Tag: pricing strategy

Is Google’s Android catching up with Apple’s iOS in the market for apps? With Android tablets and smartphones taking an ever larger proportion of the market, you would expect so. In the third quarter of 2011, 53% of smartphone shipments used Google’s Android system, compared with only 15% with iOS.

However, Apple is still ahead of Google in the share of apps downloads. To date, there have been 18 billion downloads from the iOS App Store for iPhone, iPad and iPod Touchs compared with 10 billion downloads of Android apps. But Android downloads are growing faster and are set to overtake those of iOS apps in the coming months. This should be boosted with the new Ice Cream Sandwich Android operating system.

But what about revenues earned from downloads? Here the picture is very different. Android Marketplace has earned around $330 million gross revenue for paid apps. Apple’s App Store, by contrast, has earned over 15 times as much: nearly $5000 million. The reason is that 99% of Android apps are free; the figure for App Store apps is 86%. But why is this so and how can Android earn revenues from its apps? And how can app developers earn revenues from the Android market? The following articles look at the economics of apps.

Android Vs. iPhone: The Economics Of Apps Financial Edge, Manish Sahajwani (6/1/12)
Google has an Amazon problem MSN Money, Jim J. Jubak (25/1/12)
Android and the economics of apps BBC News, Rory Cellan-Jones (7/12/11)
Apple Getting Best Of The Android Vs. iPhone Economics Forbes, Manish Sahajwani (6/1/12)
Fragmentation Is Not The End of Android cek.log, Charlie Kindel (14/1/12)


  1. Why are most Android apps free to download?
  2. What is the business model for (a) developing and (b) offering Android apps?
  3. How can money be made from free apps?
  4. What are the long-term strengths and weaknesses in Apple’s apps business model?
  5. Assess Amazon’s business model for apps for Kindle users.

This autumn has been one of the mildest on record. Whilst this may be very nice for most of us, certain industries have been suffering. For example, gas and electricity consumption is down as people delay turning on their heating. One sector particularly badly hit has been clothing. Sales of winter clothes are substantially down and many retailers are longing for colder weather to boost their sales.

Of course, this is not helped by consumer incomes. With inflation at around 5% and average (pre-tax) weekly earnings currently rising by less than 2%, real incomes are falling. In fact over the year, even nominal disposable incomes are down 2.1%, given the rise in national insurance and income tax. And the problem of falling incomes is compounded by worries over the future state of the economy – whether it will go back into recession, with further falls in real income and rises in unemployment.

It’s no wonder that retailers are longing for some cold weather and for their customers to return from the seaside or their garden barbecues to the shopping malls. Look out for the ‘sales’ signs: they’re beginning to spring up as desperate retailers seek to attract wary customers.

Retailers slash prices in Christmas build-up BBC News, Tim Muffett (25/11/11)

Winter woes: warm weather means shoppers aren’t buying as much Guardian, Zoe Wood (21/11/11)
Shoppers urged to be savvy as Christmas sales last for weeks The Telegraph, Victoria Ward (21/11/11)

Earnings tables: Labour Market Statistics ONS (November 2011)
Personal Income and Wealth ONS
Price Indices and Inflation ONS
Personal Inflation Calculator (PIC) ONS


  1. Identify the determinants of demand for winter clothing.
  2. How responsive is demand likely to be to these determinants (a) over a period of a few weeks; (b) over a period of a few months?
  3. What factors should a retailer take into account when deciding whether to make pre-Christmas discounts?
  4. Assume that you are employed but are afraid of losing your job in a few months’ time. How would this affect your consumption of (a) seasonal goods; (b) durable goods; (c) day-to-day goods?
  5. What longer-term strategies could retailers adopt if they predict tough trading conditions over the next two or three years?

