[MUSIC] Hi there, students. Welcome back to the price module. After having discussed internal factors affecting price definition, we will now explore which are the external factors. In this blog, it will be not only useful but necessary to refresh concepts learned in economics. Marketers need to have knowledge of economics as well as in cost accounting. As we saw in repeated locations, the ultimate objective of a company in the marketing war is to conquer the mind of a consumer. But in this war, the company is constrained by the market, which is composed of at least three groups of external participants that influence our ability to define prices. In the first place, the characteristics of the demand which our clients. In second place, we have our competitors who condition our capicity to maneuver. We should note that our competitors with us make the supply side. Finally, in third place, our stakeholders who might affect all the other players mentioned before. These stakeholders could include regulators, consumer groups, media and press, scientific institutions, environmental groups, etc. We will analyze each of these factors individually and interacting with each other. In the first place, we will have to mention demand. Conventional economists describe the demand as it curve which represents the amount of goods bought at different price levels. The demand curve shows the behavior of a certain product vis a vis its price. In the X axis we have the Q of quantity whereas in the Y axis we have the P of price. When prices of a product are high, we can expect consumers to buy small quantities and if prices for the same goods go down, we can expect the consumers to be willing to buy more quantity of the same product. But the slope of the demand curve is affected by how sensitive the product is regarding the variation of prices. This word in economics is defined as price elasticity of demand, the proportion of change in the quantity demanded of a product in relation to the variation of its price. The elasticity of the demand curve will depend on several factors, one of them is the nature of the product. We can expect the consumption of many such as water, fruit, essential products for life to be less sensitive to price changes than superfluous goods. If you need a certain medicine to stay alive and its price increases significantly, you will do whatever you can in order to buy it, and if you're healthy it doesn't matter that you are offered a discount, you will simply not buy the medicine. This is a typical example of a product with inelastic demand. The quantitative of the demand is not very sensitive to changes in prices, but prices are made by the interaction between demand and supply. The point of equilibrium is where the demand curve crosses with the supply curve, defining the quantities sold and the prices paid. And this is why, besides the demand, it is important to understand other three elements in the price formation process in a market. A, the structure of the supply, B, the price elasticity of the supply and C, the power of regulators and other stakeholders. The number of players in the supply linked with the demand side create different scenarios. A monopoly is when there is only one supplier and lots of clients. An oligopoly is when there are a few suppliers and lots of clients or buyers. Perfect competition is when there are many sellers and many buyers, and none of them has a significant dominant situation. A monopsony is when there is only one buyer and many suppliers. Imagine that the demand curve is totally inelastic, as in the case of the medicine mentioned above. And we are the only player on the supply side. In this case, we should be a monopolistic player and we can pick the price we like. Monopolies by themselves are nether good nor bad. The problem appears when monopolies are in markets of essential goods for survival of the people. If we are the only supplier of the market we might feel tempted to decrease the supply creating scarcity artificially in order to make prices go up. If we are only supplier of water in the desert, we might put the price of water as high as we wanted. In those cases, normally the regulator would appear to impose some time of cups to price raises. Or the government can become a competitor on the supply side as to force prices to go down. That was the case of Brazil, when the government decided in 2013 to produce insulin for diabetic patients in order to decrease the price of the medicine. But if the product is not considered of first need, then monopolistic players may end up raising prices up to maximum benefits and nobody would care. This has been the case of companies owning broadcasting rights for soccer matches or in the case of luxury goods like Lamborghini or Pagani. So far, we have analyzed what happens when the demand is inelastic and the supply decreases. But the exactly same effect takes place in a scenario in which supply has a limited capacity to offer growth and the demand explodes. In this case, the suppliers don't reduce the offer but given that the offer is already limited, when demand soars, it produces the same effect, an explosion in prices. This is what happens with the price of tickets to see a final match when the Real Madrid or Barcelona get to the final stage. The stadium has a limited capacity, no more than 60,000 seats, and as the demand explodes, prices go up. And in this case, there is a, again, a monopoly, but the government doesn't intervene. The same phenomenon has happened over the past decade with the price of the top red wines from Bordeaux, whose quantity has been exactly the same for the last 100 years. But the explosion on the demand side, driven by Chinese consumers, made them soar producing the barrel. In oligopolistic markets, the competitors are very careful in not creating price wars, that might end up being a bad business for all the contenders. In markets like this, our capacity to different prices will be conditioned by our competitive situation and position in the market. For instance, Hermes being one of the leaders in the tie businesses, normally commands the highest price. Other contenders, then the price defined by Hermes is their ceiling and define their price catalog in accordance. In these oligopolistic markets, where products have certain differentiation among the brands, we also have to understand how the demand, consumers, react depending on their tastes and the natures of the product. Consumers both in the B2C and the B2B arenas, base their purchase decisions, not only on quality on price, but by making most times rational decisions concerning both elements. We have to state clearly that the notion of quality is subjective. Quality, like beauty, lies in the eyes of the beholder. Buyers want to maximize the number of quality units they get for every monetary unit they pay. This notion of quality divided by price is what we call value. Price is what you pay, value is what you get after paying the price. A product quality ten in the view of a customer is clearly superior to a product quality six as defined by the same client. But if a product quality 10 costs $10 whereas a product quality 6 costs $3, the consumer's rational choice will be to buy the product quality 6 because he or she will get 2 units of value, quality per dollar invested, compared with the 1 unit of value, quality per dollar invested, in the first product. So we have to be very careful when deciding to define our prices. In terms of how we are positioned vis a vis our competitors in the market. In a market of perfect competition where all the products are undifferentiated commodities, normally the driver to make a decision is just price or conditions being alike competition is based on price. After understanding which are the internal and external factors affecting price definition, in the next blog we will comment and general price and approaches. And these is all for today, thank you very much and I look forward to meeting you in the next session. Bye bye. [SOUND]
