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Role of pricing in managerial decision-making We can now see that pricing is best considered as one of many interdependent decisions that firms have to make, and often is not the most fundamental. Firms need to start from their objectives in general terms, and then consider their competitive advantage in terms of their resources and capabilities, in conjunction with the external conditions of the market in terms of customers and competitors. Normally (with exceptions examined later in this chapter) this means starting with a positioning decision, leading to a product decision, and then considering the other elements of the marketing mix. Pricing is considered in this context, and affects the buying decisions of consumers through determining the amount of consumer surplus created. Firms can pursue either a cost advantage or a benefit advantage. In either case the firm has to create more value (B_C) than competitors. A firm then must determine a pricing policy to divide this value between consumer surplus and producer surplus. If a firmwants to increase market share, it has to create more consumer surplus (B_P) than its competitors. An alternative strategy is for the firm to increase profit margin by creating more producer surplus (P_C). It can be seen, therefore, that the main priority of management is to identify and determine products where value creation is possible. Only then is the division of such value into consumer and producer surplus considered. Thus pricing is usually seen as being a secondary consideration.
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