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Chapter 16: Problem 8

Would you expect a publishing company to use a strict cost-plus pricing system for all its books? How might you find some indication about whether a publishing company actually is using cost-plus pricing for all its books?

Short Answer

Expert verified
It would be unlikely for a publishing company to use a strict cost-plus pricing system for all its books due to the diversity in production costs, market demand, and competition. Indications of a company using cost-plus pricing could be found by observing a consistent pattern of markup percentage or amount across all books, regardless of other factors.

Step by step solution

01

Understand Cost-plus Pricing

To answer this exercise, one first needs to understand what a strict cost-plus pricing system is. This is a strategy where the selling price is determined by adding a specific amount or percentage to the costs of production of the product (in this case, the books). The additional amount or percentage represents the profit of the company.
02

Evaluate Viability of Cost-plus Pricing for Publishing Company

Now, one needs to consider whether a publishing company would use this kind of pricing strategy for all its books. Several factors influence this: the diversity of book types, different production costs, diverse target markets, etc. Therefore, it's debatable if a one-size-fits-all pricing strategy such as cost-plus pricing could work effectively in the publishing industry. Standard answer could be that it would be unlikely for a publishing company to use a strict cost-plus pricing system for all its books, given the diversity in production costs, market demand, and competition.
03

Identify Signs of Cost-plus Pricing Use

To find out if a company is using a cost-plus pricing method, one should look for a pattern or correlation between the costs of production of different books and their selling prices. If there is a constant markup percentage or amount across all books, regardless of other factors such as demand and competition, it might indicate the use of a cost-plus pricing system.

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Most popular questions from this chapter

Give an example of a firm using a two-part tariff as part of its pricing strategy.

Many supermarkets provide regular shoppers with "loyalty cards." By swiping the card when checking out, a shopper receives reduced prices on a few goods, and the supermarket compiles information on all the shoppers' purchases. Some supermarkets have switched from giving the same price reductions to all shoppers to giving shoppers differing price reductions depending on their shopping history. A manager at one supermarket that uses this approach said, "It comes down to understanding elasticity at a household level." a. Is the use of loyalty cards that provide the same price discounts for every shopper who uses them a form of price discrimination? Briefly explain. b. Why would making price discounts depend on a shopper's buying history involve "understanding elasticity at a household level"? What information from a shopper's buying history would be relevant in predicting the shopper's response to a price discount?

(Related to Solved Problem 16.1 on page 541) Suspicions about arbitrage have a long history. For example, Valerian of Cimiez, a Catholic bishop who lived during the fifth century, wrote, "When something is bought cheaply only so it can be retailed dearly, doing business always means cheating." What might Valerian think of eBay? Do you agree with his conclusion? Briefly explain.

Economist Richard Thaler of the University of Chicago noted that most economists consider arbitrage to be one way "that markets can do their magic." Briefly explain the role arbitrage can play in helping markets work.

In early \(2017,\) a headline in the Wall Street Journal read: "Pricey Virtual- Reality Headsets Slow to Catch On." Is it possible that Sony, Facebook, and the other firms producing virtual-reality headsets were better off keeping prices high when initially offering them for sale, even if the result was a smaller quantity sold? Briefly explain.
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