Chapter 14 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 Answer: B Rationale: A reference price is the internal benchmark consumers use to evaluate the observed price of a product. It helps them assess whether the current price is fair or not by comparing it to their perceived reference price. 2. ________ price refers to what the consumers feel the product should cost. A) Fair B) Typical C) Usual discounted D) List E) Maximum retail Answer: A Rationale: The fair price is what consumers perceive as a reasonable cost for a product based on their assessment of its value and utility. 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 Answer: B Rationale: Jane's perceived price of $5 for the lipstick represents what she believes is a fair price based on her assessment of its value. 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 Answer: C Rationale: The upper-bound price, also known as the reservation price, is the maximum amount consumers are willing to pay for a product based on their perceived value of it. 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 Answer: D Rationale: In this scenario, the $100 price cited by 95 percent of the participants represents the upper-bound price or the maximum amount consumers are willing to pay for the MP3 player. 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 Answer: E Rationale: The lower-bound price is the minimum amount consumers are willing to pay for a product based on their perceived value of it. 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 Answer: C Rationale: The $500 price represents the lower-bound price, indicating the minimum amount customers are willing to pay for the mobile phone based on its features. 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 Answer: B Rationale: Image pricing relies on consumers' perception of value based on factors such as brand reputation, image, and prestige, rather than the actual cost of production. 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 Answer: D Rationale: Pricing cues like sale signs and prices ending in 9 are more influential when product designs vary over time because they create a sense of urgency or perceived value, especially when consumers are comparing products with changing attributes. 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 Answer: B Rationale: Selecting the pricing objective is the first step in setting a pricing policy as it defines the overarching goal or purpose that the pricing strategy aims to achieve, guiding subsequent decisions regarding pricing methods, costs, demand, and competitive analysis. 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. Answer: D Rationale: After determining pricing objectives, the firm should assess demand for its product to understand how customers will respond to different price levels, helping to set an appropriate pricing strategy. 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 Answer: C Rationale: In situations of overcapacity, intense competition, or changing consumer preferences, the primary objective for a firm would be survival, ensuring it can withstand market challenges and remain operational. 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 Answer: E Rationale: Maximizing current profit involves setting prices to maximize the difference between total revenue and total costs, ensuring the highest possible rate of return on investment. 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 Answer: A Rationale: By aiming to maximize market share, companies expect to achieve economies of scale, driving down unit costs through higher production volumes and ultimately leading to higher long-run profits. 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 Answer: B Rationale: Market-penetration pricing aims to set prices low to penetrate the market quickly, attract a large customer base, and capture significant market share. 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 Answer: B Rationale: Market-penetration pricing is effective when production and distribution costs decrease with increased production experience, allowing the firm to maintain profitability despite lower initial prices. 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 Answer: B Rationale: Market-skimming pricing involves initially setting high prices to capture maximum revenue from segments willing to pay a premium, then gradually lowering prices to attract more price-sensitive customers. 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 Answer: C Rationale: Apple initially adopted a market-skimming pricing strategy by setting a high price for its iPhone to target early adopters and maximize revenue, then gradually lowered the price to attract more price-sensitive customers. 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 Answer: D Rationale: Market-skimming pricing is not suitable if consumers are likely to delay purchasing until the price drops, as it relies on capturing maximum revenue from early adopters who are willing to pay a premium. 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 Answer: E Rationale: Companies aiming to be product-quality leaders focus on providing high-quality products perceived as affordable luxuries, offering superior value compared to competitors while maintaining a premium image. 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 Answer: E Rationale: Companies like Starbucks, Aveda, and BMW focus on offering high-quality products or services that are perceived as luxurious and premium by consumers, thereby establishing themselves as leaders in product quality within their respective markets. 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 Answer: C Rationale: Understanding what affects price sensitivity is crucial in estimating demand because it helps businesses identify factors that influence consumers' responsiveness to changes in price. 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 Answer: E Rationale: Consumers are less price sensitive when they do not readily notice higher prices, meaning small price changes may not significantly impact their purchasing behavior. 