The following points highlight the top four roles of demand and costs in pricing decisions. The roles are: 1. Market Versus Firm Elasticity 2. Demand for Buyer’s Output 3. Likelihood of Competitive Entry 4. Demand Consequences of a Product Line.

Role # 1.

Market Versus Firm Elasticity:

Price elasticity of demand is a measure of the degree to which buyers are sensitive to price chang­es.

In any market characterised by several function­ally substitutable products, there are actually two demand schedules:

(1) Demand for the general product (primary demand) and


(2) Demand for the firm’s specific offering (secondary demand).

In gen­eral, secondary demand is found to be more price elastic. But a seller may sometimes mistake rela­tively inelastic market or primary demand as elas­tic secondary demand.

Role # 2.

Demand for Buyer’s Output:

The market for buyer’s products may actually be price-elastic. So a reduction in price by a firm would raise demand for its product. Hence, manu­facturers selling to such buyers, and whose product represents a significant position of these buyers’ product costs may curtail sales opportunities by eliminating discounts or low-margin products.

Role # 3.

Likelihood of Competitive Entry:

K. B. Monroe has pointed out that “an emphasis on high-price strategies may encourage the entry of competitors when entry barriers are minor and when demand is actually price-elastic. Moreover, continued high prices or rapidly increasing prices may force buyers to reconsider their needs and, per­haps, actively seek out competitive substitutes”.

Role # 4.

Demand Consequences of a Product Line:

Most firms sell a wide variety of products re­quiring a variety of different marketing strategies. Within a product line there are usually some prod­ucts that are functional substitutes for each other and some products that are functionally comple­mentary.


For example, a photographic product line includes such items as cameras, films, flash bulbs, projectors, screens and other accessories. Because of the demand interrelationships and because there are usually several price-market targets, the prod­uct line pricing problem throws a major challenge before the marketing executives.

The pricing problem is made more complex by the fact that complementarity is likely to exist even if the products are functionally substitutable. Substitute relation often exists for the product line brand versus competitors’ brands, but complemen­tarity relationships exist between brands within the product line.

Furthermore, by adding new items or reducing certain prices, a firm may increase de­mand for already existing products. Finally, in re­ality, the lowest and the highest priced products are more frequently remembered and perceived, im­plying a further complementarity.


The low-end (floor) price is usually the most frequently remem­bered price and probably has considerable influence on the marginal buyer. Hence the lowest-price product often is used as a traffic-builder. On the contrary, the highest-priced product also is quite visible and, possibly through quality connotations, may also stimulate demand.

Emphasis on deleting low-volume and/or low- margin products may have unanticipated conse­quences depending on the effect a full line has on demand. Even though a particular product’s direct profit contribution is small, it may be actually “building traffic” for higher margin products. In re­ality, there is ample evidence that functionally substitutable products within a product line actual­ly complement sales of each other.

Furthermore, “prices at the low end (and often the lowest-margin product) positively affect buyers’ perceptions of the entire product line. Thus, product line decisions based only on cost considerations may result in a weakening of demand for the sellers’ product line.”

So one of the most important cornerstones of price determination is demand for the firm’s prod­uces). A product’s demand indicates the volume of a product that buyers are willing to buy at a specif­ic price.

The price setter must estimate the amount that will be demanded at each alternative price in order to be able to analyse alternative pricing deci­sions. These volume estimates can then be used to provide both a revenue estimate and a cost esti­mate for each price alternative.