Price points are

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

s at which

demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...

for a given

product Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Produ ...

is supposed to stay relatively high.

Characteristics

Introductory

microeconomics Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...

depicts a

demand curve In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...

as downward-sloping to the right and either linear or gently convex to the origin. The downwards slope generally holds, but the model of the curve is only

piecewise In mathematics, a piecewise-defined function (also called a piecewise function, a hybrid function, or definition by cases) is a function defined by multiple sub-functions, where each sub-function applies to a different interval in the domain. P ...

true, as price surveys indicate that demand for a product is not a

linear function In mathematics, the term linear function refers to two distinct but related notions: * In calculus and related areas, a linear function is a function whose graph is a straight line, that is, a polynomial function of degree zero or one. For dist ...

of its price and not even a

smooth function In mathematical analysis, the smoothness of a function is a property measured by the number of continuous derivatives it has over some domain, called ''differentiability class''. At the very minimum, a function could be considered smooth if ...

. Demand curves resemble a series of waves rather than a straight line. The diagram shows price points at the points labeled A, B, and C. When a vendor increases a price beyond a price point (say to a price slightly above ''price point B''), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity-demanded more than offsets the additional revenue from the increased unit-price. As a result, total revenue (price multiplied by quantity-demanded) decreases when a firm raises its price beyond a price point. Technically, the

price elasticity of demand A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...

is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve).

Firm A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

s commonly set prices at existing price-points as a

marketing strategy Marketing strategy allows organizations to focus limited resources on best opportunities to increase sales and achieve a competitive advantage in the market. Strategic marketing emerged in the 1970s/80s as a distinct field of study, further buil ...

Causes

There are three main reasons for price points to appear: #

Substitution Substitution may refer to: Arts and media *Chord substitution, in music, swapping one chord for a related one within a chord progression *Substitution (poetry), a variation in poetic scansion * "Substitution" (song), a 2009 song by Silversun Pic ...

price points #* price points occur at the price of a close substitute #* when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply # Customary price points #* the market grows accustomed to paying a certain amount for a type of product #* increasing the price beyond this amount will cause sales to drop dramatically # Perceptual price points (also referred to as "

psychological pricing Psychological pricing (also price ending, charm pricing) is a pricing and marketing strategy based on the theory that certain prices have a psychological impact. In this pricing method, retail prices are often expressed as just-below numbers: ...

" or as "odd-number pricing") #* raising a price above 99 cents will cause demand to fall disproportionately because people perceive $1.00 as a significantly higher price

Oligopoly pricing

In relation to customary price points,

oligopolies An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result fr ...

can also generate price points. Such price points do not necessarily result from

collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...

, but as an emergent property of oligopolies: when all firms sell at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally); on the other hand, any firm in an oligopoly which lowers its prices will most likely be matched by competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand-curve where the kink lies at the point of the current price-level in the market. These results depend on the elasticity of the demand curve and on the properties of each market.

Characteristics

Causes

Oligopoly pricing

See also

References

Further reading