In a democratic set up, price level affects the process of economic development in a number of ways. Level of price determines economic incentives for more production. It affects the allocation of resources in different sectors. Distribution of wealth in a country is also determined by the level of relative prices. In short, people’ s capacity to save is determined by the level of prices.
It has been felt by economists that rapid increase of prices is not good in a developing economy as it creates hardship for the common man. It becomes difficult to put the plans of development into operation and plan targets could not be achieved.
On the other side, a rapidly declining price level is also harmful for a developing economy because it weakens the incentive of the producers and thus may lead to unemployment. That is the reason, why that moderately rising level can be called the best for an economy to attain the development in a economy.
What is Pricing Policy?
In business, a systematic approach is required in pricing the commodities produced. Decision-making in this respect is very important, as it leads to a permanent source of revenue to the business and also survival in the venture. It is the most important device for the firm to expand its market.
If the price is too high, a seller may have to go out of the market. If the price is too low, the firm may not cover its cost and face loss. Hence, setting prices is a complex problem. There is no cut and dried formula for fixing the prices. It depends upon various situations in the business.
Taking all these into consideration, the firm has to meet the pricing in a generalized and codified policy, covering all the principles of pricing problems. This pricing policy should be made to meet the various competitive situations.
Objectives of Price Policy
Price policy plays an immense role to attain rapid economic development. A suitable price policy can provide more finance for economic development and help to lead to increase savings and capital formation. Investment is promoted due to greater incentive for investment. It can be utilized for the establishment of economic stability and more rational allocation of resources. In short, price policy is a mean to attain certain objectives of a firm.
Prof. Joel Dean sets forth the following objectives of price policy:
1. Prices should aim at maximizing profit for the entire product line i.e. they should stimulate profitable combination sales.
2. Prices should be set to promote the long-range welfare of the firm. eg: to discourage competitors from entering the field.
3. Prices should be adopted and individualized to fit the diverse competitive situations encountered by different product.
4. Pricing policies should be flexible enough to meet changes in economic conditions of the various customer industries.
5. A predetermined and systematic method of pricing new products should be provided.
The other objectives set by V.K.R.V. Rao are as follows:
1. To establish equilibrium between demand and supply of goods and services.
2. To bring flexibility in prices and stabilize price of consumer goods.
3. Price policy should have both macro and micro aspects.
4. Capturing the market, market shares, and survival and further adopt service motives.
5. Aim at long-run welfare of the firm.
Besides the above-mentioned objectives, Philip Kotler has listed the following additional objectives:
1. Market penetration: Relatively low price may be set to stimulate market growth and capture a large share thereof.
2. Market skimming: High initial price is charged to take advantage of the fact that some buyers are willing to pay a much higher price than others as the product has high value to them.
3. Early cash recovery: Some firms try to set a price which enable rapid cash recovery as they may be financially tight or may regard future as too uncertain to justify patient cash recovery.
4. Rate of Return: Achieving a satisfactory rate of return, though another price may produce even large return
In firms with professional management, the motives of the executives may fall in any of the following categories:
- A desire not to be conspicuous which would lead him to go along the crowd.
- A desire to recommend a safe course rather than one which might be far more profitable but involves risks.
- A desire to do it the easy way rather than the best way when the best way would mean a lot of extra work.
- A desire to stick to thee past methods and conclusions rather than admit past error or imply that an associate was wrong.
- A desire to make a showing by taking an unorthodox stand and the like.
Importance of Price Policy
A well-formed price policy has special importance if price rises in a continuous process in planned economy. It has not only influenced the living standard of people but due to increase in the expenditure of full planning, the prescribed aims and objectives of the planning are disturbed.
As a result, there is obstacle of economic development. But in under-developed countries, with economic development, price rise is quite natural. Till the increase in monetary income of the public is more than price rise, there is no problem. But when these, is more price rise than investment and national income, there is a need to protect from the defects of monetary fluctuations. It requires price regulation. In short, in developing countries, the significance of price policy can be known from the following facts:
1. To maintain appropriate living standard, price control is essential.
2. To maintain planning process in a fine manner, price should be controlled at all costs.
3. Protect from monetary fluctuations, i.e. fluctuation defects are created, so to remove them appropriate price control is required.
4. Establishment of balance in demand and supply; if not hardship develops with consumer, producer and investor. So balance is needed in a proper way.
5. It is necessary to control the consumer price for well distribution management.
6. The major objective of economic planning is multi faced development of national resources. Thus price policy should be quite independent as price regulation can adjust this motto.
Principles of Price Policy
Dr. V. K. R. V. Rao has laid down the following basic principles of price policy:
1. Equality in Increase of Income and Production
Price policy should be such that national income and national production should have equal increase. The government should try that the increase in income should not be less than of production increase in a developing country, otherwise, it will lead to rise in prices.
2. Income increase by transfer
In a developing economy, an increase in any class or sector necessarily should be by transfer of less income of other sector class; otherwise increase in demand of a class and decrease in demand of another class will substitute and give birth to price rise i.e. inflationary impulse in the economy.
3. Balance in savings and Investment
It should balance in savings and investment as far as possible; otherwise decrease in savings, monetary fluctuation will result. In other words, saving must be matched with increased investment.
4. Adequate Distribution Management
If compulsory consumer goods supply is according to demand, then there will be price stability. But, this is not possible in short time. Under such condition, price control, distribution control and price encouragement policy should be used in co-ordination. To keep balance in demand and supply of compulsory goods, proper rationing is must.
5. Control over the prices of goods of compulsory consumption
In UDC, inflation is caused by the increase in the prices of consumption goods and not by capitalized price increase. Hence, by price policy only compulsory consumer goods prices should be controlled. Further more, it gives birth to cost inflation and this type of rise in prices should be controlled immediately.
6. Formation of Buffer Stock
In UDC, buffer stock should be created for controlling price increase caused due to draught, heavy rain, famine, flood-like sudden seasonal or temporary causes. During crisis such stock can supply the goods.