer demand. In order to restrict the increase in the price of the candy bar in spite of the rising sugar prices, the manufacturers have reduced the size of the bar. 47. _______________ entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: B. Captive pricing Rationale: Captive pricing entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. For example, HP counts on the fact that customers will go back time and again to repurchase the replacement cartridges for their printers. 48. Krista wants to buy a new foaming soap dispenser. Currently the store is offering the dispenser for free when she purchases the largest refill of soap. The pricing strategy being used for the dispenser and soap is _______________. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: B. Captive pricing Rationale: Captive pricing entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. Krista is experiencing captive pricing because the refills offer the real margin to the store rather than the dispenser. 49. When customers are given the opportunity to purchase a package deal at a reduced price compared to what the individual components of the package would cost separately, the firm is using a _______________ strategy. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: C. Price bundling Rationale: When a package deal is offered at a reduced price compared to what the individual components of the package would cost separately, the pricing strategy used is called price bundling. 50. Lauren went to Leisure Travel to book a vacation to the Bahamas. The travel agent told her about multiple all-inclusive resorts where the price of the airfare, hotel, and food are all included. The resort is using a _______________ strategy. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: C. Price bundling Rationale: When customers are given the opportunity to purchase a package deal at a reduced price compared to what the individual components of the package would cost separately, the firm is using a price bundling strategy. Since the package offered by the resort includes various benefits like airfare, hotel, and food, it is using a price bundling strategy. 51. As in price bundling, it can be useful for customers to have some type of comparative price when considering a product purchase. Such a comparison is referred to as _______________. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: D. Reference pricing Rationale: In the case of price bundling, reference pricing is the total price of the components if sold separately versus the bundled price. The savings would be expected to stimulate purchase of the bundle so long as the perceived value realized is sufficient. 52. Bella Luna is a specialty baby furniture store. Most of the items in the store are designer, and, therefore, tend to be more expensive than other baby furniture. Recently Bella Luna started to put the manufacturer's suggested retail price next to the price they charge in order to show the savings. Bella Luna is using _______________. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: D. Reference pricing Rationale: Bella Luna is trying to create a powerful psychological impact on customers by virtue of the savings demonstrated by the comparison. This becomes an example of reference pricing. 53. One rationale for establishing a price-skimming objective is that _______________ lends status to a product or brand by virtue of a price relatively higher than the competition. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: E. Prestige pricing Rationale: Prestige pricing plays on psychological principles that attach quality attributions to higher-priced goods and thus lends prestige to a product by virtue of a price relatively higher than the competition. 54. Geoff works at an Aspen ski shop. He has just gotten a shipment of new snowboards and realizes that the company has priced its snowboards higher than the rest of the boards in Geoff's shop. Since Geoff took a marketing class in college, he knows that the company is using _______________. A. Product line pricing B. Captive pricing C. Price bundling D. Reference pricing E. Prestige pricing Answer: E. Prestige pricing Rationale: Prestige pricing lends prestige to a product by virtue of a price relatively higher than the competition. Since the company has priced its snowboards higher than the rest of the boards in Geoff's shop, it is using prestige pricing. 55. Creating a perception about price merely from the image the numbers provide the customers is called as _______________. A. Psychological pricing B. One price strategy C. Variable pricing D. Every day low pricing (EDLP) E. High/low pricing Answer: A. Psychological pricing Rationale: Psychological pricing means creating a perception about price merely from the image the numbers provide the customer. For example, customers mentally process the price $9.99 significantly lower than $100. 56. Doug runs a hardware store. He puts prices on the products and scans them when they get to the register. The price that is marked is the price that will be charged, no exceptions. Doug uses _______________. A. Psychological pricing B. One price strategy C. Variable pricing D. Every day low pricing (EDLP) E. High/low pricing Answer: B. One price strategy Rationale: In a one price strategy, the price of the product remains the same for all the customers. 57. With _______________, customers are allowed—even encouraged—to haggle about prices. A. Psychological pricing B. One price strategy C. Variable pricing D. Every day low pricing (EDLP) E. High/low pricing Answer: C. Variable pricing Rationale: When customers can negotiate prices, it is called variable pricing. 