 So, we will continue our discussion on product pricing in this session also. So, if you remember last time, last session we discussed about the product pricing and what is the need of product pricing, when the firm generally go for a pricing strategy altogether, whether about launching a new product, whether there is an improvement in the, improvement in the existing product and also getting into a strategy where getting into a different market altogether or different market segment. So, in that context, we discuss about the cost based pricing, typically the cost plus pricing and the market pricing, then that on the basis of the cost, what is the, whether it is a full cost, whether it is the variable cost. Then we discuss about the target price, then we discuss about the pricing on the based of competition, then we discuss it is on the basis of the firm's objective. If the firm's objective is profit maximization, what strategy to be followed and if the firm's objective is for the sales maximization, what strategy to be followed. So, on that basis we discuss three types of product pricing in the last session, one on the basis of the goal of the firm or the objective of the firm, second is on the basis of the competition and third is on the basis of the cost. So, today we will continue our discussion on product pricing and the first type of product pricing we are going to discuss today is product life cycle based pricing. Here the pricing is based on the product life. So, typically if you look at the product life is divided into four stages. The first stage introduction, second stage is growth, third stage is maturity and fourth stage is decline. And generally the product faces different demand pattern and the competition level under the different stages. So, charging uniform price at the different stages generally gives less optimum revenue to the firm because each stages they have a different demand pattern and the different kind of competition under the different stages. So, that is the reason if you are charging or if the firm is charging the uniform price, the possibility is that it will give us less optimum revenue. So, it is preferable or it is advisable that there should be high price at the introduction stage and low price in the decline phase. So, before going into the different techniques of the product life or different strategy when the product life based pricing, we will understand what is the nature of all these four stages of the product life like starting from introduction to the growth to the maturity to the decline. So, we will first understand this four stages of the product life cycle and then we will see how the sales generally increases or decreases in all these four stages of production. So, to start with we will just draw a graph to understand this four stages of production. So, this is our sales revenue curve, this is the sales revenue curve, this is the introduction stage, this is the introduction stage, then we will get the growth stage, then we will get the maturity stage and then we will get the maturity, then we will get the saturation and finally, we will get the decline. So, when it comes to a product life cycle, the first stage is introduction and if you look at here generally the product is introduced and the sales increases because it is a new product in the market, then the sales pick up because consumer they were aware of this product and finally, the growth happens in this stage, then the product become generic in the case of maturity stage and shrink the increase in the sales force because this is considered to be the generic, then people they become saturated at this stage and after this decline continue. So, if you look at generally always the high price is charged in case of introduction stage and why high price is charged because the product is new, people they are ready to pay for it and here the sales force here the priority is to it is reaching to the consumer and they are they have to increase the sales with the high price or increase the sales revenue with the high price. But in the case of growth and maturity, generally they charge a low price because the product has already reached to a stage where people they know about this product and that is why this low price is being charged in case of the growth and maturity and also that continue in case of the saturation and decline stage. So, rather than saying low we can say this is the value for maybe this is the moderate price this is the value for this product in case of growth and maturity. So, generally if you take an example of suppose the television when this LED LCD television came initially it was such a high price and who are the customer segment or who are the group of consumer they are going to buy the LCD TV who attach high value to it who consider this is a status symbol and they are less bother about that whatever the price is being charged because there in that customer segment whatever new in the market they should use it and they are not responsive to the price whatever whether it is high price or whether it is low price. So, in that case generally high price is charged in the introduction stage, but later on if you look at now the price has come down for LCD TV now it is in the growth and if you look at it is also matured because it is now from LCD we have move into the LED TV and now at this stage the typical that color TV television or may be the so called flat television that has already reached maturity or the saturation or we can say the typical black and white they have already reached the saturation or there in the decline phase. But in this case that flat TV or the color TV is still in the maturity those who cannot afford the LCD LED TV they are just taking the flat screen TV because it is in the maturity stage and the price is moderate. So, if you look at now you can bring the LED TV here which is high price LCD TV here which is has already reached the growth stage that is the moderate price. Maturity again it is the price considered to be the this to product it is low price and then again the saturation typically and decline for the black and white TV. So, practically where the price is almost in the bottom side. So, on that basis on the product like cycle based pricing there are three kind of pricing technique the first one is price skimming and what is price skimming under this price skimming producer charges a very high price in the beginning to skim the market and earn super margin on sale. So, if you remember your first degree price discrimination the monopolies try to identify the consumer group who is ready to pay more and generally charge a higher price to them. So, in this case also the producer try to skim the market and earn the super margin on the sales and here the markup cost is normally high the margin whatever that is normally high. This is the typical example of a first degree price discrimination and high price at the time of introduction and low price at the time of the maturity. Now, here we can take the example of maybe here we can take the example of suppose the every Friday we get a new movie get released and to the consumer group. Now, though you watch the movie on the first day first show they pay higher price and those who are watching that movie at a later time when the demand is saturated then they give it they generally they generally pay lower price. So, the first day first show when you are trying to watch a movie your focus is not on the price your focus is that because you want to watch the movie and here the producer try to skim the market and they exercise the first degree price discrimination and they charges a higher price because here the consumer they are not ready for or they are not responsive for the price rather they are responsive for the product. So, in this case the producer will charge a higher price and in this case there will be a price differential who