Price point
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Price points are prices at which demand is relatively high. In introductory microeconomics, a demand curve is downward sloping to the right and either linear or gently convex to the origin. The first is usually true, but the second is only piecewise true, as price surveys indicate that demand for a product is not a linear function of its price and not even a smooth function. Demand curves look more like a series of waves than a straight line.
Points A, B, and C in the diagram are price points. By increasing the price beyond a price point (say to a price slightly above price point B), sales volume decreases by an amount more than proportional to the price increase. This decrease in quantity demanded more than offsets the additional revenue from the increased unit price. As a result, total revenue (price * quantity demanded), decreases when a firm raises its price beyond a price point. Technically, the price elasticity of demand is low (inelastic) at a price lower than the price point (steep section of the demand curve), and high (elastic) at a price higher than a price point (gently sloping part of the demand curve). It is a common marketing strategy for a firm to set prices at existing price points.
There are 3 main reasons for the existence of price points:
- Substitution price points
- price points occur at the price of a close substitute
- when an item's price rises above the cost of a close substitute, the quantity demanded drops sharply
- Customary price points
- people are used to paying a certain amount for a type of product
- increasing the price beyond this amount will cause sales to drop dramatically
- Perceptual price points
- also referred to as psychological pricing or odd-number pricing
- raising a price above 99 cents will cause demand to fall disproportionally because $1.00 is perceived to be a significantly higher price
[edit] Oligopoly pricing
Another reason for the existence of price points, related to Customary price points is price points that are created by oligopoly. These are not necessarily the result of collusion but can be an emergent property of oligoplies: when all firms are selling at the same price, any firm which attempts to raise its selling price will experience a decrease in sales and revenues (preventing firms from raising prices unilaterally) and any firm which lowers its prices will mostly likely be matched by its competitors, resulting in small increases in sales but decreases in revenues (for all the firms in that market). This effect can potentially produce a kinked demand curve where the kink lies at the point of the current price level in the market. These results are dependant on the elasticity of the demand curve and properties of each market.