The law of demand tells us that when the price of a good falls, quantity demanded will rise. But, firms want to know much more than this. They need to know by how much quantity demanded will rise – we refer to this as the price elasticity of demand (PED) and we can categorise it as relatively inelastic or elastic, depending on by how much demand changes relative to the change in price. The price elasticity of demand is crucial for a firm to know, as it gives them vital information about the best price to charge and getting the price right is probably the most important element in a successful business. As Warren Buffett said in a meeting with the staff from the Federal Crisis Inquiry Commission:

‘Basically, the single most important decision in evaluating a business is pricing power. You’ve the power to raise prices without losing business to a competitor, and you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you got a terrible business.’

The grammar may not be entirely correct, but hopefully you get the gist! Should a firm increase price or reduce it? Whatever action it takes, there will be an effect on demand, total revenue and profit. The key question is: what will be the effect? The answer depends on the PED.

If a firm is selling a product for which there are no close substitutes, we would expect demand to be relatively inelastic. This means that the firm can increase the price it charges without seeing any large fall in quantity. On the other hand, if a firm faces a lot of competition and hence there are many substitutes for a product, then demand becomes much more elastic – any increase in a firm’s price will lead to a proportionately larger decrease in the quantity demanded, as customers will simply switch to a cheaper alternative. The article below looks at the concept of price elasticity of demand and how it is used in practice by competing firms.

The importance of pricing power: PEP, CPB Guru Focus (16/10/11)
Pricing strong for Philip Morris in Q3, but volumes also encouraging; dividend yield attractive MorningStar (7/11/11)


  1. How do we define price elasticity of demand and what formula can we use to calculate it?
  2. If a firm faces an PED of –5, is its demand relatively inelastic or elastic and what does it mean about the responsiveness of customer demand to a change in price?
  3. If a firm faces demand that is (a) relatively inelastic (b) relatively elastic, (c) perfectly elastic (d) perfectly inelastic, what should it do to its price? Explain your answers.
  4. In the article, ‘The importance of pricing power’, is demand for the ‘Daily Racing Forum’ relatively inelastic or elastic? Explain your answer and what it means in terms of the company’s ability to change price.
  5. Is demand for cigarettes likely to be inelastic or elastic? Explain your answer. What does this suggest about a firm’s ability to pass on taxation and excise duties to its customers in the form of higher prices?
  6. Based on the data given in ‘The importance of pricing power’ about the change in demand for Campbell’s Soup and PepsiCo, what conclusions can we reach about PED? How could these firms use this information to set prices and maximise revenue and profit?
  7. Following a change in supply (due to a factor other than price), when will the impact on equilibrium price be larger than the impact on equilibrium quantity?

You will probably have come across the concept of consumer sovereignty. In the mythical world of perfect markets, producers are at the beck and call of consumers. Firms that are not responsive to consumer demand go out of business. In other words, in order to survive they have to respond to any shifts in consumer demand. These in turn can be the result of changes in tastes, changes in income, changes in the prices of other goods, and so on.

Of course, the real world is not perfect, but it is still often assumed that consumers are powerful in influencing what firms sell and at what prices. Well, firms would much rather be in a position of manipulating consumer tastes and hence the huge amounts spent on advertising and marketing.

And it doesn’t end there. Firms use many pricing practices which, to put it mildly, try to confuse consumers or lure them into buying things by making them think they are getting something much cheaper than they really are. Take the case of airline tickets. Some budget airlines offer tickets at extremely low prices, such as 99p. But if you select such a flight, by the time you get to the final screen where taxes, charges, supplements, luggage, etc. are added, the price could exceed £100! And ask yourself this, when you buy something with 20% off, or when you buy ‘three for the price of two’ how rational was your decision? Did you really want the product? Was the offer really ‘genuine’?

The Office of Fair Trading has recently completed two investigations into pricing. As it stated 14 months ago when the investigations were launched:

The first, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer’s internet use. It is expected that this study will be completed by spring 2010.

The second, into advertising of prices, will consider various pricing practices which may potentially mislead consumers. The study will look in particular, but not exclusively, at how these practices are used online.

