 Then we will talk about the cyclical pricing and what is cyclical pricing? Cyclical pricing related to the fact that there is always the instability in the economic condition. It is not constant. There may be expansion, there may be contraction in the economic activity which is typically known as the business cycles. And we also get different phases of the business cycle like starting from whether it is recession, whether it is boom, whether it is revival or whether it is the growth. In all these cases we get different stages of the business cycle and in all these phases either there is expansion of economic activity or there is contraction of economic activity. So the seller has to be very careful in deciding the pricing at the different phases of the business cycle when the economic activities are contracted and when the economic activities are expanded. So firms need to consider the economic condition in formulating the policy. So whether firms should continue the same pricing strategy irrespective of the phases of business cycle or they should adopt a different strategy across the phases. So the challenge is for the seller is to know whether they can do the same pricing in all these phases of the business cycle or they have to follow the different pricing strategy in the different phases of the business cycle. There are two kinds of pricing, one rigid pricing where the same pricing is being followed in all these stages and second is the flexible pricing. So coming to the rigid pricing companies should follow a stable pricing policy irrespective of the phases of the economic cycle. So whether it is a recession or expansion, if the consumer can postpone their purchase they would not be affected by a fall or the increase in the price. So company in this case of rigid pricing company generally follow a fixed pricing policy in all these phases of the economic cycle. And whether it is a recession phase, whether it is a expansion phase consumer cannot postpone their purchase, they would not be affected by the fall or the decrease in the price. So if the firm reduces its price to attract demand, consumer can wait for more decrease in price and in that way it generally reduces the price. Because once the consumer knows that there is there is a reduction in the price because of this economic activity they will anticipate that again there is going to be decrease in the price and if they are going to wait for the decrease in the price there is a going to be effect on the quantity demanded. Similarly, in the phase of expansion if firm increase the price consumer may hasten to buy in fear of the further increase in price. So even if there is a increase in the price still people they will consume more because they are going to anticipate that this is the phase of expansion or it may happen that again the price can increase and that is why they increase their consumption with a high price also. So neither in recession nor in expansion firm is getting benefit by changing the price. Here we have flexible pricing and under this flexible pricing firm keeps their prices flexible to meet the change in the demand or the typically the challenges in the demand and generally the flexible pricing is more relevant in case of the FMCG goods and the agricultural products because they are generally they changes with respect to the different phases of the business cycle. So in case of flexible pricing if you look at during the recession prices should be reduced in view of declining income of the consumer because there is a recession in general the market is going on a lower side and income decreases. So during recession price should be reduced in view of declining income of the consumer whereas when income rises price can also be raised to take advantages of higher demand especially when the supply is less elastic. So in one case if there is a recession price to be reduced because there is a decline in the income but when there is a increase in the income there should be increase in the price to take advantage of the higher demand. There is a increase in the price people that demand more and since that they demand more prices can be increased because if the consumer is not responsive to change in the price still they will continue the same amount of the demand and there is one more backdrop over here is also income is going on a increasing side. So in that case if they are increasing the price still the quantity demanded is going to maintain and there whatever the high price they are charging that is accepted to the consumer. Here one more point to note is that if the quantity is increase in a higher price the supply is also has to be less elastic because if the high price again supply more it is not going to give the benefit if supply is more than the demand the price has to come down again. So supply has to be less elastic high price can be charged if the income is increasing. Then we will talk about the multi product pricing and multi product pricing here is specifically relevant to those firm who produce large number of goods which have some kind of interdependence either in term of production or in term of the demand. Now what is a multi product pricing? Multi product pricing is relevant to the firm where they are producing more than one products and they are interdependent in term of production of the goods or in term of the demand for the goods. What are the options for multi product firm? Either they produce and sell it final products to the end consumer or they produce and sell only which are used as the intermediary goods. So either they will produce or sell the final products to the end user that is option one for the multi product firm or they will produce or sell only the intermediary goods which will be by the other firms to produce test as a final product. If the firm only producing only produce the intermediary products they use these goods internally for the final goods of production, sell part of to it to the other firm and sell it to the other firm. So when they are producing the intermediary products what are the options for them? They use these goods internally for final goods of production it is not going to the outside market or they will sell part of it to the other firms or they will sell all this product into the other firm. The pricing strategy has to be different in all these three cases whether it is getting used for the final products whether part of it is being sold or enter intermediary goods is getting sold in the market. And this pricing is dependent on the fact that what is the interdependence between the products when they are interdependent on the basis of the demand, when there is interdependence on the basis of the supply and when it is input and output kind of relationship. So we will start with the demand interdependence and here we will talk about two kind of goods one is substitute goods and second one is the complementary goods. So if it is demand interdependence then substitute good is one where both the goods they are related to each other and that is why there is a demand interdependence. Now what happens in case of substitute goods optimal output of each goods will be less than when there is no demand interdependence. So if there is no demand interdependence generally the optimal output for each good will be