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 Answer: A Rationale: When price is only a small part of the total cost spent on the product over its lifetime, consumers are less price sensitive because they prioritize other factors over price when making purchasing decisions. 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 Answer: C Rationale: Inelastic demand refers to a situation where demand hardly changes with a small change in price, indicating that consumers are not very responsive to price changes. 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 Answer: B Rationale: Elastic demand refers to a situation where demand changes considerably with a small change in price, indicating that consumers are highly responsive to price changes. 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 Answer: A Rationale: A price increase falling within customers' price indifference band implies that consumers are largely indifferent to the price change, as it does not significantly affect their purchasing behavior. 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. Answer: B Rationale: Within the price indifference band, price changes have little or no effect on demand because consumers are largely indifferent to small price changes. 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 Answer: A Rationale: Overhead costs remain constant regardless of production levels or sales revenue, including expenses such as rent, utilities, salaries, and insurance. 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 Answer: B Rationale: Fixed costs are expenses that remain constant regardless of changes in production levels or sales revenue, including rent, utilities, interest payments, and salaries. 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 Answer: E Rationale: Variable costs are expenses that vary directly with the level of production or sales, such as raw materials, direct labor, and production supplies. 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 Answer: A Rationale: Total costs represent the sum of both fixed and variable costs incurred by a business for a given level of production or sales. 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 Answer: B Rationale: Average cost is calculated by dividing total costs by the number of units produced, representing the cost per unit at a specific level of production. 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 Answer: C Rationale: The learning curve refers to the decline in average cost per unit as cumulative production increases due to factors such as increased efficiency and experience gained by workers. 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 Answer: A Rationale: Experience-curve pricing assumes that competitors are weak followers, meaning the firm can maintain a competitive advantage by leveraging its experience and efficiency in production to offer lower prices. 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 Answer: B Rationale: Target costing involves calculating the desired profit margin and subtracting it from the expected selling price to determine the maximum allowable production cost. 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 Answer: C Rationale: Competitors are most likely to react to a price change when there are few competing firms in the market, as any pricing action by one firm can have a significant impact on market dynamics and competitors' strategies. 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 Answer: C Rationale: Markup pricing is the most elementary pricing method as it involves adding a standard markup to the cost of the product to determine its selling price. 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. Answer: E Rationale: Despite its weaknesses, markup pricing remains popular because many people feel that cost-plus pricing is fairer to both buyers and sellers, providing transparency in pricing and ensuring a reasonable profit margin for the seller. 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 Answer: A Rationale: Target-return pricing involves adding the desired profit margin to the unit cost. In this case: Target-return price = Unit cost + (Desired ROI × Unit cost) Target-return price = $18 + (0.15 × $18) Target-return price = $18 + $2.70 Target-return price = $20.70 Therefore, the correct answer is option 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) 18,000 B) 5,500 C) 27,500 D) 55,000 E) 1,819 Answer: D Rationale: To break even, total revenue equals total costs. Total costs include both fixed costs and variable costs. Let x be the number of units sold. Total revenue = Total costs $10x = $275,000 + $5x $10x - $5x = $275,000 $5x = $275,000 x = $275,000 / $5 x = 55,000 units Therefore, the firm should sell 55,000 units in order to break even. 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 Answer: A Rationale: Perceived-value pricing considers various factors beyond just the cost of production, such as the perceived value by the buyer, product performance, warranty quality, customer support, and the reputation of the supplier. 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 Answer: B Rationale: The key to perceived-value pricing is to deliver more unique value than competitors, ensuring that customers perceive the product or service as worth the price charged. 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 Answer: A Rationale: Value pricing involves reengineering the company's operations to become a low-cost producer while maintaining or even enhancing product quality, allowing the company to offer competitive prices. 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 Answer: A Rationale: Everyday low pricing (EDLP) is a pricing strategy where the retailer maintains consistently low prices without relying on frequent promotions or discounts. 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 Answer: C Rationale: Matt's retail store is following an everyday low pricing policy by consistently offering products at lower prices than its competitors without relying on promotions or discounts. 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 Answer: D Rationale: Everyday low pricing is most suitable when the cost of conducting frequent sales and promotions is high, making it impractical or costly to engage in such activities. 