Download Research on Pricing Model for Leading Casting Pipe Manufacturers

Research on Pricing Model for Leading Casting Pipe Manufacturers
LI Cheng Zhang WU Yu Ping
University of Science and Technology Beijing
P.R.China 100083
Abstract: Under the situation of the industrial economy develop quickly, and the social investment
funds supply increase, the decision making on market price will exert an import influence on the benefit
of superior enterprises in the industry as well as on the sustained and healthy development of the
industry. The paper centers on the pricing strategy of the superior enterprises in casting pipe industry.
Enterprise benefit and development of the industry is much more import to for the superior enterprises
than the inferior enterprises. Regarding this, the article puts forward the product pricing models of
superior enterprises which will keep eyes on both Enterprise benefit and development of the industry.
Key words: Enterprise benefit; Pricing model; Casting Pipe; Superior enterprises ; Pricing;
1. Introduction
For different types of products, the enterprises at different status in the industry, considering the
different pursuits to the market position in the future, will set down different pricing principles. In order
to establish a guiding pricing principle which is benefit to the long term development and profit
maximizing of the enterprise, a clear understanding to the product types, enterprise status in the industry,
and the industry development characters must be gained at first.
The product involved in this article is piping product which is mainly used for the liquid
transportation pipeline. In the market with different characters, this product possesses different market
demand elasticity, in Zhujiang, when to be used in utility sector, the public use investment character as
well as its unique properties decide its lower market demand elasticity, the impact of price change on the
total market demand is so little, whereas, in the infrastructure building industry with complete
competition, this product shows higher market demand elasticity. The enterprise involve here possesses
absolute advantageous position, the brand effect of its product is evident, and the market share goes
beyond 40%. In this enterprise, the products of every size are available, and the production is large in
scale, but due to the character of many competitors are private enterprises, the product cost doesn’t show
any evident advantage.
2. The Correlation Between Enterprise Benefit and Industry Development
The market price change has a considerable influence on market share among competitors and benefit
of enterprise, and there is an evident positive correlation between the changing of enterprise and the
overall income level. After more than ten years rapid development, the manufacturing technique is daily
ripening and skilled labor resource is becoming abundant, the social investment fund supply is unstinted,
and the threshold for entering into this industry is general, but the cost for withdrawing from this
industry is very high, therefore, the influence of average benefit on the subsequent capacity of this
industry is very considerable.
If the superior enterprises obtain better income, without a doubt, it will improve the overall income
level of the industry, and the increase of income will make the industry new entrant increase, thus, the
production capacity will be increased significantly, which will increase the competitive strength on the
subsequent market. Therefore, I hereby try, through partitioning of the market characters, to study the
product pricing model which is suitable for the market character of this product, so that we can keep
eyes on both the benefit of enterprise and the long-term development of the industry.
3. Study to the Pricing Model
3.1Pricing method directed by profit
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The maximization of profit is the focal target sought by enterprises for their survival and development,
and is also the key motive force making enterprises keep extending the competitive edges continuously
and steadily. Due to the evident product brand effect of the involved superior enterprise which possesses
a higher market share in the dominant core market, and the influence of price of the dominant core
market on the income of the enterprise is far more than the influence on the income of the other
competitors in this industry, therefore, in this market, more higher the price is, more income will be
obtained compared with the competitors.
In market competition, due to the constraint of market system, the relationship among sales
quantity Q , unit cost C and Price P is very comprehensive. According to market investigation and
statistics, and according to the analysis to links in the production chain, it is supposed that there is the
following dynamic variable relationship:
Q = b ln( P + 1)

−aQ
C = Ae
(b > 0, A > 0, a > 0)
Therefore, the pricing model for calculating maximized profit should be:
max L = ( P − C )Q
The constraint condition is:
Q = b ln( P + 1)

