Posted in Finance, Accounting and Economics Terms, Total Reads: 438
Definition: Pricing Power
This refers to the power of pricing by different entities involved in a transaction. Each entity can assert its own power based on its position in the deal. Porter’s five forces describe two power: bargaining power of suppliers and bargaining power of consumers. In case of supplier, it refers to the power that suppliers have over fixing the raw material prices, whether the supplier is a single supplier or the company is a monopoly, number of buyers available and market size of product.
In case of consumers, it refers to pricing power that consumers have over the product such as in case of power sector, consumers have no power and the monopolistic power companies can exert their influence, however, the government intervenes to protect the interests of the consumers. Whereas consider airline industry, the airlines have to reduce prices for them to attract the consumers if the market is price conscious as unfilled inventory of seats is a sunk cost for the airlines.