Price transparency in economics refers to the degree of openness in terms of product prices that a market provides to its players. It informs consumers of the cost of various items and services before they purchase them.
Price transparency promotes healthy competition by allowing consumers to compare the pricing of various products. As a result, it minimizes consumer search costs and offers a healthy environment for identifying appealing goods. Furthermore, it ensures that there is no price discrimination.
Aside from being advantageous to buyers, pricing transparency allows sellers to confidently set prices. They can engage in deliberate parallelism, which entails charging prices that are comparable to their competitors. However, transparency can lead to vendors engaging in anti-competitive cooperation in order to artificially raise prices. This could be detrimental to buyers.
Price transparency can be demonstrated in a variety of areas, including business, real estate, healthcare, and stocks. Lately, the internet has emerged as a critical tool for price transparency. It provides immediate access to information about any market. As a result, it has changed the landscape of markets, making them more efficient.
Price transparency is a wide phrase used in capital markets that refers to the public dissemination of all data linked to stocks and bonds. It ensures that all investors have access to the same data while making trading decisions.
To ensure transparency, stock exchanges must provide all necessary information on the price of assets, their trading volume, trader identity, and the dangers that investors face.
- Trader identity reveals the identity of the person who executes a trade.
- Ask price is the price at which the seller agrees to sell the securities.
- Trading quantities can be seen as the total volume of securities traded.
- Bid price is the price at which the buyer agrees to buy the securities.
The above information helps the traders to have full knowledge of all transactions taking place in a market, the actual value of the securities traded, and their demand and supply.
Furthermore, rules governing financial reporting laid down by the US Securities and Exchange Commission encourage transparency in the capital markets. It ensures that market participants have access to reliable information, including financial reports of public limited companies whose stocks are being traded.
Pre-trade information is all the information related to executable quotes and current trading orders before the transaction. Such information is accessible until trading occurs. It helps traders to choose the best price.
Post-trade information is the category of information available to the traders after a securities transaction has been completed. Stock markets must report the necessary information on a timely basis so that traders can benefit from it.
Traders base their decision on both pre- and post-trade information. Such information sharing contributes to price transparency in stock markets.
Let us understand the concept of price transparency better through the examples given below.
- Example #1
The last decade has witnessed the tremendous rise of e-commerce. Price transparency is one of the major influencing factors in their rise. E-commerce platforms have lowered the search cost for the buyer and, at the same time, offered greater variety.
Buyers feel that online platforms provide them with all the requisite information about different products. This gives them greater bargaining power and places them in a better position. Price transparency is also good for sellers as satisfied buyers tend to bring back more business to them in the future.
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Amazon has taken advantage of the price transparency of its e-commerce platform to create an image of the company as the cheapest destination. As a result, customers compare prices of similar products from numerous sellers and feel that they get a better deal on Amazon. Thus, Amazon has emerged as a global e-commerce giant.
- Example #2
NASDAQ has always ensured that all the information related to stock trading is publicly available on its exchange. For instance, NASDAQ’s order book allows traders to see orders in real-time and predict future price movements based on the bids and asks placed. This helps them to time their trade well.
NASDAQ TotalView provides information about every quote and order placed at every price. As a result, investors get the level of insight needed to maximize their returns on trading. Thus, NASDAQ advocates and practices transparency in listed securities in its exchange through TotalView.
Transparency is important to:
- prevent insider trading
- eliminate artificial price fluctuation of stocks and bonds
- improve the entry of new participants into the market
- reduce the anti-competitive cooperation among traders
How Does Pricing Policy Affect Your Sales?
Price optimization is an important component in any business operation since it allows you to boost pricing while increasing sales volumes. Savvy price managers will put it in place and concentrate on growing their firm to cater to the most profitable customers. However, that sounds easier in principle than it is in practice because many businesses use simple price policies without recognizing important market indications such as the most profitable products and client needs, among others.
As a result, decision-making procedures are based on a lack of knowledgeable information, which leads to poor pricing policies that don’t work nearly as effectively as they might and should. Pricing policy has a direct impact on total corporate revenue and must therefore be carefully considered. Companies employ best practices to determine and develop their pricing policy.
We’ll go through some of these practices and how they affect sales in this article.
Cost-based pricing policy
Cost-based pricing is determined by adding a fixed profit percentage to the overall cost of a product or service. The end result is a selling price that aims to cover all the costs during the production or delivery stage and attain a certain level of profit.
The policy is simple and fast to implement as it doesn’t require much market and competition research. That is why cost-oriented pricing is also extremely popular because it uses information managers can obtain very easily. In addition, the company can easily present a case for defending its prices as they cover the costs for the most part.
