A pricing strategy is a combination of different accounts such as the ability to pay, the market conditions, competitors’ behavior, and the cost of raw materials- that aid in selling other products. Some of the pricing strategies are sales maximization, premium pricing, price discrimination, psychological pricing, bundle pricing, limit pricing, average cost pricing, mark-up pricing, etc. Firms use pricing strategies for different objectives. Some of the pricing strategies used are to cement the market share, customer attraction, and price determination.
Roundup is a product of Monsanto company. Roundup is the leading product that gave Monsanto firm gargantuan profits. Roundup is an agricultural chemical that limits weed’s growth by keeping them from competing with herbs or plants, sunlight, water, and nutrients. The Roundup herbicide is widely accepted in the agricultural field, leading to Monsanto maximizing large profits (Gu et al., 2015, p. 867). Roundup had a patent with Monsanto, which acted as a monopoly hence the huge success.
Monsanto’s patent with Roundup got over, and it was the firm’s interest to reduce the herbicide price. Herbicide prices declined due to increased competition in the market. Secondly, the Monsanto firm reduced the price due to average production growing over time. The average output grew over time because there was increased demand for Roundup since it was popular in the agricultural industry (Gu et al., 2015, p. 867). Even though there was a price reduction, the firm received huge profits.
Moreover, the firm was advantageous because it had economies of scale, and price reduction seemed an excellent strategy for Monsanto. Roundup herbicide price reduction strategy used to increase the number of customers. The price-matching approach discourages the herbicide competitors from reducing their prices too. The psychological reason is that the competitors would fail to act because they know Monsanto will react immediately.
In cases the demand is elastic, the price reduction often leads to increased revenue generation and vice versa. The pricing strategy used depends on instances where demand is either elastic or inelastic (Gu et al., 2015, p. 867). In cases of price being inelastic, firms charge low prices.
In conclusion, Monsanto reduces the price of Roundup to discourage competitors from implementing the same strategy, better economies of scale, and the demand for Roundup being highly elastic, generating vast amounts of profits.
Price elasticity is the sensitivity of quantity demanded to its price. There are five types o price elasticity: perfectly elastic demand, perfectly inelastic, relative elastic demand, and unitary elastic demand. Price elasticity is useful in determining whether to cut product prices. Consumers are sensitive to price changes when the price elasticity is high (Benassi & Chirco, 2003). Price elasticity indicates that when there are high prices of goods, there reduced demand levels, and the lower the costs, the higher the demand levels. The price elasticity of demand is inelastic if the price reductions increase demand quantity (Benassi & Chirco, 2003). Furthermore, firms have market power when the demand of output is inelastic, and the firm can set their prices higher. However, the firm is cutting its costs to take advantage of its competitors.
Roundup herbicide price was reduced by 9% annually between 1995 and 2000, and the volume of products increased by 22% annually. The price elasticity of demand calculated as follows:
Price Elasticity= =2.444
In 1995, the price elasticity was 2.444
From the price elasticity of demand, Monsanto gains profits through reducing the price of Roundup and increasing the quantity demand. The higher the costs, the lower the market and vice versa.
Profit Maximizing Price Calculation and Explanation
Economically, price equals Marginal Revenue and Marginal Cost. From the information acquired, the Marginal Revenue and Marginal cost were not given. Hence the profit-maximizing worth is not estimated.
c) Monsanto firm did not reduce the prices earlier because of several issues. One of the problems is that price reduction is not an administered experiment, and there might be market forces changes. Was there growth in the herbicide market? We had no idea. Once we know the market, we can estimate elasticity by using different variation methods. Another crucial point, the ratio of price to marginal cost is 1.67 when we use a 2.5 as an estimate and the price being 25 when the cost of production is 10. The price of 25 is lower than the price Monsanto chose. In the case above, there is price discrimination happening in the market, making the estimate an essential qualification of the optimal price (Cacicedo, 2019). In the event the case above was taking place, Monsanto was selling Roundup’s complementary product. The complementary product was Roundup Ready seeds. Lastly, Monsanto could target the Roundup seeds and Roundup markets if seed buyers were willing to pay than the Roundup users. Researchers and observers suggested that Monsanto targeted both markets.
Moreover, the economies of scale experienced in the market increase profits and improved business scale (Cacicedo, 2019). Monsanto lowers prices due to reduced production costs signifying that consumers will have higher incomes leading to increased demand.