58. The fundamental philosophy behind _______________ is to reduce investment in promotion and transfer part of the savings to lower price. A. Psychological pricing B. One price strategy C. Variable pricing D. Every day low pricing (EDLP) E. High/low pricing Answer: D. Every day low pricing (EDLP) Rationale: Firms practicing an EDLP strategy typically reduce their promotional budgets and create buzz in the market place with the help of low prices. 59. _______________ is known for its every day low pricing strategy. A. Walmart B. J C Penney C. Sears D. Best Buy E. Kmart Answer: A. Walmart Rationale: Walmart has brought the concept of everyday low pricing (EDLP) to the forefront of global consumer consciousness. 60. _______________ is used by firms that rely on periodic heavy promotional pricing that is primarily communicated through advertising and sales promotion, to build traffic and sales volume. A. Psychological pricing B. One price strategy C. Variable pricing D. Every day low pricing (EDLP) E. High/low pricing Answer: E. High/low pricing Rationale: A high/low pricing strategy heavily promotes sales during certain periods of time when the prices are low, while the rest of the time the prices are high. 61. Heather runs Cute Cakes, a gourmet cupcake bakery. In order to set prices for her cupcakes, Heather looks at the costs of making each cupcake and then adds an additional amount on top of that to arrive at her price. Heather is demonstrating _______________. A. Cost plus pricing B. Price war C. Markup on sales price D. Average-cost pricing E. Target return pricing Answer: A. Cost plus pricing Rationale: Cost-plus pricing builds a price by adding a standardized markup on top of costs for an offering. Since Heather is using the same approach to pricing, she is demonstrating cost plus pricing. 62. The Internet created a rise in _______________ as more and more people decided to meet online in order to sell products to the highest bidder. A. Price elasticity of demand B. Stability pricing C. Pricing tactics D. Auction pricing E. Reverse auction Answer: D. Auction pricing Rationale: The Internet has created a rise in auction pricing by providing a vast electronic playing field for customers to participate in auctions on a real-time basis. 63. The Internet helped to create a market for _______________ where sellers bid prices to capture a buyer's interest. A. Price elasticity of demand B. Stability pricing C. Pricing tactics D. Auction pricing E. Reverse auction Answer: E. Reverse auction Rationale: In case of reverse auctions, sellers bid prices to capture a buyer's interest. Priceline.com is a prominent example of a reverse auction firm. 64. _______________ uses the sales price as a basis of calculating the markup percentage. A. Cost plus pricing B. Price war C. Markup on sales price D. Average-cost pricing E. Target return pricing Answer: C. Markup on sales price Rationale: In determining markup, one approach is to use the sales price as a basis. This is known as markup on sales price. 65. Caution is warranted in employing _______________, as it is always possible that the quantity demanded will not match the marketing manager's forecast. A. Cost plus pricing B. Price war C. Markup on sales price D. Average-cost pricing E. Target return pricing Answer: D. Average-cost pricing Rationale: In average-cost pricing, the average cost of a single unit is determined by dividing all costs by the total number of units. Thus, this calculation requires accurately predicting the quantity of the product that will be demanded. 66. James is trying to determine the best price for his new fishing poles. He decided to divide all of his costs by the number of fishing poles he will be manufacturing, to come up with a price. James is using _______________. A. Cost plus pricing B. Price war C. Markup on sales price D. Average-cost pricing E. Target return pricing Answer: D. Average-cost pricing Rationale: In average-cost pricing, the average cost of a single unit is determined by dividing all costs by the total number of units. James is using the same approach to pricing. 67. To better take into account the differential impact of fixed and variable costs, marketing managers can use _______________. A. Cost plus pricing B. Price war C. Markup on sales price D. Average-cost pricing E. Target return pricing Answer: E. Target return pricing Rationale: Target return pricing takes into account the differential impact of fixed and variable costs. 68. As with average-cost pricing, the effectiveness of _______________ is highly dependent on the accuracy of the forecast. A. Cost plus pricing B. Price war C. Markup on sales price D. Markup on cost E. Target return pricing Answer: E. Target return pricing Rationale: Target return pricing requires accurate forecasts of demand. This is one of the draw backs of target return pricing. 69. _______________ are incurred over time, regardless of volume. A. Fixed costs B. Variable costs C. Total costs D. Both A & B E. Both B & C Answer: A. Fixed costs Rationale: Fixed costs are incurred over time, regardless of volume. Variable costs fluctuate with volume. Total costs are simply a sum of the fixed and variable costs. 70. _______________ fluctuate with volume. A. Fixed costs B. Variable costs C. Total costs D. Both A & B E. Both B & C Answer: B. Variable costs Rationale: Variable costs vary with volume. Fixed costs are incurred over time, regardless of volume. Total costs are simply a sum of the fixed and variable costs. 