Price changes, Public policy and pricing.

Initiating Price Cuts

Why cut prices?
- Excess inventory: When a company has too much stock that isn’t selling, they may lower the price to move the products faster. This helps avoid having unsold goods piling up, which can be costly.
- Falling demand: If a product’s demand is dropping, often due to a tough economy or stronger competition, lowering the price might attract more customers and boost sales.
- Market domination: Some companies may reduce their prices as a strategy to dominate the market. By offering lower prices, they can attract more customers and potentially force other competitors to lower their prices as well.
Risks of Price Cuts:
- In industries where companies have excess production capacity, cutting prices can lead to a price war, where multiple businesses keep reducing their prices in an attempt to outdo each other. This leads to lower profits across the board and might harm all companies in that sector.

Why increase prices?
- Improved profits: A company might raise prices to increase its profit margin, especially when the product is in demand, and customers are willing to pay more.
- Cost inflation: If the cost of materials, labor, or other resources goes up, companies may raise prices to cover the additional expenses. Without increasing prices, the business may lose money.
- Strong demand: When there’s unexpected high demand for a product, the company might increase the price, assuming that consumers will still buy even at a higher cost.
Shrinkflation: Instead of increasing the price of a product, some companies reduce its size or replace expensive ingredients with cheaper alternatives. This way, customers may not notice as much because they’re more sensitive to price changes than to changes in the product’s size or features.
Fairness: When companies do raise prices, they should be transparent and communicate why the increase is happening. If customers feel the price increase is unfair or unjustified, it can damage the company's reputation and customer loyalty.

Price increase: When prices go up, customers might feel that the quality of the product has improved. However, most of the time, price increases lead to reduced sales because customers feel they’re paying more for the same product.
Price cuts: When a company lowers its prices, customers often feel like they’re getting a better deal. However, if the price drops too much, it can hurt the brand's image, especially if it was previously seen as a premium or luxury product. Customers may start associating the brand with lower quality or lower status.

Competitors in the market react to price changes based on several factors:
- Few competitors: If there are only a few players in the market, a price change by one company can significantly impact the others, forcing them to either match the new prices or risk losing market share.
- Highly substitutable products: When products are very similar and easily replaceable, a price cut from one company can lead to a loss of customers for others, forcing them to lower their prices as well.
- Well-informed buyers: If customers know a lot about the products and prices, a company changing its prices may influence the entire market as buyers may choose to switch to cheaper alternatives.
Competitor’s Response: When one company cuts prices, others may see it as a threat to their market share and could respond by:
- Reducing their own prices to stay competitive.
- Offering better deals or additional features to attract customers.
- Trying to initiate a price war, especially if they feel it will increase overall demand in the market.

Company’s considerations:
- Why did the competitor change their price? Understanding the reason behind the competitor’s price change helps a company determine how to respond effectively.
- Is the price change temporary or permanent? If a price cut is temporary (for a sale or limited offer), the company may not need to react, but if it’s a permanent change, a response may be required.
- Are other competitors likely to respond? A company needs to be aware of how other competitors will react to ensure their strategy is successful.
Fighting Brands: In some cases, a company might introduce a new brand or product line specifically to counter a competitor’s price cuts. For instance, a premium brand might launch a more affordable version to compete with a lower-priced competitor.

While companies have the freedom to set their own prices, they must still follow government regulations to ensure fairness in pricing. These regulations are especially important for industries that sell essential products.
Important Acts:
- Competition Act, 2002: This act aims to prevent anti-competitive behavior and promotes healthy competition.
- Consumer Protection Act, 2018: This act helps protect consumers from unfair practices, including deceptive pricing and false advertising.
- Essential Commodities Act, 1955: This act allows the government to control the pricing of essential goods like food, medicines, and fuel to make sure they remain affordable for consumers.

Price-fixing: When companies in the same industry discuss and agree to set prices at a certain level, it is called price-fixing, which is illegal. This practice harms competition and can lead to unfair prices for consumers.
Predatory pricing: Some larger companies may lower their prices below cost to drive smaller competitors out of business. This is known as predatory pricing, and it is illegal. Predatory pricing can hurt the overall market by limiting consumer choice and reducing competition.
Protecting small sellers: Predatory pricing laws are in place to protect smaller businesses that might be unfairly pushed out by larger companies that can afford to sell at a loss.

Unfair price discrimination: Companies cannot charge different prices to different buyers unless they can justify the price difference. For example, a company can’t charge one retailer a higher price for the same product just because they’re a bigger buyer.
Resale price maintenance: Manufacturers cannot dictate the price at which a retailer must sell a product. If they do, this is called resale price maintenance, and it’s illegal.
Deceptive pricing:
- Bogus reference prices: A retailer might advertise a product as being on sale, claiming it was previously sold at a much higher price. If the higher price was never the actual price, this is misleading to customers.
- Scanner fraud: Sometimes the prices in a store’s system aren’t updated, which means customers could end up paying more than the listed price at the checkout.
Reputable sellers: Even though laws exist, trustworthy companies make sure their customers are treated fairly. They ensure that prices are clear, accurate, and that any ambiguities are addressed quickly.