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 Answer: A Rationale: Going-rate pricing involves setting prices based on competitors' prices, often matching or closely aligning with prevailing market prices. 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 Answer: B Rationale: Ascending bid auctions involve one seller and multiple buyers, where buyers compete by submitting increasingly higher bids until a final highest bid is determined. 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 Answer: E Rationale: In a Dutch auction with one seller and many buyers, the auctioneer starts with a high price and gradually decreases it until a bidder accepts the price, allowing the seller to find the highest price buyers are willing to pay. 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 Answer: A Rationale: In a Dutch auction with one buyer and many sellers, the buyer announces what they want to buy, and sellers compete to offer the lowest price until a seller accepts. 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 Answer: B Rationale: Sealed-bid auctions allow potential suppliers to submit only one bid, without knowledge of other bids, offering confidentiality and fairness in the bidding process. 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 Answer: C Rationale: Barter involves direct exchange of goods or services between two parties without using money or involving a third party. 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 Answer: B Rationale: A compensation deal involves payment in a combination of money and goods or services, as in this case where the Japanese firm requests part payment in mica. 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 Answer: A Rationale: A buyback arrangement involves payment in goods produced by the equipment sold, as in this case where Armac Ltd. requests part payment in ores recovered by using the machines. 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 Answer: B Rationale: An offset agreement requires the seller to spend a portion of the revenue generated from the deal within the buyer's country, as in this case where ROC Engineering purchases Sri Lankan tea. 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 Answer: C Rationale: Functional discounts are discounts offered by manufacturers to trade-channel members in exchange for performing specific functions, such as selling, storing, or record-keeping. 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 Answer: D Rationale: Seasonal discounts are discounts offered during slow selling periods to stimulate sales and encourage customers to buy during off-peak times. 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 Answer: B Rationale: An allowance is an extra payment provided by a manufacturer to resellers to encourage participation in special programs, such as promotions or advertising campaigns. 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 Answer: E Rationale: Trade-in allowances are discounts or allowances granted for turning in an old item when purchasing a new one, often used in the automotive industry or electronics retail. 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 Answer: C Rationale: Promotional allowances are incentives given by manufacturers to dealers for participating in advertising and sales support programs, such as co-op advertising or point-of-sale displays. 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 Answer: B Rationale: Loss-leader pricing involves temporarily reducing the price of well-known brands to attract customers and stimulate store traffic, often used by supermarkets and department stores. 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 Answer: A Rationale: The bank was willing to offer Alan a longer payment term by extending the loan repayment period from 24 months to 36 months. 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 Answer: E Rationale: First-degree price discrimination involves charging each customer a separate price based on their willingness to pay, maximizing the seller's revenue. 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 Answer: A Rationale: In second-degree price discrimination, the seller charges less to buyers who purchase larger volumes of the product. 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 Answer: B Rationale: Third-degree price discrimination involves charging different prices to different classes of buyers based on their willingness to pay, such as student or senior citizen discounts. 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 Answer: C Rationale: When museums charge different admission fees based on customer segments like students or senior citizens, it is known as customer-segment pricing. 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 Answer: A Rationale: Charging higher entry rates for tourists compared to locals at Madame Tussaud's wax museum is an example of customer-segment pricing based on geographic location. 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 Answer: D Rationale: When Coca-Cola has different prices depending on the channel through which it is sold (fine restaurant, fast-food restaurant, or vending machine), it is an example of channel pricing. 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 Answer: E Rationale: The variation in ticket prices based on seating location at the opera represents an example of location pricing, where prices differ based on where the product is purchased or consumed. 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 Answer: D Rationale: Time pricing involves varying prices based on the time of purchase or use, such as hotels dropping rates on weekends to attract more customers during off-peak times. 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 Answer: B Rationale: Yield pricing is a strategy commonly used by industries like airlines and hospitality, where prices vary based on the timing of purchase, aiming to maximize revenue from different segments of customers. 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 Answer: C Rationale: Predatory pricing involves selling products below cost with the aim of driving competitors out of the market, after which the firm can raise prices to monopolistic levels. 