71. To use target return pricing, the first step for one is to calculate _______________. A. Fixed costs B. Marketing costs C. Total costs D. Both A & B E. Both B & C Answer: A. Fixed costs Rationale: While using target return pricing, the first step is to calculate fixed costs. The variable costs per unit are added at the end. 72. _______________ are direct, immediate reductions in price provided to purchasers. A. Fixed costs B. Variable costs C. Total costs D. Discounts E. Allowances Answer: D. Discounts Rationale: Discounts are direct, immediate reductions in price provided to purchasers. Discounts can be provided for variety of reasons such as paying a bill early, purchasing a certain quantity, and so on. 73. _______________ remit monies to purchasers after the fact. A. Fixed costs B. Variable costs C. Total costs D. Discounts E. Allowances Answer: E. Allowances Rationale: Allowances are different than discounts in that they return money after the purchase. 74. Solid Surface, a countertop store, will give customers a 10% discount if they pay their bills in full in 20 days, however after 20 days they do not receive a discount. This is an example of _______________. A. Cash discounts B. Trade discounts C. Quantity discounts D. Seasonal discounts E. Promotional allowances Answer: A. Cash discounts Rationale: Sellers offer cash discounts to elicit quicker payment of invoices. Since Solid Surface is trying to receive payments quickly by offering a discount, this becomes an example of cash discounts. 75. From a legal standpoint, it is essential that _______________ are offered to all customers on an equally proportionate basis so that small buyers as well as large buyers follow the same rules for qualification. A. Cash discounts B. Trade discounts C. Quantity discounts D. Seasonal discounts E. Promotional allowances Answer: C. Quantity discounts Rationale: From a legal stand point, quantity discounts have to be offered to everyone on an equally proportionate basis. 76. _______________ are typically expressed as greatly extended invoice due dates. A. Cash discounts B. Trade discounts C. Quantity discounts D. Seasonal discounts E. Promotional allowances Answer: D. Seasonal discounts Rationale: Firms often purchase seasonal products many months before the season begins. To accommodate such lengthy sales processes, firms offer seasonal discounts. Seasonal discounts are typically expressed as greatly extended invoice due dates. 77. To accommodate lengthy sales processes, firms offer _______________, which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. A. Cash discounts B. Trade discounts C. Quantity discounts D. Seasonal discounts E. Promotional allowances Answer: D. Seasonal discounts Rationale: Firms often purchase seasonal products many months before the season begins. To accommodate lengthy sales processes, firms offer seasonal discounts which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. 78. Veggie Vitality will send retailers a check if they promote their vegetable-based smoothies in the retailer's promotional efforts. Veggie Vitality uses _______________. A. Cash discounts B. Trade discounts C. Quantity discounts D. Seasonal discounts E. Promotional allowances Answer: E. Promotional allowances Rationale: Wholesalers, distributors, and retailers promote a manufacturer's brands nearly always in response to promotional allowances provided by the manufacturer. Since Veggie Vitality sends retailers a check for the promotion of its product, it is using promotional allowances. 79. _______________ means that title transfer and freight paid on the goods being shipped are based on the free on board location. A. FOB pricing B. Uniform delivered pricing C. Zone pricing D. Geographically driven pricing E. None of the above Answer: A. FOB pricing Rationale: FOB stands for free on board, meaning that title transfer and freight paid on the goods being shipped are based on the FOB location. For example, FOB-origin or FOB-factory pricing indicates that the purchaser pays freight charges and takes title the moment the goods are placed on a transportation vehicle. 80. Giovanni's Gems is a high quality Italian leather goods store in Manhattan. Giovanni runs an Internet site where people can buy his products and he will charge the same delivery fee to any location within the 48 contiguous states. Giovanni utilizes _______________. A. FOB pricing B. Uniform delivered pricing C. Zone pricing D. Geographically driven pricing E. None of the above Answer: B. Uniform delivered pricing Rationale: Many direct-to-consumer marketers practice uniform delivered pricing, in which the same delivery fee is charged to customers regardless of geographic location within the 48 contiguous states. 81. When shipping prices are dependent upon geographic pricing zones based on the distance from the shipping location, it is considered _______________. A. FOB pricing B. Uniform delivered pricing C. Zone pricing D. Geographically driven pricing E. None of the above Answer: C. Zone pricing Rationale: In a zone pricing approach, shippers set up geographic pricing zones based on the distance from the shipping location. 82. _______________ is the amount of price increase that can be taken without affecting customer demand. A. Just noticeable difference B. Average-cost price C. Target return price D. Predatory price E. Captive price Answer: A. Just noticeable difference Rationale: Price changes upward will generally reflect the just noticeable difference (JND) in a price, which is the amount of price increase that can be taken without affecting customer demand. 83. _______________ could result in overall higher prices for consumers since various competitors are all pricing the same to maximize their profits. A. Price fixing B. Price discrimination C. Deceptive pricing D. Bait & switch E. Predatory pricing Answer: A. Price fixing Rationale: Price fixing occurs when companies collude to set prices at a mutually beneficial high level. When competitors are involved in the collusion, horizontal price fixing occurs. This can be detrimental to the consumer as it tends to raise prices. 