IV. Communicative practice. Situations

1. Suppose you are a sales manager of a firm that sells sportswear. Judging by what you see in the streets (people jogging, running, skating, riding bicycles) you feel that sports and physical fitness are becoming more and more popular. The demand for sportswear and sports facilities is growing. Discuss your firm’s price policy with the President. Make up a new price-list.

2. You run a pub in an English town. You are well aware that one of the main dishes on your pub’s menu is fish and chips (that is fish and fried potatoes). Prices on the fish market have gone down to a “catastrophic” level. Why is it a catastrophe for you? Why should you worry about it? Discuss your problems with your suppliers.

3. Americans are often said to be very wastful in consuming food and goods but very strict, extremely strict about spending their time. How could it be explained? Suggest your theory. Discuss the saying “time is money”

Russian Experience

1. Think and say:

a) Is there a great computer market in Russia?

b) What about supply and demand and the prices?

c) How does it affect the buyers if at all?

d) What are consumer preferences in this market?

2. Read the text and get ready to prove that Russia’s market is very dynamic and promising. What is the approach to the Russian market on the part of serious Western companies?

Citicorp Invests in Russia

The financial company Citicorp (USA), and the computer companies IBS (Russia) and Dell Corporation (USA) have announced their joint establishment of a computer company, DellSystem Ltd., which will be the exclusive supplier of Dell Computer’s products in Russia.

The new company will be staffed mostly by employees from IBS’ Personal Computers Division and headed by Azer Badalov, who until recently was the PCD’s director.

“Dell Computer has long been cooperating successfully with IBS, one of the biggest Russian distributors”, says Eric Muris, Dell Computer’s managing director for European regional business. “IBS has always worked shoulder to shoulder with its clients, thereby sustaining Dell’s tradition of direct sales. The computer business, however, must now grow together with the market. We are glad to announce a new investment project which shows that Dell is seeking to bolster its positions in Russia’s dynamic market. Special attention will be paid to developing Dell service in Russia, so that clients may be able to get information backup directly from the producer. There will be greater opportunities to train qualified personnel.”

Commenting on that project, IBS president Anatoly Karachinsky said, “This initiative points to an entirely new approach to the Russian market on the part of serious Western companies which have long been successful in the world market and are oriented on long-term cooperation.”

“Citicorp’s and Dell’s participation in the project show that they are confident in the real prospects of the Russian market and in the possibility of doing business on a long-term basis in Russia.”

It is not easy to assess the true potential and growth rate of the Russian market. In Russia there is one personal computer for every 65 persons; in Britain and Germany the ratio is 1:7.

“We are carrying out this investment project mainly because we have found a company that has been performing successfully even at a time when Russian economy is in dire straits (the country’s gross domestic product has declined by more than 35 % over the last five years)”, said Milenko Horvath, Citicorp’s managing director in Russia.

“We are certain that IBS employees are the best specialists in Russia’s computer industry. It is our belief that this company is bound to flourish when Russia sees an economic upsurge. Because of the extremely low level of utilization of office equipment in general and PCs in particular in the variuos areas of the Russian economy, we regard the computer market as highly promising”.

Citicorp ranks among the leading international financial corporations and at the end of the last year was the biggest banking holding company in the United States.

(Moscow News, July 18-24, 1996).

World Experience

1. Think and say:

a) do you often do shopping?

b) are you price-sensitive?

c) are you an Internet user?

d) do you believe the Internet can be helpful in shopping?

e) is it necessary that prices should be flexible?

2. Read the text and speak about the prices of the future according to Bill Gates. Be sure to express your attitude to the problem in question.

Friction-Free Capitalism and the Price of The Future

By Bill Gates

Because the Internet encourages the free flow of information, it promises to revolutionize how people shop and how prices are set.

Usually this will mean smaller margins for sellers as consumers comparison shop in highly efficient marketplaces. But sometimes the opposite will happen, and sellers will find ways to charge more — at least to certain customers and for certain kinds of products.

