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Pricing Process

ECO01 7 - Operational Aspects of Pricing Process

QuestionAnswer
1. Individual negotiations 2. Organized markets 3. Formula pricing 4. Administered prices 5. Group or collective bargaining Tomek and Robinson (1988) - Mechanisms of price discovery
Individual negotiation A simple bargaining between individual buyers and sellers for each transaction.
Individual negotiation In pure form with equal market power and equal information for the participant, it is the implicit procedure of the competitive market model.
Individual negotiation Formal rules are usually not in evidence.
Individual negotiation The seller tries to obtain the highest possible price and the buyer, the lowest possible price
Individual negotiation Sole means of pricing a widely traded product would probably be costly.
Individual negotiation Information on general supply-demand conditions for a product will influence the price outcome of the negotiation.
Individual negotiation Prices in previous transactions and judgments on changes in supply and demand are likely to be explicitly or intuitively considered.
Individual negotiation One participant is better informed on market conditions than the other, the price in a given transaction may be higher or lower than when both participants have sufficient information.
Individual negotiation Each buyer and seller would want to obtain the best information on total supply and demand conditions, and yet each might find it advantageous to keep such information secret.
Individual negotiation Monopolistic buyers or sellers are in the environment to exploit the other participants.
Individual negotiation Most common way of pricing farm products in the PH
Organized markets Slowly replaced individual transactions like auctions or commodity exchanges
Commodity exchanges The exchanges provide a site for trading to take place under specified rules.
Spot or cash market Involves trading in actual commodities, normally on the basis of samples
Future contracts Form of trading which specifies the minimum grade or particular grades of a commodity which must be delivered in fulfillment of the contract at some future date.
Commodity exchanges. Although not yet fully enforced in the country, a number of internationally traded commodities such as sugar, coconut oil and gold to name a few, are priced in this way in the world market.
Futures The mechanics of trading _____ deals with the allocation of supply of the commodity over time and the elimination of some risks associated with holding commodities.
near future price basis for discovering the cash prices paid for the specific lots of commodities;
Discounts or premium Buyers and sellers negotiate cash prices as ____ or ____ from the near future with the differences based on the grade, moisture content, etc., of a particular lot or grain
Future market When cash transactions do not take place on a central market, the _____ _____ is sometimes used as a reference for pricing.
Commodity exchanges Exchanges standardized in nature and decently regulated
Exchange Plays role of an intermediary to all commodity dealings, and takes initial margin from both sides of the trade to act as a guarantee
Cash, future In advanced countries, especially the United States, trading in ___ markets has declined whereas ____ trading has increased.
Auction markets Type of market for commodities which are difficult to standardize.
Auction markets Market most widely used where actual inspection of the product is desirable to determine its quality.
Auction markets Market system wherein buyers are able to observe each animal or each lot of product.
Dutch/Danish auction Auction wherein prices are then determined by progressively bidding for each transaction made through public outcry.
Canadian auction Auction wherein offers are started at somewhat the anticipated prices. The offering price declines until someone accepts
Canadian auction Rationale: product is sold to the buyer at the maximum price he is willing to pay. The progressive bidding may result in the buyer paying the lowest price that he is willing to pay.
Publicly or privately owned facility The more traditional type of auction market is a ___ or ____ owned facility where sellers bring their products.
Publicly or privately owned facility Where a wide range of commodities is to be traded and to be physically assembled at a particular location, selling through auction markets can be time consuming and more costly than direct buying and selling.
Publicly or privately owned facility The practice of directly selling livestock to country buyers had greatly determined the government’s efforts of establishing centralized auction markets.
Terminal livestock exchanges The procedures for selling through terminal livestock markets is essentially standard.
Terminal livestock exchanges Livestock producers consign their animals to a commission firm at the terminals.
Terminal livestock exchanges The commission agent seeks out buyers for the livestock, negotiates the best possible price, collects payment, deducts yardage fees and commissions, and refunds the remainder to the seller.
Terminal livestock exchanges The prices at which transactions take place are reported by the exchange and news media, though the latter is not fully observed in the country.
#1 The number of transactions is large Conditions in approx equilibrium prices in organized market
#2 The quality of the products sold on the exchange is broadly representative of total production Conditions in approx equilibrium prices in organized market
#3 The number of buyers and sellers is large and no single participant is able to manipulate prices Conditions in approx equilibrium prices in organized market
Government #5 The primary factor in determining price in organized commodity markets.
#4 Complete and unbiased information is available on the supply and demand characteristics of the commodity Conditions in approx equilibrium prices in organized market
Criticism against commodity markets .As the volume sold through central markets becomes smaller, due to this development, the price established on such markets are likely to fluctuate more and may reflect different quantities rather than the average of the entire output
Rumors, mass psychology Prices tend to fluctuate excessively and at time irrationally in response to ____ or mass ____.
Direct When ___ selling of commodities becomes more prevalent, it complicates the process of price discovery and price reporting.
Criticism against commodity markets A representative price quotation thus becomes more difficult to obtain from a large number of decentralized markets than from a few central ones.
Criticism against commodity markets Unfavorable weather, for example, can lead to buying in anticipation of a price increase. This may attract other buyers who want to capitalize on a rising market. The reverse may occur in a falling market
Administered pricing The opportunity to do so is limited to those firms which produce a unique or differential product, or otherwise have some monopoly power
Administered prices, central Most agricultural products are sold under circumstances where ____ markets do not exist and where individual negotiation is impractical and costly.
Administered, government ______ pricing in agriculture is almost exclusively a _____function.
Administered pricing To provide a floor price for large crop so as to minimize price fluctuations
Administered pricing To provide incentives to increase production as in palay
Administered pricing To assure farmers of a fair price or equitable price
nonfarm In the ____ sector, such decisions are made by private firms.
Individual farmer Unlike many firms producing nonfarm goods, have little opportunity to control or administer prices.
● The only alternative to limiting production is either to develop secondary outlets for surplus commodities or to request the government to purchase whatever quantities which cannot be sold at the higher price.
Differentiated, narrow Firms producing a _____ product have some discretion in deciding at what price to sell but in most cases the zone of discretion in pricing is quite ____.
Upper The ____ limit is determined by the price offered by competitors for similar products.
Unduly, undermined A firm which attempts to raise prices ____ will find its market position ____ by competition rom existing products by the development of substitute products, and by the entry of new firms.
uhm The competitive nature of agricultural products makes it difficult for farmers or even those marketing farm products to administer prices, and especially to maintain them substantially above competitive equilibrium levels without government assistance.
Supply If prices are to be raised, farmers and processors must accept some degree of control over ____.
Collective Bargaining Dissatisfaction with prices determined by fully competitive markets had led farmers to form bargaining associations through which they can negotiate for higher prices.
Collective Bargaining Through joint efforts, farmers hope to achieve results similar to those obtained by the more successful labor unions.
Collective Bargaining There are now producers of some farm products who have organized themselves to the point that they have been able to collectively bargain with the handlers of their products.
Bargaining agency Must have complete control over price so that outsiders cannot offer a lower price for the product.
Few It is desirable that buyers are _____ in number to facilitate bargaining and to let them readily see the advantages of setting or not setting a negotiation.
Bargaining association Require producers to cutback or restrain supply in order to obtain higher prices.
Inelastic An ____ demand is desirable so that prices can be raised without substantially reducing sales.
Cutback ____ in production, if small, will be acceptable to farmers
Created by: jisoos
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