84. Jameson has wanted to purchase an alarm system for his car for a couple of months and has been waiting for the right price. Last week, Jameson watched as the price for the alarm system he wanted shot up. The next month the price came back down. Jameson has just observed _______________. A. Price fixing B. Price discrimination C. Deceptive pricing D. Bait & switch E. Predatory pricing Answer: C. Deceptive pricing Rationale: Deceptive pricing occurs when firms set artificially high reference prices for merchandise just before a promotion so that an advertised sale price will look much more attractive to customers. Since the price of the alarm system suddenly increased and then decreased, this can be considered as deceptive pricing. 85. When a seller advertises an item at an unbelievably low price to lure customers into a store, and then refuses to sell the advertised item and instead pushes a similar item with a much higher price and higher margin, the seller is participating in the illegal practice of _______________. A. Price fixing B. Price discrimination C. Deceptive pricing D. Bait and switch E. Predatory pricing Answer: D. Bait and switch Rationale: When a seller has no true intent to actually make the lower priced item available for sale, the practice is called bait and switch. 86. _______________ assures everybody in the channel is satisfied with their "cut" of the profits. A. Sherman Antitrust Act B. Horizontal price fixing C. Robinson-Patman Act D. Vertical price fixing E. Federal Trade Commission Answer: D. Vertical price fixing Rationale: When independent members of a channel collude to establish a minimum retail price, vertical price fixing occurs and everybody in the channel achieves his/her desired cut of the profit. 87. A strategy to intentionally sell below cost to push a competitor out of a market, then raise prices to new highs is called _______________. A. Price fixing B. Price discrimination C. Deceptive pricing D. Bait & switch E. Predatory pricing Answer: E. Predatory pricing Rationale: Predatory pricing drives competition out of the market. It is illegal but prosecuting it can be very tricky because intent of the low pricing must be proved. 88. In the past, _______________ allowed manufacturers to establish artificially high prices by limiting the ability of wholesalers and retailers to offer reduced or discounted prices. A. Fair trade laws B. Minimum markup laws C. Loss leader products D. State fair trade laws E. None of the above Answer: A. Fair trade laws Rationale: Fair trade laws allowed manufacturers to establish artificially high prices by limiting the ability of wholesalers and retailers to offer reduced or discounted prices. These laws protected mom-and-pop operators from the price discounting by chain stores. 89. _______________ require a certain percentage markup be applied to all products. A. Fair trade laws B. Minimum markup laws C. Loss leader products D. State fair trade laws E. None of the above Answer: B. Minimum markup laws Rationale: Minimum markup laws require a certain percentage markup be applied to all products. Minimum markup laws may protect small retailers but it hurts everyday shoppers. 90. _______________ are products that are sacrificed at prices below cost or close to cost in order to attract shoppers to the store. A. New-to-the-world products B. Disruptive innovations C. Loss leader products D. Core products E. None of the above Answer: C. Loss leader products Rationale: A loss leader product is a product sold at a low price (at cost or below cost) to stimulate other profitable sales. It is a kind of sales promotion. Short Answer Questions 91. Harvey has just been hired as a marketing manager for a start-up technology company. His bosses have asked him to look at the pricing of their products and determine if the pricing strategies are best. Harvey is nervous because he has never done that before. How would you walk him through the pricing decision-making process? Answer: The pricing decision-making process from a marketing manager's perspective includes: Establish pricing objectives and related strategies; select pricing tactics; set the exact price; determine channel discounts and allowances; execute price changes; and understand legal considerations in pricing. Exhibit 10.1 portrays these elements of managing pricing decisions. 92. Thomas has just developed a line of grills for use in tailgating. He expects the wealthy alumni to be attracted to his grills because they are of higher quality than other portable grills on the market, and they have an ingenious design. Thomas wants to gain a good portion of the market share, so he decides to use a penetration pricing strategy. What negative effect could Thomas create using the penetration pricing strategy with his product? Answer: Thomas needs to be careful with a penetration pricing strategy. Because price is a cue for developing customer perceptions of product quality, the value proposition may be reduced if a low price belies the product's actual quality attributes. An axiom in marketing is that customers always find it more palatable when a firm reduces a price than when it raises a price, and a corollary to the axiom is that once a price has been changed (one way or the other), changing it back creates confusion about positioning and brand image. 93. Jacob has spent the last few years developing a new gaming system for one of the major gaming companies. He is getting ready to go meet with the head of the new products division and he has been asked to bring a pricing strategy along with his presentation. What pricing strategy should Jacob use? Keep in mind that significant costs have been put into researching and creating the system and that they will be the first company with a system of this type. Answer: A good pricing strategy for Jacob would be price skimming. One reason for this is that a strong price-quality relationship exists for the product. Since this is a new-product introduction by a firm with a first-mover advantage, they can skim early sales while the product has a high level of panache and exclusivity in the marketplace. Additionally, price skimming allows them to charge a higher cost now, thereby allowing them to start to recoup some of their R&D costs. 