less as these good compete with each other in the same market and sale of one product cannot be enhanced at the expenses of the others. So the firm cannot sell maximum of either of this product both the goods they goes from one firm. So generally the optimal output for each good will be less because there is no interdependence and they are operating in the market independently and they competing with each other in the same market and sales of one cannot be enhanced at the expenses of the others because they are independent. So firm cannot sell maximum of either of this product if there is no interdependence. If the price of one commodity is increased it will push its customer to the substitute that generally happens in case of a market. Seller must trade its own product on the same pattern as those of competitor. Generally they have to charge the same price for both the goods or differentiate the product and take advantage of the perceived value pricing. So if it is both the products are substituted either they have to charge a price which is same or they will differentiate the product either on the basis of the content or in the basis of the service associated with it or the basis of the packaging or with the basis of the quality and they will say these two products are different and on that basis they will give a perceived value if the consumer is perceiving a higher value product for a product they will charge a higher price and they are perceiving a lower value for a product they will charge a low price. So both the products seller trade as the own product either they he will produce the product in the same level at charge the same price or he will differentiate it and the take the advantage of the perceived value pricing. And in this case generally the pricing is followed as the going rate pricing or the combination of the cost based pricing strategy. So if you remember the going rate pricing is the same pricing for the all the substitute products in order to avoid the price war or in order to avoid the uncertainty associated with a different market different price being charged for the different firms. Then we will see the demand interdependence in case of the complementary goods and what are the complementary goods when one goods cannot be consumed without the consuming the other goods. So in case of complement goods and increase in the demand for the other as well and optimal output is greater than when there is no demand interdependence. So optimal output is greater when there is no demand interdependence and increase in demand of one will be always leads to increase in the demand for the others. So increase in price of one good would result in the decrease in the demand for both the goods because both the both the goods they are complementary in nature. So if the increase in the price of one goods that leads leads to decrease in the demand for that goods and that simultaneously leads to decrease in the demand for the other goods also because both of them they are complementary in nature. Now, what is the pricing strategy that has to be in case of complementary good? Pricing strategy should be either product bundling because it is a complementary product or loss leader where the price of the product can be taken from the combined value of the product by charging low price to one product, but the complementary product is on a higher price. So, the pricing strategy in case of the complementary goods when it is a multi product pricing either it has to be the product bundling pricing strategy or it has to be to the loss leader pricing strategy. Then, we will come to the second category of multi product pricing where there is a supply interdependence between the product. So, here the firm has to first decide whether it would further process both the product or would dispose of the joint product and process and sell only the primary product. So, since the firm is producing the multi product it has to choose one of this option they have to further process both the products which is in the intermediary in nature or they would dispose of this joint products or the process or sell only the primary product. If the option taken is the first option then the pricing method should be the cost plus where the full costing has to be taken which consider both the variable cost and the fixed cost. And second option is the marginal costing of the joint product and in this case the marginal costing has to be taken marginal costing where we only consider the variable cost not the full cost which is consist of the fixed cost and the variable cost. So, when they are disposing of then in this case they are following a marginal cost pricing method and when they are not disposing of they are doing it and for processing for the generally they do the full cost pricing method or the cost plus pricing method. Then the third category is input output relationship in case of a multi product pricing and what is input output relationship large firm producing multi product bearing an input output relationship and what is the input output relationship? Suppose a sub drink manufacturer also producing in a bottling plant or if you take the example of tartarsans they produce iron and steel in one set of they produce they produce trucks and car in the other set of. But when it comes to the relationship between both this product produced by the same company iron and steel is being used to produce the truck and car and similarly when it comes to the final product by the sub drink manufacturer the bottling plant is always the complementary product because the final product of the bottling plant has to be taken to the software manufacturer then only sub drink manufacturer then only it can be the final product. In this case generally the pricing strategy is followed as the transfer pricing about which we will discuss bit later that what is transfer pricing and how the pricing has to be determined in case of the transfer pricing methods. So, in this case in case of input output relationship if the one product is the input and the other product is the output because large firm produce the multi product in this case generally the transfer pricing method has to be followed. Then we will talk about a pricing strategy known as Ramsey pricing and what is Ramsey pricing? This is developed by Frank Ramsey and the initial contribution of Frank Ramsey is the model of taxation and according to this model of taxation government should let be high tax on the goods which had low price elasticity and low tax for the goods which had high price which had high price elasticity. Why this has to be followed? Because if you look at what is higher if you are giving a high tax on the basis of this model of taxation if you are giving high tax you are leaving high tax on low price elasticity and low tax on high price elasticity because if it is low tax and high price elasticity because if tax is low this is the market where the responsiveness is more. So, if it is low tax it cannot if you are combining with the market still since the market is elastic at least there is a responsiveness is more, but rather than low tax if it is going to be high tax it is going to have more effect on the quantity demanded if the seller is trying to charge it to the or trying to transfer it to the buyers. That is