What is Pricing Decision?
By the term pricing decision, we mean the choices of business entities taken
into consideration by them while setting the prices for their products and
services. As price of a product plays an important role in growth of the
business entities. Price of a product must be set after considering various
1. Pricing for different market structures.
3. Type of Product and services
4. Demand and Supply of such products and services.
5. Cost structure
Importance of Pricing decision
For the Long Term survival and Growth of an business entity, the entity should
plan proper and acceptable pricing policy. For example; if a company launches a
new product in the market, then the new product should be categorized into Two
types for the purpose of pricing –
1. Revolutionary Product:
This type of product is said to be revolutionary
when it is newly introduced in the market and has the potential to create its
own value. When a new product is introduced, it has the capability of becoming
market leader and capture the major market share.
A Product which has been introduced with some upgradations like with few additional characteristics in it, is known as
evolutionary product. It may priced by taking cost benefits, competitor and
demand for the product.
Now coming on to main discussion
Understanding the role of Predatory pricing done by business entities,
What is predatory pricing?
In Predatory pricing, the pricing of goods and services are quoted at such a low
level that other firms cannot compete and are forced to leave the market.
This type of pricing is mainly done to drive out the competitors from the market
and gain the major market share. After driving out the competitors from the
market, the dominating firm create its own monopoly and, thereafter controls the
entire market and price of products and services. Predatory pricing is also
known as undercutting. The main objective of setting out this type of pricing is
to achieve new customers and creating barriers for new entrants.
Predatory pricing is anti-competitive in nature and therefore this type of
practice is illegal and is prohibited under many competition laws
Predatory pricers are also termed as loss leaders.
There are two stages in predatory pricing;
1. Predation stage:
In this stage, goods and services are offered at
below its cost in order to price its competitors out of the market
2. Re-coupment stage:
This stage only arises in cases where the dominant
firm succeeds in squeezing competitors out of the market- within this stage the
dominant firm charges monopoly prices in the effort to cover their losses.
At last, this type of practice should be avoided so as to create healthy
competition among the players present in the market.
Written by: Pushp Kumar Sahu