Accounting: What You Need to Know

1. View the video at the link below and share your thoughts on the economic concepts that you believe are applicable. In your response, provide a rationale on whether or not a firm has to possess the market power to raise prices.

In the video, ‘’How to raise Prices without Losing Customers’’. It is objective to maximize profit with the right price that aligns with the demand curve amid economic instability. Depending on the type of industry and the customers, there is a sharp difference that occurs on the products and services, and thus, companies need to devise methods of retaining customers in a competitive market. One basic concept that Prosen insists is that the best way of increasing the prices and retaining the customers is in is maximizing the equation for value which is the benefits plus the price (Nagle, 2017). This implies that when the prices are going up, the value of the product should also be increased to make customers enjoy the same product even at an increased price. Adding incentives in business is also an important economic aspect in business. Such may include information disclosure on increasing of the prices and creating a relationship with customers.

A firm has to possess the market power to raise prices. A firm’s market power is mostly determined by the number of competitors in the market as well as the stipulations on the ease of entry and exit. An illustration of how monopolies operate for instance show that monopolies enjoy retaining customers even with an increase in prices. Monopolies can raise prices above the level that would prevail under competition but still attract customers. Monopolies continue to amass profits from the market power. This situation implies that the amount of market power that a firm possesses dictates the ability of the firm to raise prices in the market. Nagle (2017) illustrates that firms with market power will have elastic demand while their mark up over marginal costs will be high. Firms with little market power do not dictate any price in the market. With market power, firms are also able to easily determine the market elasticity of demand which is helpful in accounting for prices. A firm with market power also recognizes the need to reduce prices at extremes to retain customers or increase sales. When firms possess market power, it is easier to level competition to gain a fair share from the market.

2. If a firm has created value, is it also always able to capture that value? How does a firm create value and then what must it be able to do to capture that value? In your answer, provide an example of a firm that has been able to create value. Then discuss whether or not you believe it has captured that value and if so how it was captured and if not why it was not able to do so.

The difference between what customers perceive as benefits and the cost associated with the benefits defines value. (Brickley, 2009) When a firm creates value, it is not always easy to capture that value. When a firm creates value , it will be able to capture some portion of the value which will be in the form of profits while customers will take the other portion in the form of consumer surplus. Other firm’s device methods of increasing value by reducing the cost of production and costs related to the producer’s side . Additionally , they can reduce the costs incurred by consumers. Nagle (2017) adds that value can be increased by increasing perception of the quality of the product, which in turn has a direct impact on the prices of substitutes and complements. In this sense, it will be easier to increase value because of increased demand which prompts the development of new services and products that are value-oriented.

Apple is an example of a has created consumer value. Apple has delighted its customers through numerous inventions and the recent introduction of iMac. The management further shows that they have made a point to frame the company’s focus on customer satisfaction for its products. Customer satisfaction drives retention and referrals for Apple’s products. Viral word of mouth in terms of marketing of the product drives measurable financial reports that gauge the success of Apple’s model (Wenistein, 2016). This form of referral business lowers the costs of advertising for Apple’s products thus creating more value. Due to the cost of the products, Apple has not yet captured value because it has not created sufficient value that captures people of all walks of life. It has not yet demonstrated value in capturing low-income earners. It would be more valuable if Apple develops an all-inclusive business model to capture more consumer value through profits from sales. Without this diversification , then Apple will struggle to produce revenues for the company .

References

James A. Brickley, C. W. (2009). Managerial Economics and Organizational Architecture (5 ed.). Pennsylvania: McGraw-Hill/Irwin.

Nagle, T. T. (2017). The strategy and tactics of pricing: A guide to growing more profitably. New York: Routledge.

Weinstein, A. (2016). Superior customer value: Strategies for winning and retaining customers (3rd ed.). Boca Raton, Florida: CRC Press.