Pricing decisions

Pricing is a decision area which draws together contributions from the theories of demand, cost and market structure. The pricing decision has been the major focus of economic theory in the analysis of resource allocation, but its position in managerial economics is more limited. In the analysis of business decision-making, pricing is just one element in a comprehensive competitive strategy. Moreover, the pricing decision is a means to an end, and not the end in itself, so that decisions about price must be considered in the context of overall business objectives. As we shall see, price is a strategic as well as an operational variable, so that pricing decisions can have a profound effect on future as well as present performance. Because of this time dimension, pricing objectives need to be carefully defined. For example, setting a low current price may be an optimal decision if the consequent establishment of a dominant market position leads to long-run profits sufficient to outweigh any short-run profit sacrifice.