REVIEW OF RELATED LITERATURE

According to Agwu and Carter (2014), ‗‘among the four Ps, price is the
only income generator and it is the value attached to a product. Furthermore, price is
the amount of money charged for a product or service. It is the sum of all the values
that customers give up in order to gain the benefits of having or using a product
(Kotler et al 2010). Baker (1996) noted that price is the mechanism which ensures
that the two forces (demand and supply) are in equilibrium. According to Santon
(1981) price is simply an offer or an experiment to task the pulse of the market. It is
the monetary value for which the seller is willing to exchange for an item (Agbonifoh
et al, 1998). Ezeudu (2004) argues that price is the exchange value of goods and
services. Schewe (1987) defines price as what one gives up in exchange for a
product or service.
It is one of the most important elements of the marketing mix as it is the
only one that generates revenue for the firm unlike the others that consume funds
(Agwu and Carter 2014). Lovelock (1996) suggested that pricing is the only element
of the marketing mix that produces revenues for the firm, while all the others are
related to expenses. Diamantopoulos (1991) also argued that, ―price is the most
flexible element of marketing strategy in that pricing decisions can be implemented
relatively quickly in comparison with the other elements of marketing strategy‖. It is
capable of determining a firm‘s market share and profitability. Kellogg et al., (1997
p.210) point out: ―If effective product development, promotion and distribution sow
the seeds of business success, effective pricing is the harvest. Although effective
pricing can never compensate for poor execution of the first three elements,
ineffective pricing can surely prevent those efforts from resulting in financial
success‘‘.
Typically, pricing strategies that are investigated in the marketing literature
consist of analyzing aggregated prices (Tellis 1986). For consumer goods, this is
applicable unlike the several types of disaggregate pricing strategies that are utilized
to promote products as favorably as possible (Eliashberg et al 1986). These
consumer products usually have small prices that are paid up at once. Disaggregate
pricing means paying in bits for instance reframing a ₦500 expense into ₦1.40 a day
expense diminishes the enormity of the expense, and therefore, eases the decision
process for the consumer. This however does not apply at all to consumer goods
therefore appropriate pricing strategies which are aggregate must be adopted to
ease the decision making process of consumers. Traditional pricing strategy by
definition is incapable of harmonious associations, but it needs to become a more
socially conscious, collaborative exercise. Bertini and Gourville (2012) stressed that
businesses should look beyond the mechanics of just fixing prices they feel is
suitable for a product having estimated cost and profit still relevant but no longer
sufficient and recognize that harmonization of the way they generate revenue can
open up opportunities to create additional value. This study therefore has dual
purposes which are to assess the effect of pricing strategies on the purchase of
consumer goods and how the advent of online pricing interferes in above!
 According to Nitisha, in economics, supply refers to the quantity of a
product available in the market for sale at a specified price at a given point of time.

Unlike demand, supply refers to the willingness of a seller to sell the

specified amount of a product within a particular price and time.

Supply is always defined in relation to price and time. For example, if a

seller agrees to sell 500 kgs of wheat, it cannot be considered as supply of wheat as
the price and time factors are missing.

Similarly, if a seller is ready to sell 500 kgs at a price of Rs. 30 per kg then
again it would not be considered as supply as the time element is missing.
Therefore, the statement “a seller is willing to sell 500 kgs at the price of Rs. 30 per
kg in a week” is ideal to understand the concept of supply as it relates supply with
price and time.

Apart from this, the supply also depends on the stock and market price of
the product. Stock of a product refers to quantity of a product available in the market
for sale within a specified point of time.

Both stock and market price of a product affect its supply to a greater
extent. If the market price is more than the cost price, the seller would increase the
supply of a product in the market. However, the decrease in market price as
compared to cost price would reduce the supply of product in the market.

For example Mr. X has 100 kgs of a product. He expects the minimum
price to be Rs. 90 per kg and the market price is Rs. 95 per kg. Therefore he would
release certain amount of the product, say around 50 kgs in the market, but would
not release the whole amount. The reason being he would wait for better rates for his
product. In such a case, the supply of his product would be 50kgs at Rs. 95 per kg.

