Have you ever wondered how producers determine markup and price? Well, for comparable products, it turns out that you, the consumer, has some influence.
If two similar goods are available, the demand for product A decreases as A’s price increases (A’s price elasticity of demand) and B’s price decreases (the cross price elasticity of demand for product A relative to price of product B).
Price elasticity of demand reflects consumer preferences and substitutability among products.
For example, how do you choose which cereal to buy when faced with the endless wall of options at the grocery store? Your preferences help determine pricing when it comes to easily substitutable products. There are literally hundreds of cereal options but most likely only a few differentiating factors. So the characteristics that help consumers decide can be boiled down to a manageable few and compared.
As with cereals, the automotive industry offers consumers many options with comparatively minor differentiators. Are you in the market for a large SUV, a small sedan, or somewhere in between? Once you have settled on the size of the vehicle, your options are relatively narrow. Choosing one car brand over another helps drive pricing.
Can you think of another market with many choices separated by a relatively few set of differences?
Your choices dictate markup and price for a particular good. So next time you are in the grocery store trying to decide between Fruit Loops and Lucky Charms, know that your decision has an impact on how much the producer can charge for that particular type of cereal. You are flexing your price setting power.
Sources:
https://theincidentaleconomist.com/wordpress/what-is-the-source-of-price-setting-power/
https://www.cheatsheet.com/money-career/youll-never-guess-americas-favorite-breakfast-cereal.html/
I think this is a really interesting to read about since I never really think about what goes into the prices of things. I think that when it comes to certain items, I only look to see if the price is cheap and a big brand. For example, when buying toothbrushes or toothpaste, I wouldn't necessarily buy a specific brand of toothbrush, as long as it gets the job done. Thinking about what you wrote about, it is seen that we need to continue to be mindful of who we want to support.
ReplyDeleteThis was interesting to me because I've never really considered how I could impact the pricing of a good. Instead, I always just saw the price that was written and assumed that was the product's definitive worth. It'll be interesting next time I go to the grocery store, to compare the different prices of the same size boxes of cereal to see which brands are likely more popular.
ReplyDeleteI think this was interesting because I definitely don't really think how I, personally help influence the pricing of certain goods. Sometimes I look for the healthiest or more valuable & cheap options when buying certain products. It happens unconsciously, my preferences. Next time, I'll definitely mentally note my choice and see the factor that price plays in my purchase.
ReplyDelete