Government measures aimed at pricing can be divided into four main groups.
1. The government limits price fixing horizontally and vertically. Horizontal fixing of the chain is an agreement between manufacturers and wholesale and retail trade on setting prices at a given level in this sales channel.
Vertical price fixing takes place when manufacturers or wholesalers can control retail prices for goods or services. In the USA until 1975 Miller-Tiding's law allowed companies to strictly control and impose retail prices. This practice is called fair trade. The law defended small retail stores, supported the image of branded products, forced the entire retail trade
I am going to set one price for each product. The principle of fair trade was heavily criticized by individual consumer groups, many retailers and some manufacturers for restricting competition, setting prices at artificially high levels and maintaining inefficient retail trade.
2. Regulation of retail trade. Currently, retail trade can not be forced to comply with the list prices, developed by manufacturers and wholesalers. In most cases, it is free to establish final sales prices. Manufacturers or wholesalers can control retail prices if:
- retail stores belong to the manufacturer or wholesaler;
- the sale is conducted on a consignment basis, i.e. the goods before their sale belong to the manufacturer (wholesaler), which carries costs, usually related to retail trade (for example, for advertising and sale);
- retail stores are carefully selected;
- the real reference retail prices are offered;
- the prices are pre-applied to the goods and installed in the usual ways accepted by consumers.
In the United States, the government prohibits producers and wholesalers in dealing with various buyers-participants in sales channels for products of "similar quality" to exercise price discrimination if it damages competition. This applies to prices, discounts, bonuses, guarantees on coupons, delivery, storage and loan terms. The terms of implementation must be available to all competing sales participants on a pro rata basis. The minimum price in retail trade is legislatively defined: products should not be sold at prices below costs plus a fixed percentage covering overheads and profits.
3. Counteraction to predatory pricing. Using predatory pricing, large firms in certain regions can reduce prices below their costs in order to eliminate small local competitors. This practice is banned in the US at the federal level in relation to producers, wholesale and retail trade.
4. Counteracting the sale of goods at a loss. The sale of goods at a loss is used to attract consumers to the store and is also limited by unfair trade laws. Retail trade resorts to this practice, usually with respect to well-known and widely advertised brands, to increase the total sales in stores. It proceeds from the premise that consumers attracted by such proposals will also buy other goods. Since the sale of goods at a loss is beneficial to customers, laws are rarely applied.
Another element determining the degree of price control by the firm is the competitive environment in which it operates.
The environment in which prices control the market is characterized by high competition and similarity of goods and services.
Firms trying to raise prices will attract few consumers, as the demand for any product of a particular firm is insignificant and consumers easily switch to competitors.
Similarly, the firm will achieve little when prices fall, as competitors will respond in the same way.
The environment, where prices are controlled by firms, is characterized by limited competition, clearly different goods and services. Companies use high prices here, as consumers view their offers as unique. Differentiation can be based on the image of the brand, product parameters, service level, product range and other factors. Firms selling products at discount prices can also find their niche in this environment, attracting consumers interested in low prices. The choice of price depends on the company's strategy and target market.
The environment in which the government controls prices includes utilities, bus transport, taxi services, etc. In each case, government agencies determine the price after receiving information from companies or industries affected by this decision, as well as from stakeholders for example, consumer groups).
In the period of increasing prices for factors of production, companies can behave differently: do not change production strategy products and transfer part of the increase in costs to the consumer, and part take on; modify the product so as to reduce its costs and keep the price level (reduce the size of the product, offer fewer options and use lower quality materials); modify the product so that consumers do not object to price increases (increase product sizes, suggest more options or use high-quality materials), and/or stop producing unprofitable products.
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