Administered price

Administered price is a pricing practice in which a company sets the price of its good or service, taking into account external factors that are beyond the company's control. It is a form of price determination that is commonly used in industries with high barriers to entry, such as utilities and transportation, where pricing decisions are often regulated by government entities. With administered prices, a company takes into account factors such as market conditions, competitor prices, production costs, and supply and demand. Companies must carefully consider these factors when setting prices to maximize their profits and remain competitive in the market.

Example of administered price

• Electricity and gas bills are examples of administered prices. Electricity and gas prices are typically regulated by government entities and are based on a variety of factors, including market conditions, production costs, and supply and demand. Companies must submit their prices to the government for approval, and they must adjust their prices to remain competitive.
• Airline tickets are another example of administered prices. Airline ticket prices are often determined by a variety of factors, such as the cost of fuel, the demand for flights, and the availability of seats. Airlines must take these factors into account when setting prices, and they must adjust their prices to remain competitive.
• prescription drugs are also an example of administered prices. The prices of prescription drugs are often determined by the manufacturer and are based on a variety of factors, such as the cost of production and the demand for the drug. Manufacturers must carefully consider these factors when setting prices to maximize their profits and remain competitive in the market.

When to use administered price

Administered pricing is often used in industries with high barriers to entry, such as utilities and transportation, where pricing decisions are often regulated by government entities. It can be used in a variety of industries, including:

• Pharmaceuticals - Companies in this industry must factor in government regulations, patent expiration dates, and competition when setting prices.
• Telecommunications - Companies in this sector must consider costs associated with infrastructure, customer demand, and competition when setting prices.
• Energy - Companies in this field must factor in government regulations, market demand, and the cost of production when setting prices.
• Retail - Companies in this industry must take into account supply and demand, customer preferences, and competition when setting prices.

Types of administered price

There are several types of administered prices that businesses use to set the prices of their goods or services. These include:

• Cost-plus pricing: Cost-plus pricing is a method of pricing in which a business sets the price of its goods or services by adding a predetermined markup to the cost of production. This type of pricing allows businesses to ensure a certain level of profitability, while also taking into account any costs associated with production and distribution.
• Market-oriented pricing: Market-oriented pricing is a pricing strategy that takes into account market conditions and the prices of competitors. This type of pricing helps businesses stay competitive in the market and can help them maximize their profits by setting prices that reflect their competition.
• Penetration pricing: Penetration pricing is a pricing strategy that involves temporarily setting prices lower than the market average in order to gain market share. This type of pricing is often used by companies that are introducing a new product to the market, as it can help them quickly gain a foothold in the market.
• Price skimming: Price skimming involves setting prices higher than the market average in order to maximize profits from early adopters of a product. This type of pricing is often used by companies who have a competitive advantage and can charge higher prices for their products.
• Bundle pricing: Bundle pricing is a pricing strategy in which businesses offer discounts for customers who purchase multiple products or services together. This type of pricing can help businesses increase sales and attract more customers.

Advantages of administered price

Administered prices offer several advantages to companies. These include:

• Ensuring that prices remain competitive in the market, while also allowing the company to cover its production costs. This helps prevent the company from being priced out of the market by competitors.
• Providing a degree of stability in the market, as companies can adjust prices to account for changes in external factors such as market conditions and competitor pricing.
• Ensuring that the company can remain profitable, even if market conditions are unfavorable or costs increase.
• Allowing the company to respond quickly to changes in the market, as it can adjust prices to remain competitive and profitable.

Limitations of administered price

Administered price can be an effective way of setting prices, but there are certain limitations to this pricing practice. These limitations include:

• Rigid pricing: Administered prices can be rigid and inflexible, making them difficult to adjust to changing market conditions.
• Lack of innovation: Administered prices may not allow for innovative products or services, as prices are determined by external factors.
• Lack of competition: With administered prices, companies can be shielded from competition and may not be motivated to innovate or improve their products and services.
• Inefficient pricing: Administered prices can lead to inefficient pricing, as prices may not reflect the true costs of production, or may be too high or too low for certain goods and services.
• Political interference: Governments may use administered prices for political reasons, such as to subsidize certain industries or to protect domestic companies from foreign competition.

Other approaches related to administered price

Administered pricing is a common pricing approach in industries where entry barriers are high and pricing decisions are regulated by government entities. Other related pricing approaches include:

• Cost-plus pricing: Cost-plus pricing involves adding a fixed markup to the cost of goods to arrive at the price. This method of pricing is used to ensure that the company covers its costs and makes a profit.
• Demand-based pricing: Demand-based pricing takes into account the demand for a product or service, and adjusts the price accordingly. Companies may increase the price when demand is high and reduce the price when demand is low.
• Competitive pricing: Competitive pricing involves setting prices based on the prices of competitors. This approach is used to ensure that the company remains competitive in the market and to attract customers.
• Geographical pricing: Geographical pricing takes into account the geographical location of the customers and adjusts the price accordingly. This approach is used to ensure that the company is able to cover its costs while still remaining competitive in different markets.

In summary, administered pricing is an approach used in industries with high entry barriers, and involves taking into account external factors such as market conditions, competitor prices, production costs, and supply and demand. Other related pricing approaches include cost-plus pricing, demand-based pricing, competitive pricing, and geographical pricing.

Administered price — recommended articles

Flexible pricing — Price discrimination — Factors affecting pricing — Price Maker — Price-Taker — Monopolistic competition — Segmented pricing — Price setting — Market based price — Loss aversion

References

• Bloch, H., & Metcalfe, S. (2018). Innovation, creative destruction, and price theory. Industrial and Corporate Change, 27(1), 1-13.