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Last Updated on: March 15, 2020 by Joseph Muriithi

In local market power, raising prices of commodities have different effects on revenue and the company’s profitability. The effects are determined by several factors like demand of elasticity, type of commodity on sale and the market structure.

The price raise of a department store to improve profitability can improve profits considering that the store’s market structure i.e. the store has a market power in its local area, because the nearest store is for example 49 miles away which makes it inaccessible to the residents near this department store. Bearing in mind that the type of commodity being sold are bought frequently and need to be readily available. This means that if the prices were to be raised, the demand elasticity would be inelastic. I.e. an inelastic demand elasticity is in which change in price has a small or no effect to the demand. Considering the traveling distance to another store and the commodities being frequently bought will improve profitability.

The market structure will reduce profitability in terms of advertisements and awareness. In this case the department stores is competing with existing market giants like Walmart and Target stores which are widely known and have formed a client base and trust with their customers. This puts the department store in a lower position to manipulate customers to choosing them thus it would reduce profitability if prices were changed

On the other hand the demand elasticity would be elastic, i.e. where change in price has significant change in demand making the strategy of price change be unprofitable to the company. This would happen because, if the store has market power in its local area some of the commodities have a high rate of substitutes and are highly competitive in the market. And some are luxury goods, this renders the demand elasticity elastic. This means that if prices were to be raised less profitability would be realized. Unless other measures are conducted and put in place.

Impact of price change in the company’s revenue given the demand of elasticity

The demand of elasticity would impact the revenues if a contribution analysis was formed (Pearce). The contribution analysis would use the demand of elasticity to calculate the actual price change that would be viable to enhance profitability. It would also determine the risk and challenges and give a theory to tackling them and give tabulated revenue figures when those measures were put in place. This demand analysis would reduce uncertainty to the manager concerning the theory.

 


 

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