Competing on Price

Competing on Price

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes 

Pricing Strategies

Cost Plus

  • This can be used when a retailer wants to find out the gross profit margin of a sale in advance
  • Since retailers know the cost will be covered if they sell the good, it reduces the uncertainty of profits
  • The price is uncompetitive, therefore it can lead to a reduction in quantity sold, revenue, profits and market share


  • A low price is set initially to attract more consumers by switching to this brand
  • Once consumer loyalty is gained, the price increases

Price Skimming

  • This is used when a new product is launched and is therefore a short term pricing strategy
  • A high price is set because the product has little competition
  • The supernormal profits earned in the short run act as a signal for other firms to enter the market and increase competition


  • Firms want to drive out other competitors in the market and therefore set low prices
  • In the short run, firms make losses
  • The remaining firms in the industry raise their prices to increase revenue, however ensure the prices are below average costs as this reduces contestability


  • This pricing strategy uses emotional reactions to the price of a good
  • It does not use rational methodology


  • Firms use the prices their competitors set when setting their own prices as the products sold are similar

Factors used to determine the most appropriate pricing strategy

Number of UPS / amount of differentiation

  • Firms are more likely to charge higher prices if the products sold are differentiated
  • Businesses which sell homogenous goods are likely to be sold at a lower price


  • Goods which have a low PED are not as responsive to changes in price and are therefore likely to have higher prices as they do not affect the quantity sold
  • Goods which have a strong brand image are more price inelastic

Stage in the Product Life Cycle

  • Products which have just been launched and have a lot of competition may result in businesses using penetration pricing
  • This encourages consumers to purchase products from their firm instead of their competitor’s
  • New products which have no competition are likely to cause firms to engage in price skimming


Quick Fire Quiz – Knowledge Check

1. Identify and explain five pricing strategies (15 marks)

2. Identify and explain three factors used to determine the most appropriate pricing strategy (9 marks)


Next Revision Topics


A Level Economics Past Papers

Tushar Depala

Author: Tushar Depala

Economics Tutor

View Profile Hire Tushar Depala