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 Answer: D Rationale: For price discrimination to be effective, it's crucial that the practice doesn't lead to customer resentment and ill will, as this could harm the firm's reputation and overall sales. 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 Answer: E Rationale: The fragile-market-share trap refers to the situation where a low price may capture market share initially, but customers are not loyal and will switch to lower-priced products from competitors, making the gained market share vulnerable. 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 Answer: E Rationale: The situation where higher-priced competitors match lower prices but have deeper cash reserves, thus outlasting the competition, is referred to as the shallow-pockets trap. 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 Answer: A Rationale: Delayed quotation pricing involves not setting a final price until the product is finished or delivered, often seen in industries where prices may fluctuate due to uncertain factors. 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 Answer: B Rationale: An escalator clause involves customers paying today's price and any inflation increases before delivery, often used to hedge against inflationary pressures. 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 Answer: C Rationale: Unbundling involves separating or pricing separately elements that were previously bundled with the product or service, such as removing free delivery or installation. 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 Answer: E Rationale: In markets with highly homogeneous products, a firm should aim to differentiate its product through augmentation rather than price reductions or reductions in product features or services. 81. Price is one of the two elements of the marketing mix that produces revenue. Answer: False Rationale: This statement is false because while price is indeed a crucial element of the marketing mix, it alone does not directly produce revenue. Revenue is generated when customers make purchases, which are influenced by various factors including product features, brand image, promotion, and distribution channels, in addition to price. 82. Traditionally, price was never a major determinant of buyer choice. Answer: False Rationale: This statement is false. Traditionally, price has always been a significant determinant of buyer choice, especially in markets where products are considered commodities or where consumers are price-sensitive. Price plays a pivotal role in shaping consumer decisions alongside other factors such as quality, brand reputation, and availability. 83. Today, consumers are price takers and accept prices at face value or as given. Answer: False Rationale: This statement is false. Today's consumers are more empowered and informed than ever before, often engaging in price comparison, seeking discounts, or waiting for sales before making purchasing decisions. They actively seek out value and are willing to negotiate or search for alternatives, rather than passively accepting prices at face value. 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. Answer: True Rationale: This statement is true. Consumer purchase decisions are heavily influenced by their perception of prices, which may differ from the marketer's stated price due to factors such as discounts, promotions, or perceived value. Consumers often weigh the perceived benefits against the perceived costs, which include not just the monetary price but also factors like convenience, quality, and brand reputation. 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. Answer: True Rationale: This statement is true. Consumers typically have a price range within which they perceive products as offering acceptable value for money. Prices below this threshold may signal inferior quality or raise suspicions about the product's authenticity, while prices above it may seem too high to justify the perceived benefits, leading consumers to seek alternatives. 86. Although consumers may have fairly good knowledge of the range of prices involved, very few can accurately recall specific prices of products. Answer: True Rationale: This statement is true. While consumers may have a general awareness of the price range for certain products or categories, they often struggle to recall specific prices accurately. Instead, consumers rely on reference prices or price perceptions formed from past experiences, advertisements, and comparison shopping when making purchase decisions. 87. When examining products, consumers compare an observed price to an internal reference price they remember or an external frame of reference. Answer: True Rationale: This statement is true. Consumers often compare the observed price of a product to their internal reference price, which is based on past experiences, perceptions, and expectations. Additionally, they may use external frames of reference such as competitors' prices, promotional offers, or suggested retail prices to evaluate whether the current price represents a good deal or value. 88. Many consumers use price as an indicator of quality and value. Answer: True Rationale: This statement is true. Price is often perceived as a signal of quality and value by consumers. While this perception may not always be accurate, many consumers associate higher prices with higher quality and are willing to pay more for products they believe offer superior performance, durability, or prestige. 89. Companies strive to maximize their current profits if they are plagued with overcapacity, intense competition, or changing consumer wants. Answer: False Rationale: This statement is false. In challenging market conditions such as overcapacity, intense competition, or shifting consumer preferences, companies may prioritize strategies other than maximizing current profits. They might focus on long-term sustainability, market share growth, product innovation, or customer retention, even if these strategies involve sacrificing short-term profits. 