−aQ
C = Ae
The above model is a nonlinear programming issue, the structure of Lagrange function is as
following:
F (Q, P, C ) = ( P − C )Q + λ[Q − b ln(P + 1)] + k (C − Ae − aQ )
Assume:
∂F
= P − C + λ + kaAe −aQ = 0
∂Q
∂F
bλ
=Q−
=0
∂P
P +1
∂F
= −Q + k = 0
∂C
Thus, the best price can be calculated as P =
Abe − ak (1 − ak ) − k
b+k
。
3.2Marginal analysis pricing
In the general industrial and civil building industry of which the market scope is broad and market
level is low, due to requirement to the product property is not so strict, plus the influence of non expert
persons in purchasing and other work, the market competes more completely, sales price is the key
factor which influent the sales volume. Many private enterprises in the same industry mainly develop
their market in this field, especially the new entrants to the industry.
The superior enterprises in the industry are the most related parties with interest of price change,
especially the subsequent development of the industry and the subsequent price change, which will have
more impact on the long-term development strategy of the superior enterprises. In this field, the new
entrants to the industry will be hold back through Implementing production of scale, forcing down the
market price, and controlling income of many competitors of the industry. Therefore, a lowest cost limit
of price decision system shall be searched from quantifying, and a best point for forcing down price
shall be established, and the point of intersection P0 on the corresponding demanding curves shall be
regarded as the most competitive price.
According to view of economics, the curve of sales function R (Q) shows a convex ascending trend,
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and the curve of cost function C (Q ) shows a concave ascending trend, the trend of income and cost is
shown as figure 1.
Price
R (Q)
C (Q )
Q
O
Optimized Sales
Figure 1 Trend Curve of Income and Cost
Figure 1 shows only intuitively the best sales volume. By applying the marginal gains and marginal
cost analysis method, I hereby would like to discuss the optimum price under the best sales volume.
Due to R ′(Q ) = lim
∆Q →0
R (Q + ∆Q) − R (Q)
= MR(Q) , while R ′′( Q ) < 0 , the marginal gains R ′(Q)
∆Q
is a decreasing function.
And due to C ′(Q) = lim
∆Q → 0
C (Q + ∆Q ) − R(Q )
= MC (Q) , while C ′′(Q ) > 0 , the marginal cost
∆Q
C ′(Q ) is an increasing function.
The above discussions show that, there must be R ′(Q*) = C ′(Q*) , i.e. the marginal gains equal to the
marginal cost. Due to the demand function P (Q) generally is a negative slope curve, under normal
conditions, MR (Q) < P (Q) , the optimum price making decision with multi indicators is shown as
Figure 2.
Price
MC
∗
P(Q )
Demand Curve
∗
P
C∗
MR
O
Q
Q*
Figure 2 Price Decision Making Curves with Multi -indicators
Q * is the optimum status point of the profit maximizing system, i.e. the best sales volume. And each
unit product is profitable before Q * , but unprofitable after Q * . In this case, Q * is the status of
reaching the maximized profit, i.e. reaching the best sales volume. P * , which is corresponding with
the Demand Curve, is the optimum price, and the area of the shadow part is the maximum profit.
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Due to being a superior enterprise in the industry, the enterprise involved has sought the maximization
of profit at its core market, at the elemental market like normal industrial and civil building industry, it
seek the scale production, and the production cost is allocated to a low level to inhibit competitors and
control market, so, P * is still not a best price decision making point, the enterprise can take control of
market edge with low price competition regardless profit. So, it is required to look for the lowest cost
limit for price making from the view of cost analysis, so that the optimum status point of the competitive
price can be established.
What the average cost function C(Q ) reflects is the variation of average cost under normal
condition, which has much to do with production scale, and having phenomena of economy of scale and
diseconomy of scale, which is a concave curve, and can be indicated as C (Q ) =
From C ′(Q) =
C (Q)
.
Q
1
[C ′(Q ) − C (Q)] = 0 , it is can be known that, when C(Q ) has the minimum value
Q
at Q0 , then C ′(Q0 ) = C (Q0 ) , i.e. for cost function, the minimum average cost is equal to its
corresponding marginal cost. The Average-Marginal cost decision curves are showed in figure 3.
MC = C ′(Q )
P
P(Q0 )
AC = C (Q )
P0
Q0
O
Figure 3 Average-Marginal Cost Decision Curves
Q
At the elemental market of which the level is low, during pricing decision making, the point of
intersection P0 on the demand curve of which the output Q0 corresponding with shall be regarded as the
optimum price of the same market.
4. Conclusion
The superior enterprises, taking into their own development strategy, and according to the various
market characters, will adopt different pricing strategies, so that when getting best benefit, these
enterprises can keep one eye on the subsequent healthy development of the industry. We can make use
of mathematic model to do quantifying analysis and calculate the optimum competitive market price, so
that a scientific price decision support can be provided for enterprise decision makers, and in actual
marketing, a suitable regulation is made to the decision according to the strong and the weak of impact
of different market factors, thus, the scientific nature and accuracy on price decision making will be
improved greatly, and the competitive edge of the superior enterprises will be constantly consolidated
and expanded.
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The author can be contacted from e-mail : lichzh•sina.com
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