We will write a custom Case Study on Microeconomics: Art Gallery’s Pricing Strategy specifically for you
301 certified writers online
Summary of the Case
The Art Gallery is experiencing financial problems and the financial controller feels that something should be done to increase revenue flow. As a curator responsible for determining the price charged for the admissions, it is necessary to come up with an appropriate way of adjusting the price to increase the revenue. The first option is to increase the price of admission. However, this can only achieve the desired result if it is determined that the demand curve is inelastic. This would mean that the number of visitors will not change due to the price increase. The second option may be to lower the price. This strategy will be appropriate if the demand curve is elastic. In such cases, more visitors will be attracted to the firm due to the reduced price of admissions.
Introduction about the Topic
According to McEachern, the elasticity of demand is one of the most important factors that firms have to consider when setting the price for their products (45). The best way of increasing revenues for a firm is to increase the number of clients purchasing a given product. There are products whose price would determine whether or not people will be interested in buying them. However, some products would always be purchased irrespective of the changes in their prices. A firm must understand the elasticity of the products they offer before setting the desired price. In this case, the focus was to determine the right pricing strategy that would help increase the revenues at the Art Gallery.
Analysis of the case
This case presents a typical pricing problem that many firms always face in the market as they try to increase the revenues. At the Art Gallery, the focus is to increase revenues by coming up with the right pricing mechanism. The curator has to make a decision that will not worsen the current financial situation. If the curator increases the price, the revenue may increase in case the current number of visitors will remain unchanged.
However, the price increase may significantly reduce the number of visitors to an extent that the revenues may go down further (Ringel 56). If the curator chooses to go for the second alternative of lowering the price of admission, then the revenue to the firm will increase in case the number of visitors shall be considerably increased. However, if the decrease in price does not have a considerable impact on the number of visitors coming to the firm, then the revenue will be reduced. This is a delicate situation that requires comprehensive knowledge about the responsiveness of the demand for changes made on the product price. It means that thorough research may be necessary to review the past trends in pricing and the response from the customers.
Reviewing the records to determine the trend in visitors’ admissions based on changes in pricing will be the first step taken by the curator to solve this problem. After determining the responsiveness of demand to changes in product price based on past trends, the curator should interview the clients to determine if their purchasing patterns may be affected by changes in product pricing (Hirschey 32).
This interview will help confirm the findings from the records of the firm about the elasticity of demand for the product. Finally, it will be necessary to review the market price for similar products offered by other competitors in the same region. Significant changes in product price may trigger price wars in the market that may worsen the current financial problems of the firm. All three factors should be taken into consideration when deciding how to solve the problem.
This case study presents one of the common problems that many firms face when setting their product prices. Sometimes a firm may lower its product prices hoping that this would attract more customers. However, if the demand curve is inelastic, such moves may only harm the finances of a firm because it will not increase the number of customers. On the other hand, a firm may increase product prices hoping to increase revenues only to drive away most of its current customers. The right information is, therefore, critical before coming up with the right pricing strategy.
Hirschey, Mark. Fundamentals of Managerial Economics. Mason: South-Western/Cengage Learning, 2009. Print.
McEachern, William. Microeconomics: A Contemporary Introduction. Mason: South-Western Cengage Learning, 2012. Print.
Ringel, Jeanne. The Elasticity of Demand for Health Care: A Review of the Literature and Its Application to the Military Health System. Santa Monica: RAND, 2011. Print.