94. Keira is looking for a profit maximization pricing strategy. Which pricing strategy would you recommend to Keira? Answer: Pricing objectives very frequently are designed for profit maximization, which necessitates a target return on investment (ROI) pricing strategy. Here, a bottom-line profit is established first and then pricing is set to achieve the target. Although this approach sounds straightforward, it actually brings up an important reason pricing is best cast within the purview of marketing instead of under the sole control of accountants or financial managers in a firm. 95. Liv has been asked to determine whether or not her company should reengineer one of its older products to include more features and be more advanced. One of the things she needs to determine is if the market will support a price point for the newly designed product that enhances the firm's overall financial performance. What can Liv do in order to determine how the company should move forward? Answer: Liv should use price elasticity of demand—the measure of customers' price sensitivity estimated by dividing relative changes in quantity sold by relative changes in price. Price elasticity of demand is central to whether a product can be viably introduced within the context of a firm's financial objectives. 96. When is the logic of competitor-base pricing not a rational option? Answer: The logic of competitor-based pricing is quite rational unless (a) it is the only approach considered when making the ultimate pricing decisions or (b) it leads to exaggerated extremes in pricing such that on the high end a firm's products do not project customer value or on the low end price wars ensue. 97. Give an example of when a value pricing strategy would be best used. Answer: The value pricing strategy would be best used when a firm has an objective of utilizing pricing to communicate positioning. Value pricing overtly attempts to consider the role of price as it reflects the bundle of benefits sought by the customer. Because value is in the eyes of the beholder, affected by his or her perceptions of the offering coupled with the operative needs and wants, pricing decisions are strongly driven by the sources of differential advantage a product can realistically deliver. Specific examples: Hotels that advertise all the fun things you can do at their hotel if you stay with them. Cars that might cost more to purchase, but cost less to maintain over time (Toyota, Honda). 98. Garrett was choosing between two hotels when booking his trip to Las Vegas. One hotel offered free wi-fi and continental breakfast, the other hotel offered free wi-fi, hot continental breakfast, a free cocktail hour at night, and free parking. Naturally Garrett decided to stay at the second hotel because of all the extra offerings. However, when Garrett arrived at the hotel the bar was undergoing a remodel so there was no continental breakfast or cocktail hour the entire length of his stay. What lesson can marketing managers learn from this? Answer: The key lesson marketing managers should draw about value pricing goes back to a key point about managing customer expectations in Chapter 9: Over promising and under delivering is one of the quickest ways to create poor value perceptions and thus alienate customers. Marketers will do well to not over promise benefits, but rather should communicate and deliver a realistic level of benefits for a price. 99. Sophie works for Music Masters, a company that creates a line of speakers for use in both indoor and outdoor settings. The company has just finished creating a new line of products for the holiday season and Sophie is looking to set the pricing. Sophie wants to have all of the items in the new product line to have complementary pricing. What would be the best pricing strategy for Sophie to implement? Answer: Product line pricing affords the marketing manager an opportunity to develop a rational pricing strategy across a complete line of related items. As a customer is evaluating the choices available within a firm's product line, the price points established for the various items in the line need to make sense and reflect the differences in benefits offered as the customer moves up and down the product line. 100. Evan is working at a home store and is pricing new items in its home décor section. He has come to the plug-in home fragrance products and has decided to price the actual plug-in gadget at a very reasonable price because he knows that customers will have to continually buy the fragrance pods. What pricing strategy is Evan demonstrating? Answer: Captive pricing, sometimes called complementary pricing, entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. 101. Stephen is developing a new website for the sports and recreation retailer he works at. He is trying to figure out how to display prices. His company prides itself on consistently selling prices below manufacturer suggested retail price and he would like to indicate this on the website. What do you think Stephen should do? Answer: Stephen should use reference pricing. He can show the manufacturer's suggested list price next to the actual price the product is offered for in the catalog. Additionally, he can carry that over to the retail stores displaying prices in the same way. Stephen should consider displaying the manufacturer's suggested retail price (MSRP) alongside the actual selling price to emphasize the discount customers are receiving, reinforcing the company's value proposition. 