why the low tax is given in case of the high price elasticity and why high tax on the low price elasticity because here the consumer is not very sensitive to the change in the price. So, in this case if the high tax is being charged which further leads to increase in the price this can be followed because there is less responsibility to the change in the price. So, the basis is again how the consumer is going to react in case of the change in the price and the change in the price has to be on the basis of the whatever the imposition of the tax. So, on that basis the model of taxation says that government should always leave a low tax in case of the high price elasticity and high price elasticity product and high tax on the goods which has the low price elasticity. Form should fix up the price close to the marginal cost of the product which has highly elastic demand and should change the substantial margin and according to this Ramsey pricing the price deviation from the marginal curve marginal cost should be inversely proportional to the price elasticity of the product. So, whatever the deviation for the marginal cost if it is more then it is the price elasticity is less and if the deviation is less then the price elasticity has to be more. Then we will talk about one more kind of pricing that is transfer pricing and transfer pricing are the charges made when the company supplies goods services or the financial to another company to which it is related as its subsidiary or the sister concern. So, generally this kind of pricing are it is more also in the internal manner because this is the pricing to that company which is related as the subsidiary or the sister sister concern. So, charges made when a company supplies goods services or financial to another company and the another company is either as a subsidiary or a sister concern. And when firm is vertically integrated it encounters the problem of fixing up the price of the product demanded and also for the internal. Now, here what pricing has to be what pricing strategy has to be follow because here pricing if you related it is related to the subsidiary sister concern and there it is going to like Tata group and just now we are taking the example of one group they produce iron and steel the other group they produce truck and cars. So, the final product of iron and steel is used as the input in the truck and car industry. So, in this case both of them they are subsidiary both of them they are the sister concern. In this case the pricing generally follow it is the transfer pricing and here if you look at the firm is vertically integrated and that is why there is a problem that what how to fix up the price for this kind of the situation. So, if in case of transfer pricing use of these goods typically the goods from the another industry of this typical group use of these good is the part of the total cost of final product, but involve no cash outflow rather it is only the transfer of account from one subsidiary to another. So, since this is the transfer of account from one subsidiary to another this is generally known as the transfer pricing because there is no cash outflow it is in the same group it is just transfer of account from the one industry to the another industry for a typical business how this generally use in the large organization for transaction between the various divisions internal pricing as opposed to the external market. So, when there is a large group of industry is there this is this transfer pricing is generally used when the transaction between the various division takes place. So, there is no cash outflow basically it is the transfer of account from one division to another division and it gain more importance in when the MNC started when we started the multinational corporation after the liberalization this typically this pricing technique gain more popular after this introduction of MNC. And this also often misused to ever takes on the net profit and that is because this is basically transferring account from one division to another division and that is why it often misused to evade the taxes on the net profit government keeps strict check on the transfer pricing. So, that the corporate may not evade the tax payment it helps related entity to reduce the global incidence of tax by transferring high income to the low tax jurisdiction and greater expenditure to those jurisdiction jurisdiction where tax is high. So, generally if it is there working in a group this incidence of tax can be planned according to the transfer pricing they generally transfer the high income to the low tax jurisdiction. So, that they pay lower tax and greater expenditure to those jurisdiction where tax is high and in that way generally as a whole as a large organization they can reduce that whatever the imposition of tax or the what is the effect of the incidence of tax. So, all regulatory authority generally they agree that transfer price should be at the arm length price the basis of the transfer price should be the arms length price and what is arms length price that the same price should be charged whether the product is transacted between the related party or with the third party. So, armor length price is one whether the transaction is between two party of the same industry or also between the related party or also with the third party and all regulatory authority they agree that the basis of the transfer pricing should be at the arms length price. But there is some potential problems if the product is transacted only between the related party there are various options for determining the arm length price and what are the options for determining the arm length price the comparable uncontrolled price methods, resale price method, cost plus method and transactional net margin method. So, these are the options to decide the arm length price and any of this method can be followed to decide the arm length price when the transaction is essentially taking place between the two related parties. The transfer pricing law requires company should submit details of its own transaction with others. So, whatever the what is the requirement for this transfer pricing the requirement for this transfer pricing that this law requires because this is given by the regulatory authority and this law requires that company should submit details of its own transaction with others major problem with non availability of the comfortable information in the public domain. So, what is the problem here in case of transfer pricing the regulatory authority requires that the company should submit details of the own transaction with others, but it is difficult to know the transaction you can at least give the details of the firm's own transaction with others, but what is the other transaction with the third party that information is not available in the public domain and that is generally the challenge or what the it comes when it is about the applicability of the transfer pricing. Then we will discuss few more types of pricing like peak load pricing and also this seal bid pricing strategy, retail pricing and administer pricing in the next session and after that we can do a comparative assessment that what is more applicable in the real world put which kind of pricing is being followed more in case of the real world.