The following articles look at some of the practices that firms use to drive sales – practices that deliberately attempt to manipulate the consumer. The assumption of ‘perfect knowledge’ by consumers may be a long way from the truth.

Shoppers lose out on ‘billions’ because of ‘deceitful’ marketing The Telegraph, Harry Wallop (2/12/10)
OFT warns retailers about ‘misleading’ price offers BBC News (2/12/10)
OFT cracks down on price gimmicks Guardian, Rebecca Smithers (2/12/10)
We’re all gulled by special offers BBC News blogs: Peston’s Picks, Robert Peston (2/12/10)

OFT publications
OFT warning on misleading pricing practices, OFT Press Release 124/10 (2/12/10)
OFT launches market studies into advertising and pricing practices, OFT Press Release 126/09 (15/10/09)
Advertising of Prices, Office of Fair Trading, OFT1291 (December 2010)
Advertising of Prices, Office of Fair Trading, project page
Advertising of Prices Study Overview, Office of Fair Trading, video


  1. Explain each of the different types of pricing practice investigated by the OFT.
  2. Which of the pricing practices are the most misleading for customers?
  3. What is meant by ‘invisible price increases’? How can they be used to mislead the consumer?
  4. Why do certain pricing practices make it hard for the Office for National Statistics to work out the rate of inflation?
  5. Explain the new framework the OFT is adopting for ‘prioritising enforcement action’.
  6. If we end up buying something that we didn’t really intend to buy, does this mean that we were being irrational?
  7. Is advertising generally in or against the interest of consumers? Explain your answer

Is the power supply industry a cartel? Are the energy companies exploiting a position of market dominance to increase profits at the expense of consumers? At first sight, it would certainly seem so. Despite falling wholesale prices for gas and electricity, the six main power suppliers have not reduced prices to their customers. The result has been a substantial rise in profits. Over the past three years, the average annual gross profit for supplying each dual-fuel customer has been £110. The figure has now risen to £170, a rise of 55%. This is likely to rise further in the short term with further reductions in wholesale energy prices over the next few weeks.

But despite this large increase in profits, the power companies are considering increasing prices this coming winter if wholesale energy prices start to rise again, even though the expected wholesale price rise would still leave them with a gross profit of £140 per dual-fuel customer.

Ofgem, the gas and electricity industry regulator, wrote to the six main companies asking them to explain their pricing position. You can read Ofgem’s report from the link below. In it, Ofgem argues that there is scope for the companies to cut their prices. But Ofgem no longer has the power to cap prices: in 2002 the RPI-X system of price cap regulation was abandoned, since it was felt that there was enough competition between suppliers not to warrant price regulation.The articles below consider the question of whether the companies are justified in their pricing policy or whether they are exploiting their market power to make excessive profits.

No energy cuts despite huge profits (video) Channel 4 News (18/9/09)
Energy bills may rise despite wholesale price drop Times Online (19/9/09)
Where is the will to power? Times Online (19/9/09)
Energy bills set to rise further, companies warn Guardian (18/9/09)
Energy bills ‘unlikely to fall’ BBC News (18/9/09)
Bills face a power surge (Douglas Fraser’s Ledger) BBC News (18/9/09)
An Electricity and Gas Price Cartel? Why Ofgem Can’t Tell iStockAnalyst (17/9/09)

Evidence from Ofgem:
Ofgem’s letter to the six main suppliers and their responses to Ofgem can be read here
Ofgem’s findings can be read in Quarterly Wholesale / Retail Price Report – August 2009
Ofgem Factsheet: Household energy bills explained


  1. Assess the justification by the power companies for not reducing the price of gas and electricity to their customers.
  2. Explain what is meant by ‘hedging’ in the context of the purchase of gas and electricity.
  3. The power suppliers are an oligopoly. If there is collusion between them, what form does it take? Why is it very hard to find evidence of collusion?