102. Kelly disagrees with her father about which paint to buy for Kelly's bedroom. Kelly believes that paint is paint, she wants to buy the color she wants in the store brand and head home to paint. However, Kelly's father believes they should buy the higher priced paint because it is better. Kelly's father is easily influenced by which pricing strategy? Answer: Kelly's father is susceptible to prestige pricing. Prestige pricing plays on psychological principles that attach quality attributions to higher-priced goods—a typical response to some higher-priced products is that they must be better than their competitors otherwise the price would be lower. 103. Vincent has just flown from his home in France to Chicago to visit his aunt. Upon landing he realized that he left his jacket at home, so on his way to his aunt's house he stops at a department store to purchase a coat. When he gets to the counter Vincent looks at the price tag and then offers to pay 10% less than the printed price. What kind of pricing strategy is Vincent used to? Answer: Vincent is used to variable pricing. Since variable is found in many other countries and cultures but is relatively rare in the United States. With variable pricing, customers are allowed—even encouraged—to haggle about prices. Ultimately, the price is whatever the buyer and seller agree to—a marked price is nothing more than a starting point for negotiation. 104. What are some of the differences between auction pricing and reverse auction? Answer: With auction pricing, individuals competitively bid against each other and the purchase goes to the high bidder, the market truly sets the price (although some minimum bid amount is often established by the seller). Reverse auctions are when sellers bid prices to capture a buyer's business. 105. Which two price calculations rely heavily on accurate forecasts of products sold? Answer: Average-cost pricing where it is always possible that the quantity demanded will not match the marketing manager's forecast and target return pricing. 106. After completing inventory assessments you have realized that you have an excess of one of your products. You need to move this excess product out of your warehouse, but you are unsure of the best way to do that. What kind of B2B pricing strategies could you offer to your channel buyers? Answer: You could offer discounts and allowances. Discounts are direct, immediate reductions in price provided to purchasers. Allowances remit monies to purchasers after the fact. In general, in B2B transactions marketing managers must be cognizant of several types of discount and allowance approaches that essentially amount to price adjustments for channel buyers. Sellers offer discounts and allowances for a variety of reasons. Paying a bill early, purchasing a certain quantity, purchasing seasonal products during the off-season, or experiencing an overstock on certain products are common rationale for offering various discounts and allowances. At its essence, the approach hopes to impact purchaser behavior in directions that benefit the selling firm by sweetening the buying organization's terms of sale. 107. What are the primary differences and uses of price, trade and quantity discounts? Answer: • Cash discounts are intended to elicit quicker payment of invoices. The rational purchaser weighs the discount offered for early payment versus the value of keeping the money until it is due. • Trade discounts provide an incentive to a channel member for performing some function in the channel that benefits the seller. • Quantity discounts are taken off an invoice price based on different levels of product purchased. 108. Jasper wants to get his retailers and wholesalers to help him promote his product, what tool could Jasper use to achieve this goal? Answer: Jasper should offer his retailers and wholesalers promotional allowances. Jasper provides promotional allowances upon proof of performance of the promotion. Once the promotion is over and the success of the promotion has been determined, Jasper sends a check to compensate for part of the promotional costs. 109. Why were fair trade laws created? Who were they intended to protect? Answer: Fair trade laws were popular in the past because they allowed manufacturers to establish artificially high prices by limiting the ability of wholesalers and retailers to offer reduced or discounted prices. Fair trade laws varied greatly from state to state, depending largely on how strong the independent retailer and wholesaler lobby was in a particular locale. These laws protected mom-and-pop operators from the price discounting by chain stores. 110. Maria works for a discount store and overheard her managers talking about loss leader products. She is having some difficulty understanding what exactly loss leader products are, and what the ethical constraints are surrounding them. Can you explain these to Maria? Answer: Loss leader products are items (typically paper towels, toilet paper, toothpaste, and the like) sacrificed at prices below cost to attract shoppers to the store. The government does not like stores using loss leader products, so they created minimum markup laws, which require a certain percentage markup be applied to products. Essay Questions 111. Carianne works for Kenny. Kenny insists that when deciding which pricing objectives to use, you just think of what you want and make it happen, independent of external factors. Carianne knows better and is trying to explain to Kenny the importance of pricing objectives and how they relate to other aspects of the business. How should Carianne explain this to Kenny? Answer: The decision of which pricing objective or objectives to establish is driven by many interrelated factors. As you learn about each of the approaches, keep in mind that most firms attempt to balance a range of issues through their pricing objectives, including internal organization-level goals, internal capabilities, and a host of external market and competitive factors. Pricing objectives are the desired or expected result associated with a pricing strategy. Pricing objectives must be consistent with other marketing-related objectives (positioning, branding, etc.) as well as with the firm's overall objectives (including financial objectives) for doing business. 