The second price determinate in UK is firm objective. Firms do not always have the same objectives. The two main kinds of firm objectives are profit maximisation and growth maximisation. Profit maximisation simply means pursue the largest return on goods sold, which in calculation means to equalise marginal cost and marginal revenue. For example, as stated in British Telecom’s Annual Report “Our aim is to increase shareholder value through service excellence, an effective brand, our large-scale networks and our existing customer base, and also through innovation in products, services and solutions.
” (BT Annual Report 2004, P7) This means BT is targeting at profit maximization. The recent news of its 4% increase in profit that reported by BBC has proved BT’s intention. (BBC Business News) As we can see in Graph 2, profit maximizing firm will closely look at the total profit even the output may not reach the vertex of the total revenue curve. In other words, total profit will not necessarily be maximized at maximum total revenue. Sales revenue maximization is another key firm objective that a company may apply in their business.
Revenue maximization is when a firm focuses on expending the sales and customer base other than getting the greatest profits, as been illustrated in Graph 2 that a revenue maximizing firm will target at the maximum revenue with price Ps and quantity Qs. In order to achieve certain short term goals or introduce a new product we may use sales revenue maximization. For example, if Carrefour wanted to break into UK super market industry, it would have to adopt sales revenue maximization. It is because there are already ASDA, Tesco, Morrison’s and Sainsbury’s dominating the majority of the market.
In the short-run it may seems not profitable or even losses, but in the long-run this could seriously harm the local or existing supermarkets then there will be rooms for Carrefour to come in. Now let us start look at some of the pricing strategies which will change prices significantly in UK market. The first pricing strategy is called cost-plus pricing which is widely adopted in industries that price is closely related to cost of production. Cost-plus pricing simply means “add a certain percentage profit mark-up to the firm’s costs, in order to arrive at a final price.
” (Griffiths & Wall, P156) There are three problems to be taken into consideration: one is which costs should be included in the pricing decision; two is the problem of estimating ‘normal’ level of output; the last one is the problem of calculating the percentage mark-up to be added to costs. One typical example will be computer industry. Hypothetically, if Dell computer is selling its Pentium III-processor desktop and suddenly Intel launch its newly invented Pentium 4 processor, Dell would also lower the price for Pentium III-processor desktop as Intel lower the price for Pentium III processors.
However, the number of firms applying cost-plus pricing strategy is shrinking since 1940s. (Griffiths & Wall, P157) However, cost-plus pricing does not always fit the situation as one firm wants to increase or keep its market share. An alternative pricing strategy is called market-share strategy. This strategy will allow a firm to keep or increase its own market share or keep others out of market. For example in the supermarket industry, ASDA clearly stated in its price commitment: “We lead the way in giving UK customers the products they want at the lowest prices and continue to widen the price gap between our competitors.
” (ASDA Official Website) Other pricing strategies are also widely adopted among industries in UK. Life-cycle strategy means price the product differently during its product life cycle. For example mobile phone producer always take up this method. Market segmentation strategy means giving different prices to different market segmentations. This is commonly practiced in daily commodity market. A case in point is that Nestli?? has eighteen different kinds of breakfast cereals such as Nestli?? Fitness for the health life styles, Nestli??
Clusters for the youngsters and so on. Price discrimination strategy means giving different prices to identical products in different market and is implemented when “price bearing little or no relation to cost”. (Griffiths & Wall, P161) To ensure this strategy is going to take off, firms have to first prevent products flowing between markets; secondly there must be different price elasticity of demand in each market. From what has been discussed above we may draw the conclusion that product price in the UK is mainly determined by market structure and firm objective.
Different market structure creates different competitiveness in the market, so price varies. Firm’s objective decides whether a firm wants to maximize its profit, sales revenue or achieve other goals. Different objective results to different price level. In addition, despite the above two, pricing strategies also determines product prices. In order to compete among each other and survive, firms carry out various pricing strategies and certainly they would appear in different prices.