Reply:
Prakashchandra Soni
I found several concepts in this week’s reading interesting, one being the aspect of the foreign exchange market which brings together people demanding currencies with those who supply currencies for example, people purchasing the pound are involved in such a market whereby the equilibrium price is said to be the price of a pound measured in the buyer’s currency or otherwise known as the exchange rate. I also found the devaluation of currencies interesting; this involves lowering the currency’s value such that it becomes cheaper to exchange for than it originally was. Devaluation tends to help a country’s domestic suppliers and people from other countries who buy from the said country since it makes buying from the country with devalued currency cheaper. However, it hurts domestic consumers who will be forced to buy goods at higher values than they are used to and also foreign suppliers. Another interesting concept was that of bubbles, which can be described as the self-fulfilling tendency formed by people’s expectancy of price increases in the future.
A large increase in trading volume can characterize bubbles; they mainly happen when big investors disagree on matters relating to economic events. Lastly, bubbles can also be characterized by the concept of not knowing; they are therefore unpredictable.
Another interesting concept was that of pricing commonly owned products; this occurs when one is dealing with two products that are competing against each other; in such a case, the best way to handle their pricing would be raising the prices of both commodities since this would stand to avoid cannibalizing the sales of one product; however, the prices must not be equal in that the one that is more elastic is given higher pricing since more consumers will be expected to shift to the substitute with a higher margin thus increasing the overall profit. Lastly, it is also important to know that repositioning the product goes a long way in ensuring that one does not cannibalize the sales of the other. I also learned that it is better to reduce the pricing of commonly owned complementary goods since a price decrease on one product would lead to more purchases on another.
Another interesting concept in the chapter was that of psychological pricing. To understand this, I was introduced to the idea of a reference price which is the price that a consumer would estimate the price of a given good or services to range close to within a given environment. This implies that first presenting consumers with higher-priced goods followed by cheaper goods may drive sales upwards since the consumers will perceive the goods as less expensive when compared to the initially expensive priced goods. It is also important to value what consumers see as fair in that perception of unfairness would decrease the demand for a given product. To increase prices beyond the line viewed as fair would be deemed as agreed.
Response
The approach used by high-end retailers is basically to work with the psychology involved in buying in that as the consumers enter their shops and see that the prices of the initial goods are high, they form an expectation that even the other goods within the shop are sold at a higher price. As they proceed into the shop, they meet the more popular goods which are sold at lower prices than the goods at the entrance. This aspect makes them feel like these goods are affordable and the prices are fair if not cheap. Consumers will tend to buy such goods due to perceived affordability based on how the retailers present their goods. This helps increased sales, thereby increasing profit.
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