112. Keegan has always followed economics and politics very closely. Over the years, he has become very interested in the ideas of pricing based purely on economic models and solely for profit maximization and how both of these affect ethical concerns. What do you think about Keegan's ideas and the ethical implications of each? Answer: The idea of pricing based on purely economic models and solely for profit maximization raises important ethical concerns, especially in cases where essential products are in short supply. The latest wonder drugs, building materials after a major disaster, and new technologies needed for emerging markets are but three examples in which pricing for pure profit motive can damage both a firm's image and ultimately its relationships with customers. And as oil prices have soared over recent years, more and more consumer groups have been actively calling for investigation of the pricing practices of the big oil companies, and Congress has periodically called in the CEOs to testify about their profits. At the same time, independent distributors, gasoline retailers, and end-user consumers of gasoline have all struggled because of the high prices. 113. Vivienne tends to pay little attention to her competitors' marketing practices, her assistant Bridget has been trying to find someone to explain the importance of understanding her competitors and has hired you. Bridget needs you to explain why competitors' marketing practices are important to her and how the competitors price factors into the equation. Answer: Gaining a thorough understanding of competitors' marketing practices is a key element of successful marketing planning and execution. A competitor's price is one of the most visible elements of its marketing strategy, and you can often infer the pricing objective by carefully analyzing historical and current pricing patterns. Based on such analysis, a firm may develop competitor-based pricing strategies. This approach might lead the marketing manager to decide to price at some market average price, or perhaps above or below it in the context of penetration or skimming objectives. 114. Andrew has just taken over as CEO of one of the nation's top hotel chains. He recognizes that hotel room prices are quite unstable and he would like to neutralize them. What strategy is Andrew considering employing? Why would this be a good strategy? Answer: A potentially more productive strategy related to competitor- based pricing is stability pricing, in which a firm attempts to find a neutral set point for price that is neither low enough to raise the ire of competition nor high enough to put the value proposition at risk with customers. Many factors go into selecting a specific product's stability price point. In markets where customers typically witness rapidly changing prices, stability pricing can provide a source of competitive advantage. Andrew could employ a stability pricing strategy by displaying only five or six fares for a particular room, with price points based on when the room is reserved and the days of the week the customer will be staying. Andrew's stability pricing approach could prove to be highly popular with customers. 115. Jorge has just taken over a technology company that has always operated in the high price/low benefits sector of the Generic Price-Quality Positioning Map. You are his marketing manager and are supposed to be preparing a report about the pricing efforts of the company. What are some of the problems that you will include in your report? What can happen in the long run to firms that operate like yours does? Answer: Operating in the high price/low benefits sector can be problematic. Some firms utilize price-skimming strategies, especially on product introductions, even when all the bugs have yet to be worked out of the product. New technology products are notorious for having surprises in quality, functionality, and reliability crop up soon after introduction. When this happens, it can be extremely damaging to the value proposition and to the brand. In such cases, from an ethical perspective, one could question the firm's intent. Did the company rush a product to market to beat an impending entry by competition, pricing it high due to first-mover advantage, all the while knowing that serious quality problems existed? Firms and brands that continually attempt to operate in the high-price/low-benefits quadrant do not survive over the long run as customer trust is damaged. Unfortunately, some highly unscrupulous companies perpetuate their operations in this quadrant by constantly changing company name, location, and brand names. Stories of customer rip-offs are particularly prolific in the service sector (from construction to financial services to health care) because in this sector the offering is inextricably linked to the provider and it's difficult to assess quality until after the service is rendered. 