Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Price Setting in the
Business World
Text © The McGraw−Hill
Companies, 2002528 Chapter 18
A marketing manager often doesn’t know the exact shape of the demand curve.
A practical way to start, though, is to think about a price that appears to be
extremely high and one that is too low. Then for prices at a number of points along
the range between these two extremes, the manager can make an estimate of what
quantity it might be possible to sell. The first two columns of Exhibit 18-9 show
the price and quantity-demanded combinations for our example firm. Multiplying
them together gives the firm’s total revenue at each specific price.
Plotting price and quantity gives a picture of the firm’s demand curve. Thus, it’s
useful to think of a demand curve as an if-then curve—if a price is selected, then
what is the related quantity that will be sold? Before the marketing manager sets
the actual price, all these if-thencombinations can be evaluated for profitability
using marginal analysis.This firm faces a demand curve that slopes down. That means that the marketer
can expect to increase sales volume by lowering the price. Yet selling a larger quan-
tity at a lower price may or may not increase total revenue. Similarly, profits may go
up or down. Therefore, it’s important to evaluate the likely effect of alternative prices
on total revenue (and profit). The way to do this is to look at marginal revenue.
Marginal revenueis the change in total revenue that results from the sale of one
more unit of a product. At a price of $105, the firm in this example can sell four units
for a total revenue of $420. By cutting the price to $92, it can sell five units for total
revenue of $460. Thus the marginal revenue for the fifth unit is $460 $420, or $40.
Considering only revenue, it would be desirable to sell this extra unit. But will rev-
enue continue to rise if the firm sells more units at lower prices? Exhibit 18-9 shows
that marginal revenue is negative at price levels lower than $79. In other words, total
revenue goes down. Obviously, this is not good for the firm! Note in the table that
total revenue obtained is positive across the range of price cuts, but the marginal
revenue—the extra revenue gained—may be positive or negative.We’ve already shown that different kinds of costs behave differently at different
quantities. Exhibit 18-9 shows the total cost increasing as quantity increases. Remem-
ber that total cost is the sum of fixed cost (in this example, $200) and total variable
cost. The fixed cost does not change over the entire range of output. However, totalExhibit 18-9 Revenue, Cost, and Profit at Different Prices for a Firm
(4)
(3) Total (5) (7) (8) (9)
(1) (2) Total Variable Total (6) Marginal Marginal Marginal
Quantity Price Revenue Cost Cost Profit Revenue Cost Profit
(Q) (P) (TR) (TVC) (TC) (TR TC) (MR) (MC) (MR MC)0 $150 $ 0 $ 0 $200 $ 200
1 140 140 96 296 156 $140 $96 $ 44
2 130 260 116 316 56 120 20 100
3 117 351 131 331 20 91 15 76
4 105 420 144 344 76 69 13 56
5 92 460 155 355 105 40 11 29
6 79 474 168 368 106 14 13 1
7 66 462 183 383 79 12 15 27
8 53 424 223 423 1 38 40 78
9 42 378 307 507 129 46 84 130
10 31 310 510 710 400 68 203 271Marginal revenue can
be negative
The marginal cost of
just one more can be
important
Demand estimates
involve “if-then”
thinking