The
price
of
a
product
logically
cover
its
production
and
distribution
costs
,
including
a
proportion
of
the
company's
fixed
cost
or
,
such
as
rent
and
interest
payments
,
and
leave
a
small
profit
.
But
prices
are
also
influenced
by
the
level
of
demand
,
the
prices
of
products
,
and
the
prices
charged
by
competitors
.
High
quality
products
made
with
expensive
and
requiring
a
lot
of
craftsmanship
are
obviously
expensive
.
They
also
generally
require
"
prestige
pricing
"
as
the
consumers
in
their
market
would
not
buy
them
if
they
thought
the
price
was
too
low
.
The
markets
for
most
other
goods
are
generally
price
,
i
.
e
.
the
lower
the
price
,
the
greater
the
sales
.
But
for
new
products
for
which
there
is
a
sufficiently
high
demand
,
companies
may
choose
to
set
the
highest
possible
price
so
as
to
maximize
profits
.
This
is
known
as
market
-
skimming
.
The
price
can
later
be
reduced
in
order
to
reach
further
.
The
opposite
strategy
is
market
-
penetration
,
which
means
setting
as
low
a
price
as
possible
so
as
to
increase
sales
volume
and
,
leading
to
lower
unit
production
and
distribution
costs
and
higher
long
-
run
profit
.
The
low
price
will
also
discourage
competitors
.
Companies
with
overcapacity
,
intense
competition
,
a
large
inventory
,
or
a
declining
market
are
likely
to
cut
the
prices
of
established
products
.
They
are
more
concerned
with
keeping
the
going
and
staying
in
business
than
making
a
current
profit
.
On
the
contrary
,
firms
facing
rising
costs
,
or
in
need
of
cash
in
the
short
term
,
tend
to
raise
prices
.
A
company
faced
with
demand
that
exceeds
supply
is
also
likely
to
raise
its
price
,
like
a
.
Firms
in
perfectly
markets
,
or
homogeneous
-
products
markets
,
or
small
firms
in
an
industry
with
a
strong
,
are
likely
to
use
a
going
-
rate
pricing
,
i
.
e
.
they
will
charge
more
or
less
the
same
price
as
everyone
else
,
rather
than
set
a
price
based
in
estimates
of
costs
or
projected
demand
.
But
of
course
,
all
prices
can
be
adapted
.
Most
companies
offer
cash
discounts
to
customers
who
pay
immediately
,
and
quantity
discounts
to
buyers
of
large
.
Many
products
and
services
are
sold
at
a
lower
price
during
an
off
-
season
.
Retailers
often
offer
some
loss
-
leader
prices
:
they
cut
the
prices
of
selected
products
to
cost
price
or
below
in
order
to
attract
customers
who
also
buy
other
goods
.
Companies
are
also
often
obliged
to
react
to
price
changes
by
competitors
.
They
might
try
to
avoid
a
price
war
by
modifying
other
elements
of
the
marketing
mix
.
Similarly
,
they
have
to
anticipate
competitors'
reactions
if
they
change
their
own
prices
.
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