116. Lovella and Curtis both work in the marketing department at a car dealership. They have been asked to determine the best pricing strategy for some of the service department offerings. Curtis is in favor of a price bundling strategy, while Lovella wants to steer clear of price bundling. Lovella says that some customers can view price bundling as a negative. Why might Lovella think this? What can she and Curtis do to overcome this? Answer: A potential dark side to price bundling is that, in some industries, it can become unclear just what the regular, or unbundled, price is for a given component of a package. The cable/telecommunications industry is regulated to the point that this is less an issue, but in unregulated industries, unscrupulous firms sometimes set artificially high prices for the sake of pushing customers into buying a package. She and Curtis can make sure that individual prices are also available so that customers can see that they are getting a deal by purchasing the bundled package, or if they do not want everything in the bundle they can choose to purchase the desired items separately. 117. Rosalie runs a manufacturing company that makes various seasonal items. Rosalie is headed to an industry tradeshow and wants to create some kind of incentive to get more buyers for her products. What would be a good strategy for Rosalie to use? What does the strategy require Rosalie to do? Answer: Rosalie should use seasonal discounts. Firms often purchase seasonal products many months before the season begins. For example, a retailer might purchase a winter apparel line at a trade show a year before its season, accept delivery in August, begin displaying it in September, yet cold weather may not hit until November or December. To accommodate such lengthy sales processes, firms offer seasonal discounts, which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. Seasonal discounts are often expressed as greatly extended invoice due dates. In the winter clothes line example, terms of 2%/120, Net 145 would not be unusual. 118. Sheridan runs a company that produces bathroom fixtures for interior design firms. Sheridan needs to raise prices because of an increase in material costs, but he is unsure of what his customers will accept. What does Sheridan need to do to determine his customer's perceptions? How will he determine the appropriate increase in price? Answer: It is important for marketing managers to conduct appropriate market research in advance of major price changes to try to determine the likely impact of a price change on customer perceptions of the offering and likelihood to purchase. Both qualitative research approaches, such as focus groups, and quantitative approaches, such as surveys and experiments, can be designed to determine the degree to which an anticipated price change might influence customer response. Ideally, price changes upward will reflect the just noticeable difference (JND) in a price, which is the amount of price increase that can be taken without affecting customer demand. 119. Jamie needs to find a way to save profit margins without increasing price. Recently the price of chocolate has gone up, so his gourmet organic candy bars are losing a good portion of the profit margin. What non-price strategies can Jamie begin to employ so he can recover his profit margin? Which strategies does Jamie need to be cautious of? Answer: Jamie can start by reducing the size of his candy bars. In addition to reducing the offering in terms of size or quantity, other non-price approaches to mitigating the pressure to maintain margins include altering or reducing discounts and allowances, unbundling some services or features from the original offering, increasing minimum order quantities, or simply reducing product quality. Jamie should be cautious when they begin to consider altering the product itself to retain margins; customer response to such tinkering might be negative. 120. Kyle and Kristin are lawyers working in conjunction with the Federal Trade Commission. They handle hundreds of cases a year that have to do with illegal pricing strategies. Kyle and Kristin are working on a paper and would like you to participate. They explain to you that there are four main kinds of illegal pricing and then ask you to share an experience or an example related to one of the illegal pricing strategies. What do you tell them? Answer: Companies that collude to set prices at a mutually beneficial high level are engaged in price fixing. When competitors are involved in the collusion, horizontal price fixing occurs. The Sherman Act forbids horizontal price fixing, which could result in overall higher prices for consumers since various competitors are all pricing the same to maximize their profits. Price discrimination occurs when a seller offers different prices to different customers without a substantive basis, such that competition is reduced. The Robinson-Patman Act explicitly prohibits giving, inducing, or receiving discriminatory prices except under certain specific conditions such as situations where proof exists that the costs of selling to one customer are higher than to another (such as making distribution to remote locations) or when temporary, defensive price reductions are necessary to meet competition in a specific local area. Knowingly stating prices in a manner that gives a false impression to customers is deceptive pricing. Deceptive pricing practices are monitored and enforced by the FTC. Deceptive pricing may take several forms. Sometimes, firms will set artificially high reference prices for merchandise just before a promotion so that an advertised sale price will look much more attractive to customers. A strategy to intentionally sell below cost to push a competitor out of a market, and then raise prices to new highs is called predatory pricing. Predatory pricing is illegal but prosecuting it can be very tricky because intent must be proved. Test Bank for Essentials of Marketing Management Greg W. Marshall, Mark W. Johnston 9780078028786, 9780071082020, 9780077400187

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