on the basis of the time period who is watching the movie and the first instance the first day first show and who is watching the movie at a later stage because the first day first show consumer group they are paying a higher price as compared to the people those who are watching at a later day. So, we will just take a graphical explanation to understand this both the cases this first day first show and watching the movie at a later stage and we will see how on the basis of the demand curve the consumer is paying a higher price in the first case and they are paying a lower price in the second case. So, we have two demand curve D 1 D 1 then we have D 2 D 2 this is the P 1 P 2. So, the demand curve D 1 D 1 is demand curve for those consumer who must watch the show on the first day irrespective of the price and D 1 D 1 is the demand curve for the rest of the consumer who generally watches the movie after the craze is gone or may be after the demand is comes to a moderate level. So, on that basis we get two demand curve the first demand curve is D 1 D 1 that is for those group of consumer who must watch the movie on the very first day D 1 D 1 is for the demand curve for the rest of the consumer. So, P 1 will be charged for consumer who is who is watching the movie on the first day and P 2 will be charged for this group of consumer who is who is who are watching the movie at a later day. So, in the first case this is the revenue and second case this is the revenue. So, revenue in the first case is O P 1 O P 1 or P 1 O Q 1 A this is the revenue when the price is P 1 and in the second case when the price is P 2 this is the revenue that is O P 2 B Q 2. So, now if you analyze this from the producer point of view in both these cases the producer is getting the revenue whether the price is P 1 or whether the price is P 2, but when he charging the revenue model is different in both these cases. In the first case it is high price and second case it is low price. If we alter the pricing technique may be he is not maximizing revenue because initially the group of consumer who will be watching on the first day the Q is less if Q is less and if he is charging a low price he is not maximizing the revenue. And second case if he is going to charge higher price at a later date also if the movie is released and after may be 2 weeks 3 weeks still he is charging a high price still the Q is going to be less and in this case again the maximization of revenue is not possible. So, the point here is when consumer is not responsive to price that time generally the higher price is charged from the by the producer and if the responsive to price generally the lower price is being charged. And that is the reason this is the strategy under the price scheme in the time of introduction generally high price is being followed and in the later date generally the low price is being followed that is typically in the maturity saturation or the decline phase of the product. So, here the basis is product life cycle on the basis of the different stage the prices are going to be charged. Then the second category here is product bundling and here if you look at two or more products bundled together for a single price. So, here what is the strategy? The strategy is used to propagate new product as well as selling a product during the decline phase. So, when you buy something you find there is a other product free with that product. So, this is the typical example of the product bundling and why the other product is free? Either the other product is new that is why it should reach to the consumer and that is why that comes as a free with the other product or the product has already reached the decline phase and if the product has already reached the decline phase then in order to again revive the sales of the product that generally comes as a free. So, that people again get back to the product and they buy the product also in the individual sense. So, in this case product bundling generally two or more product is bundled together for a single price and in this case the motivation is to either to do a marketing for a new product or to help in reviving a product who is at the decline phase. The typical examples here if you will find this package trip they will say in this ticket price will take care of your stay will take care of your sightseeing and also it is a part of your travel expenses or typically the travel package if you look at now there is a option that if you want food during your travel that is added and they will charge a price. Like initially when this AC class was introduced in the train if you have to pay a price to get the bedding, but later on if you look at price is increased many fold, but at least this bedding part is included in the ticket fare. Similarly, if you are travelling by Rajdhani generally the food is free because that food price is added in your ticket fare in case of the Rajdhani expenses. Similarly, suppose if you are travelling if you are staying in a hotel many of this hotel they gives the breakfast as free as complimentary, but it is not complemented it is not entirely free the charges for the breakfast is considered under the tariff charges for the room and you get this as the free. So, in this case the product is bundled together. So, if you are staying in a hotel you are not going anywhere out for the breakfast you are taking generally breakfast in that hotel itself because it is added together to your room tariff. So, product bundling is generally a strategy used to either to launch a new product or to revive a product who is already in the decline phase and here we get two products in one single price. So, that generally gives a feel good factor also for the product for the consumer because they are getting two products in one single price. Then the third kind of product life cycle based pricing is perceive value pricing. Now, what is perceive value? Perceive value is the consumer the different consumer group they assign the value to the product on the basis that what kind of what kind of perceive benefit they are getting out of it. So, the value of the good for different consumer depends upon their perception of utility of that good. So, if it is for one consumer group may be the typical product gives a higher value. So, they usually give a higher value to the product, but for the other consumer group may be the perception of utility is less and that is why they gives a low value to the product. So, if you look at here in this case this is a psychological pricing because here the producer identify what is the psychology of the consumer with respect to the value of the product or the utility of the product and then on that basis they have to charge a price. So, small sellers identify the perceive value on the basis of the knowledge of the market forces and change in the price which aims taking away the consumer surplus. So, here they try to analyze how much this consumer is ready to pay for this specific product and on that basis they generally try to charge a higher price. So, that they can take away the consumer surplus because if the consumer is considering that this is a high value product or the perceive benefit is many is ready to pay a higher price. So, they will charge a higher price from that typical consumer and again they will analyze what is the for the same product what is the perceive value from the other consumer and on that basis generally they again charges a price on the basis of the perceive value of that typical consumer. So, here also the basic aim is to take away the consumer surplus. Now, to now to take the consumer surplus from the consumer what is needed the seller has to understand the perceive value of the consumer. So, if the knowledge about that what the consumer perceive about the value of the product that is the prerequisite to charge a price which will give us the which will give the consumer surplus