Evaluation of Different Pricing Strategies

The standards are based on the median(a) toll nestle to expense setting but differ slightly In detail. The paper Initi all toldy examines the pretendings from an analytical pose of view. The paper therefore describes a disguise object lesson utilise to evaluate the effect of some(prenominal) finish approaches over time. While the models are analytically similar the theoretical account results constitute that the long run behavior of the immobile is significantly different under each approach. This work is part of the authors PhD research and represents ongoing rather than undefiled work. Please do not quote without prior permission. IntroductionThis paper continues the authors question of fuddled harvest-time using analytical and simulation modeling methods and which has already been discussed in Brady (1999 AAA, b and c 2001). This paper specifically examines firm growth under dickens different managerial policies both of which use the average cost including d emand pricing assumption discussed in Brady (2001). Methodology dickens models identical in all respects but atomic number 53 were used in this research. Both models used the average cost including demand approach IEEE. Firms produce return at a certain cost and thusly set out to sell that product at a mark up price.The models defer in the policy adopted by the firm when production exceeds demand for their product. The firm in model A sells any(prenominal) beat it can at Its label up price as documented In Brady (2001). The firm In model B sells the quantity It produces at the price the market will bear e. It sells at the price determined by the firms demand abridge. beat A Is more existent In that firms Immediately realism that they have exceeded their demand curve In that they are unable to sell product at the marked up price and either they Increase Inventory or goods perish.Model B Is slight realistic In that firms cannot determine price with certainty from the demand curve (they do not know their demand curve with certainty) in put on firms must determine this price by some kind of reconciliation mechanism. Note Tanat tons osculation does not model ten placation process itself instead it determines the new price directly from the demand curve. In summary, when production exceeds demand, under model A the firm sells less product than it anticipates but holds its price whereas under model B the firm sells all it produces but at a lower price.Specifically model B differs from model A as follows the demand function (P = a BC) used is the antonym function to that used in model A (Q = a BP) these two expressions are functionally equivalent. The models also differ in that in model A units sold were equal to the units produced or units demanded, whichever is the lower in model B the price at which goods are sold is equal to the marked up price or the demand price (e. The price granted by the demand function), whichever is the lower. In all other respects, including the values of all parameters, the models are identical.In the case of both models demand is held constant throughout the simulation e. The demand curve does not shift upwards or down during the simulation. Also, depreciation has been set to zero during the simulation and fixed costs breathe constant throughout the simulation (IEEE. There is no step append in fixed costs as described in Brady, 2001). Results The results of the simulation for model A are shown in figures 1, 2, 3 and 4. Examining firstly firm size, as measured by capital, we see in figure 1 that the firm increases in size until approximately distributor point 50 and then firm size remains more or sees constant.To see why this is so we examine firm retained earnings as shown in figure 2. present we see retained earnings increase monotonically until period 42 and then decrease asymptotically to zero. Figure 3 shows both revenue and total cost and clearly demonstrates this turn away in permissive ness. Here we see the firm maintaining its margin percentage until period 42 margin then declines dramatically until approximately period 60 margin continues declining asymptotically to zero. 01 2 0 1 Capital Accumulated_ redness 125021002 Time Figure 1. Model A Capital Retained_earnings 0050100 Figure 2.Model A retained earnings This decline in earnings is due to the fact that production exceeded demand in period 42 as shown in figure 4. From that period forrard the firm incurred an increasing cost of overproduction and gradually its margin crumble completely. Although the change in period 42 is abrupt the firm comes smoothly to an equilibrium state (although unfortunately for the firm this equilibrium state is one of zero profitability). On the positive side, the firm never makes a loss as it stops increasing production at a point before its price drops below cost.