In 1995, I introduced the term “friction-free capitalism” to describe a marketplace in which buyers and sellers have almost perfect knowledge of the true supply and demand for a particular product. The Internet is moving us in this direction.

Most products are commodities on one level or another. For example, numerous companies make television sets that are roughly equivalent, and any given model is available from a multitude of retailers. Consumers have abundant choices.

To the extent the product is commodity, consumers get better buys as the marketplace becomes more efficient. Superstores and mail-order houses have gradually improved the efficiency of the marketplace in recent years, driving prices down. In the United States, at least, neighborhood appliance and camera stores have been forced to be more competitive (and often settle for smaller margins).

The Internet is accelerating the trend toward efficient markets. People can browse from retailer to retailer readily. Over time, software will automate the process of comparison shopping, and “haggling” over prices will become electronic and effortless. As it becomes easier for consumers to discover the lowest prices, suppliers and retailers who charge too much will see business suffer. This raises a question: Will people who don’t shop for low prices get them anyway?

Sometimes they won’t. Sellers will use technology to extract the highest price they can from a particular shopper, especially if the goods or services aren’t commodities. This is an extension of pricing practices that are common today.

Flexible prices are a mixture of the marketplace. Many electronic and appliance stores advertise price guarantees in which they promise to match the lowest price a consumer has identified This lets them say they won’t be undersold, even if their marked prices are relatively high. Direct-mail marketers often publish different prices in different catalogs. When you call to order, the sales representative first asks for your customer number or catalog number — often so that the company knows what to charge you. If you call a toll-free number, the merchant may know who you are without even asking.

The goal of these and similar pricing strategies is to capture the low-margin business of price-sensitive shoppers, while harvesting higher margins from sales to shoppers who aren’t as diligent or flexible. These techniques are fairly crude, however, next to what the Internet will make possible.

Interactive technology allows sellers to know the identities of the people they are selling to, or at least to know that a specific repeat visitor is returning.

A Web site can recognize you when you log in with a member password or if the site reads an identifying number it has previously recorded to your hard disk. These numbers, called “cookies,” also enable Web sites to provide you with personalized information and services. (Many sites won’t function properly, or give a very gratifying experience, if they can’t record and read cookies freely.)

If a Web site you visit frequently comes to know what kinds of prices you have or haven’t been willing to pay in the past, it may reduce a price to spur you to buy — or raise one if your pattern suggests that you’re not particularly price-sensitive.

I don’t know how many Web sites are personalizing prices today, but many will in the future. After all, it’s an extension of pricing behavior that is already common in the conventional marketplace. Keep in mind, though, that in the long run this approach will only work for distinctive goods and services. When a Web site offers you a product, it will take only a few seconds for you to discover whether the price is competitive. Any product that resembles a commodity — and most do — will be driven down in price by the efficiency of the Internet works in their favor.

For example, once recordings are distributed mostly online, the world may see music by particular artists priced according to the income (or assumed income) of the specific buyer.

Setting prices according to an individual’s ability to pay may sound radical, but the idea is as old as progressive taxation. College educations are priced this way, with a discount called “financial aid” that varies according to family income and assets.

New pricing schemes will arise. Already, a new type of disc, a variant on DVD called Divx, is being promoted. It is a new form of pay-per-view that allows people to watch a movie for a limited period before it expires.

I don’t really know how this will all work out, of course. Consumers will decide, ultimately, through their purchasing patterns. Divx, for example, will succeed or flop based on consumer reaction. So will pricing schemes tailored to the Internet. What I do know is that potential of the Internet to create nearly friction-free markets will lead to innovation in how products are priced. Because the vast majority of products are commodities, consumers will be winners most — but not all — of the time.

Key terms

1. Demand and supply

2. Quantity demanded and quantity supplied

3. Equilibrium price and quantity

4. Normal and inferior goods

5. Complements and substitutes

6. Free market