to the seller. So, here if you look at the difficulty is also to understand what is the perceive value of consumer regarding a specific product. Sellers may try to influence perceive value through the brand awareness and also the emphasis on the quality. So, sometimes sellers they try to influence the people this is the product it is very high value product and there is generally they create a brand awareness because the consumer in that way the consumer will try to give a high value for it and if they are giving a high value for it generally they can charge a higher price for it. Typically, if you look at the example or economy and premium segment for different product if you will find one comes under the economy segment other comes under the premium segment. So, always the high value if it is a premium segment high value is being charged and if it is comes under the economy segment generally the low price is being charged. So, if you take the example of typically Tanishk they are known as they are there from the Tata group they are known as they are their quality of the gold what they give or their specific design what is not being offer in the general market. So, they create a brand that they are different from the others and on that way if you find if you talk to the people they will always say that it is Tanishk they charge a high making charges, but their product is good their design is good. So, the endos for the making charge with that that their design is good or their product is good. Similarly, it is Philips or you take the Parker pen generally they creates the hype in the quality and that quality the hype in the quality may be through the creating a brand awareness through the celebrity through the quality or through the different media generally they create a hype about it and when it comes to buying that product they the perceived value is very high from this for this product and that is why they charge a higher price. When you go for shopping whether it is Tanishk whether it is Philips whether it is Parker if high price is being charged you say the product has to be good because this is from Philips the design has to be good because this is from Tanishk or this pen has to be good because this is Parker and that is why the consumer ready to pay higher price and this is how the typically the seller they take care with the consumer surplus from the consumers by charging a high price. Then the other category in case of product life cycle price pricing is value pricing and what is value pricing? Value pricing here sellers try to create a high value of the product, but keep the price low. They they will say this is a high value product, but generally keeps the price low and here seller allows some consumer surplus to the buyers it creates a high value of the product with charges a low price. So, if you look at there are few store in the market and throughout the year you have some discount on it whether it is a second shop it is a it is a factory outlet or in general also few brands if you look at every Wednesday you get some discount every Friday you get some discount every festive season you get the discount. So, that is that is typically the value pricing the consumer knows that the product is of high value, but he is getting a discount. So, the pricing is generally given at a higher note, but every time some discount is given keeping it is not that the margin is not getting by the sellers they are getting the margin, but after giving discount also they are giving a profit margin whatever the price they are charging during the discount. So, generally here seller creates a high value a product and charges a low price. So, typically if you go to the garment some of the garment shop every time you find some offer is going on. So, they create a hype that this is a very high value product, but they are giving you some discount and typically this is known as the value pricing. Then one more category is loss leader pricing and what is loss leader pricing. Here the multiproduct firm sell one product at a low price and compensate the loss by the other product. So, combining together whatever the prices of the two products that has to be same, but when they are offering it they always charges a lower price, but they compensate the loss by charging the prices of the other product. Typically it happens in case of the complementary product and how it happens if you have seen typically HP does that and what HP does that through this loss leader pricing they offer the printer at a lower price and for all of their printers the cartridge is very specific and the cartridge is very highly priced. So, in this case even if they are offering the printer is at a lower price, since the cartridge is high value the value of the printer and the cartridge is covered through combining the price of the printer and the cartridge. So, generally they are offering the product at a low price, but whatever the requirement the complementary products that is on a high price and that is very specific and the consumer cannot try to substitute whatever the complementary product and in that case the prices of the high value product and the low value product both get covered in the combined price. However, the success of this strategy is always dependent on the combination of good which are complementary in nature or the company has to produce also the complementary goods then only they can do the practice this loss leader pricing. 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 firm 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 challenges 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 kind 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 a trick 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. Then 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 they 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 a 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 increased 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 multiproduct pricing and multiproduct 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 multiproduct pricing? Multiproduct 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 multiproduct 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 multiproduct 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 goods 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 treat 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 an 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 treat as the own product either they he will produce the product in the same level and charge the same price or he will differentiate it and they 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 pricing charge 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 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 ordinary 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 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 tartar sands 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 complimentary product because the final product of the bottling plant has to be taken to the software manufacturer then on a sub drink manufacturer then only it can be the final product. And 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 levy high tax on the goods which had low price elasticity and low tax for the goods 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 leving 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 the 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 levy 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 where 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 used 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 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 agrees 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 shield 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 which which kind of pricing is being followed more in case of the real world.