Price point

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Definition

In terms of market demand curve

A price point for a market demand curve (typically, in the context of a seller with market power, such as a monopolistic firm) is defined as a price value at which the curve is non-differentiable, i.e., it changes direction, in the following way:

  • For the price range just slightly higher than it, the curve is close to horizontal, i.e., the price-elasticity of demand is high. In other words, a small price change above it leads to a large reduction in the quantity demanded.
  • For the price range just slightly below it, the curve is close to vertical, i.e., the price-elasticity of demand is low. In other words, changes in quantity demanded due to changes in price are small.

In terms of marginal revenue curve

For the corresponding quantity value for a price point, the marginal revenue curve has a downward jump discontinuity.

Price points as attractive price choices

Intuitively:

  • Lowering the price is not attractive, because the gain in quantity sold isn't enough to compensate for the decline in price.
  • Raising the price is not attractive, because the loss in quantity sold more than offsets the gain in price.

In terms of the marginal revenue curve: Since the marginal revenue curve has a downward jump discontinuity at the price point, it's highly likely that it crosses the marginal cost curve at this point, and since it moves downward while the marginal cost curve moves upward, the crossing is in the correct direction.

Possible choices of price point

  • Prices of substitute goods: This is debatable, because while it's clear that the price-elasticity of demand is high somewhere close to the price of a substitute good, it's not clear that it's low just below that price, in fact, it's likely to be high even slightly below that price if the products are somewhat differentiated.
  • Psychological pricing