Early studies on dynamic pricing for revenue management by Gallego and

van Ryzin (1994) and Bitran and Mondschein (1997) examine the pricing of a single
product over a finite horizon with no replenishment opportunities. Gallego and van
Ryzin (1994) formulate the problem in a continuous‐time setting, while Bitran and
Mondschein (1997) use a discrete‐time setting. Later researchers have shown a
growing interest in studies of RM pricing. Bitran and Caldentey (2003), Elmaghraby
and Keskinocak (2003), Talluri and van Ryzin (2004), Chiang et al. (2007), and Chen
and Chen (2015) give excellent reviews of the work in this field. Phillips (2005) points
out the importance of markdown management and dynamic pricing in the recent
successes of revenue management applications. Petruzzi and Dada (1999) extend
single‐period pricing to the multiple‐period dynamic pricing model in the newsvendor
setting, and discuss the applicability of the model. They comprehensively review the
joint pricing and inventory decision for the firms in a newsvendor problem. Bertsimas
and de Boer (2002) examine a joint pricing and resource allocation problem in a
network, and propose several approaches to dynamic pricing and resource
allocation. They show numerically that considering demand uncertainty, coordination
of pricing and resource allocation policies in a network results in significant revenue
improvement. Maglaras and Meissner (2006) investigate a revenue management
problem for a firm with a fixed capacity and multiple products, and show that
dynamic pricing and capacity control can be reduced to a common formulation. In
very recent studies, Besbes and Zeevi (2012) consider a class of network revenue
management problem in which the demand function is unknown to the price decision
maker. Gallego and Hu (2014) study dynamic price competition in an oligopolistic
market with a mix of substitutable and complementary perishable goods. Aydin and
Ziya (2009) examine personalized dynamic pricing with limited inventories.
Elmaghraby et al. (2008) and Levin et al. (2010) investigate dynamic pricing
decisions in the presence of strategic customers.

The present paper for the first time introduces the reference effect in the
classical context of revenue management built on a discrete‐time dynamic pricing
model, similar to those proposed by Bitran and Mondschein (1997) and Maglaras
and Meissner (2006). In our model, the dynamic price is set not only in reflection of
the current stock level and the remaining time in the selling season, but also in
consideration of the prices in the previous periods.

On the other hand, dynamic pricing with reference effect has been
extensively studied, but never been exploited as a tool for revenue management.
Since Kahneman and Tversky (1979) proposed the prospect theory, a large number
of studies have been published on modeling the reference effect. Among these
models, memory‐based reference price models have been validated by empirical
studies and accepted as an empirical generalization (Hardie et al., 1993;
Greenleaf, 1995; Briesch et al., 1997; Mazumdar et al., 2005). Some recent studies
have investigated dynamic pricing strategies based on reference price
models. Popescu and Wu (2007) provide a dynamic pricing model in which
consumers’ price expectations are assumed to follow an exponentially smoothed
adaptive expectation process. They show that a rational firm monotonically
decreases or increases the price of its product over time and adopts a skimming or
penetration strategy. Nasiry and Popescu (2011) explore a different memory‐based
reference price model, based on the peak‐end rule. They find that the optimal
solution is a range of constant pricing policy, and show that the behavioral
regularities of peak‐end anchoring and consumers’ loss aversion limit the benefits of
varying prices. Coulter and Krishnamoorthy (2014) consider the impact of reference
effect on optimal pricing strategies in the competitive environment. They confirm that
even with competition, firms optimally price high in the short run to generate a high
reference price, and then decrease this price over time. All of these studies use a
deterministic demand model with unlimited capacity.

According to Soheila Lunney, once a year, usually at the beginning of the

fiscal year, Procurement professionals face the challenge of responding to supplier
price increases. They usually try, perhaps unsuccessfully, to negotiate those
increases away or at least minimize them.

How do you respond to supplier price increases? Better yet, when should
you begin preparing to negotiate price increases? The answer to the second
question may surprise you. You should have begun preparing to negotiate or
respond to a price increase when you originally obtained the current price. Here is a
statement that your suppliers may initially find more painful than a root canal: Please
provide cost breakdowns for this product/service in your response to our Request for
Proposal (RFP).

You must convince your supplier that your intent in obtaining costing
information is not to reduce their profit. They need to realize that you’re not
promoting the 1960s mentality of battling over price concessions, such that their
profit is reduced or eliminated, causing them to take shortcuts on quality or service
and eventually go out of business. Rather, you‘re utilizing 21st century thinking by
emphasizing that you want them to maintain the same or even greater level of profit,
while at the same time exploring ways to reduce costs in the supply network. Thus,
not only does the supplier reach its financial goals, but they are also able to maintain
market competiveness due to a lower or maintained price level. Test your “Reverse
Sales” skills, a process by which the purchaser reverses roles with the supplier and
sells him/her on an idea or a concept that at first may be unpopular.

Consider a typical supplier justification for a price increase, such as, “We
must raise your price by 28% because aluminum costs went up 28% last year.” That
point is tough to argue if you’re not prepared with cost information for that product.
So, when first obtaining responses to your RFP or quotes for high annual spend
products or services, ask for suppliers’ cost breakdowns. They don’t have to be in
dollars and cents. As long as they’re expressed in percentages, they will serve your
need. It’s likely that you’ll face resistance; out of five suppliers taking part in the RFP
process, perhaps only one or two will provide you with their cost breakdowns. Use
their information for your discussions and validation with other suppliers.

A cost breakdown will indicate the percentage of the total cost that is
comprised by each major material, other materials, labor, overhead, and profit. If a
supplier proposes a price increase, and tries to justify it with an increase in a
component of the supplier’s cost, you can say something like, “Aluminum increased
by 28%, but aluminum only comprises 7% of your price. Considering nothing else,
your price should only go up by 2%.”
Should you stop there? Absolutely not! You can argue that productivity
gains should have reduced labor costs enough to offset the small materials price
increase. Maybe you can even convince the supplier that productivity gains more
than offset the materials price hike, and that your price should go down!