90. In reality, it is very easy for firms to estimate their demand and cost functions. Answer: False Rationale: This statement is false. Estimating demand and cost functions accurately is often complex and challenging for firms. Factors such as market dynamics, changing consumer preferences, technological advancements, and competitive pressures can significantly affect demand and cost structures. Firms must invest in thorough market research, data analysis, and modeling techniques to develop reliable estimates of demand and cost functions. 91. If firms wish to maximize their market share, they should opt for market-skimming pricing. Answer: False Rationale: Market-skimming pricing involves setting a high initial price to "skim" revenue layers from the market, targeting early adopters or segments willing to pay a premium. However, this strategy typically results in lower market share as it may limit the product's accessibility to a broader audience. To maximize market share, firms often employ market-penetration pricing, setting lower initial prices to attract a larger customer base. 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. Answer: True Rationale: This statement is true. Market-skimming pricing involves launching a product with a high initial price to capture maximum revenue from segments willing to pay a premium. Over time, the firm gradually reduces the price to attract more price-sensitive segments, thereby maximizing overall revenue from the product. 93. In the case of prestige goods, the demand curve sometimes slopes upward. Answer: True Rationale: This statement is true. For prestige goods or Veblen goods, demand may indeed increase as prices rise because consumers associate higher prices with greater exclusivity, status, or quality. The upward-sloping demand curve contradicts the typical law of demand, illustrating the unique nature of certain luxury or status-symbol products. 94. Companies prefer customers who are less price sensitive. Answer: True Rationale: This statement is true. Companies generally prefer customers who are less price sensitive because they are willing to pay higher prices for products or services, leading to higher profit margins. However, attracting and retaining less price-sensitive customers often requires offering superior quality, brand reputation, or unique features that justify premium pricing. 95. Price elasticity depends upon the magnitude and direction of the contemplated price change. Answer: True Rationale: This statement is true. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It varies based on the magnitude and direction of the price change. Demand tends to be more elastic (responsive) to larger price changes and less elastic to smaller changes. Additionally, demand may be elastic or inelastic depending on whether the price change leads to an increase or decrease in total revenue. 96. A small change in the price of a product within the price indifference band causes a substantial change in the demand for that product. Answer: False Rationale: This statement is false. Within the price indifference band, where consumers are relatively indifferent between purchasing or not purchasing a product, small changes in price are unlikely to cause substantial changes in demand. Demand remains relatively stable within this range, as consumers perceive the product as offering similar value regardless of minor price fluctuations. 97. Total costs consist of the sum of the fixed and variable costs for any given level of production. Answer: True Rationale: This statement is true. Total costs include both fixed costs (costs that remain constant regardless of production volume, such as rent and salaries) and variable costs (costs that vary with production volume, such as raw materials and labor). Summing fixed and variable costs yields total costs at any given level of production. 98. In target-return pricing, the firm adds a standard markup to the product's cost. Answer: False Rationale: This statement is false. In target-return pricing, the firm sets the price based on a target return on investment (ROI) or profit margin rather than simply adding a standard markup to the product's cost. The price is determined by calculating the desired profit margin as a percentage of the total investment or cost, considering factors such as market demand, competition, and perceived value. 99. The key to effectively using perceived-value pricing is to deliver value that is on par with your competitors. Answer: False Rationale: This statement is false. The key to effectively using perceived-value pricing is not necessarily to deliver value that is on par with competitors but to ensure that customers perceive the value of the product or service as higher than its actual cost. This may involve creating unique features, offering superior quality, providing exceptional customer service, or building a strong brand image that justifies premium pricing, regardless of competitors' offerings. 100. Value pricing requires a company to reengineer its operations to become a low-cost producer. Answer: True Rationale: This statement is true. Value pricing involves setting prices based on the value perceived by customers rather than on the company's costs or competitors' prices. To implement value pricing successfully, a company often needs to reengineer its operations to streamline processes, reduce costs, improve efficiency, and enhance value delivery to customers. Becoming a low-cost producer is one approach to support value pricing by offering competitive prices while maintaining profitability. 101. In high-low pricing, retailers charge low prices on an everyday basis with occasional price increases. Answer: False Rationale: This statement is false. In high-low pricing, retailers typically set high prices initially but offer frequent discounts or promotions to attract customers. These discounts are not occasional; rather, they are part of the retailer's strategy to create a perception of value and stimulate sales. 102. The U.S. government often uses Dutch auctions to procure supplies. Answer: False Rationale: This statement is false. The U.S. government typically uses competitive bidding processes or requests for proposals (RFPs) to procure supplies, services, and construction projects. Dutch auctions, where the price starts high and decreases until a buyer accepts, are not commonly used by the U.S. government for procurement. 