marginalism coursework...help!!!?

Question

hello, i am still struggling to find argumentsregarding the extent to which marginalist pricing is a close approximate to actual pricing decision.can anybody help me out?

What are arguments supporting the propsition that marginalist pricing is a close approximate to cost plus pricing?
What are arguments against?

Thanks a bunch

Answer 1

Okay, lets imagine a world in which you have two types of pricing mechanisms, marginalist costs and markup pricing.

Person A uses marginalist pricing and finds the price to be $1 per unit with variable costs of $0.86 per unit.

Person B uses markup pricing and adds 16% to the costs as a markup. The costs being $.86 results in a charge of $1 per unit.

Studies have found that people quite commonly use mark-up pricing BUT they change their markups over time and these costs plus markups tend to equal the marginalist cost method. The reason is that when prices change, people can see their volume change and profits change. If they fall, they drop their prices, if profits still fall further they increase them. They don't realize they are using marginalist pricing but they are.

The argument against is that some people are incompetant and cannot mentally make the connection between price and reward quickly. However, they tend to seek help from their CPA and tend to observe their competitors. Still, they would tend to move their markups slower than those with higher skills.

Finally, the other argument against is that some people do not keep adequate records and cannot see the connection between price changes and volume because they are marginal business with poor accounting records.

One other argument against is the problem of "small menu costs." When a price is near optimum the changes in profit become very small and so a small change in price, plus the fixed cost of the menu change can result in a huge loss of profits relatively speaking. In that case, if a markup is close to optimum it can cost far more to optimize than could be gained by optimizing.