Nevertheless, the main drawback of a cost-based pricing policy is its ineffectiveness. Determining costs before pricing is not suited for today’s markets as costs vary depending on volume. In turn, as the price forming is driven solely by costs, this significantly reduces profitability because these prices don’t reflect the true value of the market. In fact, they are closer to being completely opposite to strategic prices as there is no consideration of market conditions.
Joel Dean, professor of business economics at Columbia University, says that “cost is usually the crucial estimate in appraising competitors’ capabilities”, which is what a cost-based pricing policy completely ignores. It also ignores the role of customers, which are two main reasons why it usually affects sales in a bad way as it doesn’t take into account these vital factors in order to determine what specific products it wants to manufacture, as well as the quantity of it.
Value-based pricing policy
In this case, the optimal price is a combination of the customer’s perception of the value of offered goods and production costs. Companies that use this approach from their prices based on market research such as customer demands, expectations and preferences, financial resources, and competition.
Value-based pricing increases profitability by creating customer satisfaction through the product’s value attributes. This approach emphasizes the value of your goods and presents the motivation for customers to pay more as they are modeled on what customers want. Also, managers must perform extensive market research and compare what their company is offering with those of their competitors, in order to pinpoint their value, advantages, and disadvantages. That way, they can get a clear picture of what sells on the market and what doesn’t.
Demand-based pricing policy
Similar to value pricing, there is no immediate concern regarding costs. The focus of demand-based pricing is on customer behavior and the quality and attributes of own goods, thus satisfying the level of demand. The prices are formed by accounting for both the cost estimates at different sales levels and projected revenues from sales associated with estimated prices. The vital part of the process is accurately
The vital part of the process is accurately determining demand that is the amount of products or services that the company can sell so that the prices can be formed. Thus, a manager needs the assistance of a market expert, preferably a comprehensive software suite with high levels of automation, to estimate increases or decreases in demand.
In turn, this will result in prices that will help a business stay ahead of its competition because they will have a comprehensive summary of the ongoing demand trends and thus, produce adequate quantity and quality of products.
Competition-based pricing policy
Finally, we have a policy that forms prices by looking at what others are charging. After identifying competition, a company first assesses its own goods and then prices them lower, higher or equal to the competition.
As is the case with cost-based pricing, this policy can be set up quickly as it doesn’t include thorough market data, meaning it’s not as accurate as demand pricing. Still, it enables a business to select different pricing strategies to achieve its goals. Because it can set a higher, lower or on-par price compared to its competition, a company can quickly attract and influence customer perceptions of its products because it already has a pre-established customer base.
As an example, company A can set its prices above those of its competitors, which could suggest to customers that its products feature higher levels of quality. This can be seen on an example of Harley-Davidson, which uses much of the same parts suppliers as other big bike companies like, Kawasaki, Yamaha, and Honda. However, because they set their prices above those of the competition, their above-the-market pricing, along with customer loyalty and a certain sense of mystique, signals quality to customers and makes it easier for them to opt for the premium they pay for.
This can be seen on an example of Harley-Davidson, which uses many of the same parts suppliers as other big bike companies like Kawasaki, Yamaha, and Honda. However, because they set their prices above those of the competition, their above-the-market pricing, along with customer loyalty and a certain sense of mystique, signals quality to customers and makes it easier for them to opt for the premium they pay for.
Effect on sales
Every pricing analyst and expert knows that profit is optimized for every product when the price reflects the customer’s readiness to pay. As Warren Buffet once said:
“Price is what you pay, value is what you get”
meaning business needs to look from the customer’s perspective. Hence, pricing must be constantly evaluated based on the customer return and feedback. That is why a cost-based pricing policy is a bad fit as it produces little customer return, hence lower sales. The other three pricing policies all have their advantages with one joint factor – market research. Each policy demands a thorough understanding of market trends, competition, customer demand, and needs, as well as production operations for minimizing costs and increasing profit.
This can be a time-consuming and expensive process, which is why the best option here is to utilize expert pricing software that can provide valuable insights and help make an informed decision. As this requires a large survey of market conditions, an ideal option would be highly automated software that offers comprehensive solutions for your pricing needs.
It could also provide you with an analysis of how competition reacts to your pricing on a regular basis. The key is to make a customer-appealing pricing policy that will balance competitive pricing with satisfactory profit margins by focusing on the value the company delivers to its customers.
Setting a pricing policy entails assessing what prices customers can afford before deciding what things to create and in what quantities. When fluctuating prices and overall production costs are factored in, a company can determine whether it can compete in the low-cost market, where customers are primarily concerned with price, or whether it can compete in the premium-price market, where customers are primarily concerned with the quality and characteristics of your goods. In either case, it entails keeping up with market fluctuations, which can be difficult without assistance.