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. Answer: False Rationale: This statement is false. In a compensation deal, also known as barter or counterpurchase, the seller agrees to accept goods or services from the buyer's country as partial payment for the original sale. There is no requirement for the products to be manufactured with the supplied equipment. 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. Answer: True Rationale: This statement is true. Offset is a form of countertrade where the seller agrees to "offset" the original sale by spending a specified amount of money in the buyer's country. This may involve investing in local industries, purchasing goods or services, or undertaking other economic activities to balance the trade. 105. A quantity discount is a price reduction given to those who pay their bills promptly. Answer: False Rationale: This statement is false. A quantity discount is a price reduction offered to customers who purchase large quantities of a product. It is not related to prompt payment of bills, which would typically be incentivized through cash discounts or early payment discounts. 106. Trade-in allowances reward dealers for participating in advertising and sales support programs. Answer: False Rationale: This statement is false. Trade-in allowances are discounts or credits given to customers who trade in their old products or equipment when purchasing new ones. These allowances are not specifically aimed at dealers but rather at incentivizing customers to upgrade their purchases. 107. Psychological discounting involves setting an artificially high price and then offering the product at substantial savings. Answer: True Rationale: This statement is true. Psychological discounting, also known as reference pricing or price anchoring, involves setting a higher initial price to create the perception of value and then offering discounts to make the product seem like a better deal. This strategy can influence consumer behavior by appealing to their sense of getting a bargain. 108. Loss leader pricing dilutes a company's brand image. Answer: True Rationale: This statement is true. Loss leader pricing involves selling a product at a price below its cost to attract customers with the hope that they will also purchase other, more profitable items. While this strategy can drive traffic and sales, it may dilute the company's brand image if customers perceive it as selling low-quality or cheap products. 109. In first-degree price discrimination, the seller charges less to buyers of larger volumes. Answer: False Rationale: This statement is false. In first-degree price discrimination, also known as personalized pricing or perfect price discrimination, the seller charges each customer the maximum price they are willing to pay. It does not involve offering discounts based on the volume of purchases. 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. Answer: False Rationale: This statement is false. When firms charge different prices to different customer groups for the same product or service, it is a case of third-degree price discrimination. Second-degree price discrimination involves offering price discounts based on the quantity purchased or the method of purchase, such as volume discounts or package deals. 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. Answer: True Rationale: This statement is true. Yield pricing, also known as yield management or dynamic pricing, is commonly used by airlines to maximize revenue by adjusting prices based on factors such as demand, time until departure, and remaining inventory. Early purchasers may receive discounted fares, while late purchasers or those booking closer to the departure date may face higher prices. 112. Price discrimination in all forms is illegal in the United States. Answer: False Rationale: This statement is false. While some forms of price discrimination may be illegal under certain circumstances, not all forms are prohibited. Price discrimination based on factors such as quantity purchased, time of purchase, or customer segment is generally legal as long as it does not lead to anticompetitive behavior or violate specific regulations. 113. Predatory pricing, which refers to the concept of selling below cost with the intention of destroying competition, is lawful under certain conditions. Answer: False Rationale: This statement is false. Predatory pricing, where a firm intentionally sets prices below its costs to drive competitors out of the market, is generally considered anticompetitive and illegal under antitrust laws in many jurisdictions, including the United States. Such practices can harm consumers by reducing competition and ultimately leading to higher prices. 114. Companies sometimes initiate price cuts in an attempt to dominate the market through lower costs. Answer: True Rationale: This statement is true. Companies may strategically implement price cuts to gain a competitive advantage by attracting more customers, increasing market share, or deterring potential new entrants. Lowering costs through efficiency improvements or economies of scale can enable companies to sustain price cuts while maintaining profitability. 115. Cost inflation provokes price increases. Answer: True Rationale: This statement is true. Cost inflation, which refers to the general increase in the cost of inputs such as raw materials, labor, and overhead, often leads to price increases as companies seek to maintain or improve profit margins. When costs rise, companies may adjust their pricing strategies to reflect the increased expenses and ensure profitability. 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. Answer: False Rationale: This statement is false. In a price-war trap, competitors matching lower prices may exacerbate the situation, leading to a downward spiral of price cuts that can erode profitability for all involved. Cash reserves may provide some resilience, but engaging in a price war can be detrimental to all competitors involved, regardless of their financial strength. 117. Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building. Answer: True Rationale: This statement is true. Escalator clauses are provisions commonly included in contracts for major industrial projects, infrastructure development, or long-term agreements. These clauses allow for adjustments to contract prices based on specified factors such as inflation, changes in labor costs, or fluctuations in material prices over time. 118. Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases. Answer: True Rationale: This statement is true. Small, gradual price increases are often more palatable to consumers than sudden, significant increases. Incremental changes may be less noticeable and perceived as more acceptable, reducing the likelihood of negative reactions or resistance from consumers compared to abrupt price hikes. 119. Shrinking the amount of product instead of raising the price is a good way to counteract consumer resistances to price increases. Answer: True Rationale: This statement is true. Rather than increasing the price directly, some companies may choose to maintain price points by reducing the quantity or size of the product, a strategy known as "shrinkflation." This approach can help mitigate consumer resistance to price increases by maintaining the perception of value while adjusting the product offering. 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: True Rationale: This statement is true. When responding to a competitor's price cut, a company must consider various factors including the product's stage in the life cycle, its positioning in the market, its contribution to the company's overall portfolio, and the potential long-term implications of price adjustments on profitability and brand perception. Different pricing strategies may be appropriate based on these considerations. 121. How does the Internet help sellers discriminate between buyers and vice-versa? 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. 122. What are the different possible consumer reference prices? 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 123. Briefly describe the different types of pricing objectives. 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. 124. What are the different price-setting methods? Briefly describe each of them. 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. 125. What are the different forms of countertrade? 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. 126. What are the different types of price discounts and allowances? 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. 127. What are the different types of promotional pricing? 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. 128. What is third-degree price discrimination? 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. 129. How can companies initiate price cuts and what are the traps that companies can fall into because of this? 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. 130. Explain the concept of overdemand. 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. 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: $20 is what Abe perceives to be the "fair price" for the product. 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: The consumers are using the upper-bound price. Upper-bound price refers to the reservation price or the maximum that most consumers would pay. 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: 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. 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: 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. 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: It can be deduced that the company's main objective is to maximize its maximum current profit. 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: The company's objective is to maximize its market share. 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: 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. 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: Daryl convinced his customer that Car A offers him the lowest total cost of ownership. 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: These are said to be a company's fixed costs. 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: 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. 141. What should a company do if its competitor's product contains some features that are not available in its product? Answer: In such a situation, the company should subtract the value of those features from the price of its product. 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: 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. 143. In oligopolistic industries, all firms normally charge the same price. What kind of a pricing method are they said to be following? Answer: Oligopolistic industries follow going-rate pricing. Firms following this pricing method, base their prices largely on competitors' prices. 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: 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. 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 compensation deal. In such deals, the seller receives some percentage of the payment in cash and the rest in products. 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: 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. 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: 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. 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: Gina's company used psychological discounting. This strategy sets an artificially high price and then offers the product at substantial savings. 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? Answer: These are examples of time pricing or price discrimination based on time. 150. When the airline industries offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires, what kind of a pricing technique are they said to be using? Answer: The airline industries are using yield pricing. Test Bank for Marketing Management Philip T Kotler, Kevin Lane Keller 9780132102926, 9780273753360, 9781292092621, 9780133856460, 9789332587403, 9780136009986
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