Effect of Government Policies on Pricing Strategies

Long-Term Investment Decisions

• April Barnes

Dr. Bernadette West

Abstract

In this paper I will outline a plan that managers in the low-calorie microwaveable food company could follow when selecting pricing strategies for making their products as inelastic as possible. I will then examine the major effects that government policies have on production and employment. I will predict the potential effects that government policies could have on the company. Afterwards, I will determine whether or not government regulation to ensure fairness in the low-calorie microwavable food industry is needed and cite the major reasons for government involvement in a market economy. After I will examine the major complexities that would arise under expansion via capital projects and propose key actions that the company could take in order to prevent or address these complexities. Lastly, I will suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers and indicate the most likely impact to profitability of such a convergence.

Outline a plan that managers in the low-calorie microwaveable food company could follow when selecting pricing strategies for making their products as inelastic as possible. Provide a rationale for your response.

The price elasticity of demand affects a company’s pricing strategies by determining the optimal profit margin. Price elasticity of demand defines the degree of change of demand in relation to the change in price of a product. The higher the elasticity, the higher the demand fluctuates in response to price. In general, most companies would like for their products to be inelastic. When a product is inelastic, the price of the good may increase, while the supply and demand of the product are unaffected. In other words, if the price of a product were to go up, consumers would still buy the product, as well as if the product price were to go down, consumers would still buy the product (Investopedia Inelastic, 2014). When considering the inelasticity of a product it is important to select the proper pricing strategy. When it comes to selecting the best pricing strategy, it is best to first understand what consumers are willing to spend on a product. This can be done by conducting market research and surveys. Managers can also select the pricing strategy by making reasonable assumptions based on historic purchases and patterns. Then managers should consider the competition and the quality of their products. If the competitor sells a product with high quality at a certain price, it is not feasible to sell a similar product with lower quality at a higher price point. The managers should first plan to sell each unit or product at the lowest price possible while still being able to break even and pay for all of the company’s expenses. When it comes to price strategizing, there is no potential for price discrimination. Price discrimination occurs when a seller sells a product for the highest price the consumer is willing to pay for (Investopedia Price Discrimination, 2014). When it comes to a microwaveable food company, there is no reason to sell products at different prices for each customer as it is also illegal.

Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.

Government regulations and policies can have a positive as well as a negative impact on production and employment. when imposed on businesses substantially increase production and operating costs of the business which could result in reduced operating and economic profit, earning per share, earning stream, dividend and eventually market equity value for shareholders. The United States regulatory stringency has contributed to loss of U.S. manufacturing firms’ competitiveness in the international markets. This loss of competitiveness is believed to be reflected in declining exports, increasing imports and a long-term movement of manufacturing capacity from United States to other countries. As mentioned, government policies can have a positive impact as well, for example; the food safety regulations. The food safety regulations are standards and procedures that companies must follow to maintain a safe and sanitary environment for employees as well as for the consumers who purchase the products (Food Safety Program, 2014). Food safety consists of regulating prepping, handling, and storage of food in ways that prevent foodborne illness and other sicknesses. If these rules were not in place, companies would manage food in any way they please and could potentially get consumers sick and face numerous lawsuits.

Determine whether or not government regulation to ensure fairness in the low-calorie microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response.

Government regulation is needed to ensure fairness in the low-calorie microwavable food industry. Government involvement is needed in a market economy to maintain social efficiency and equity. Social efficiency is attained at the mark where the marginal benefits to consumers for either production or consumption are equivalent to the marginal costs of either consumption or production. Matters of equity are challenging to evaluate due to the subjective assessment of what is and isn’t a fair sharing of resources (Pearson Education, 2010). As similar to the automotive industry, the government regulates many aspects. The government regulates auto manufacturing, repair, maintenance, recycling, sales and dealerships. The government also has policies regarding environmental, safety, and import regulations and standards (SBA, 2014).

Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities.

Capital expansion is generally an investment in a major company that wishes to expand or restructure operations without losing control of the business. Some disadvantages that may be faced when undergoing capital expansion would be business owners potentially losing a percentage of the company, investors wanting to be a part of day to day discussions and decisions as well as company secrets revealed (G. Segal, 2013). In order to address these complexities, the company can set up regulations or contracts with the investors or equity partners stating the conditions and ownership of the company.

Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact to profitability of such a convergence. Provide two (2) examples of instances that support your response.

One recommendation would be that the stockholders become very careful and adamant about the company’s expenses and cash flow. By creating share owners out of management, executive management will take action in its greatest interest as a shareowner, in which will be of an advantage to all equity investors (M. Anson, 2004). Creating share owners out of management would likely survive a merger or capital expansion because this gives the opportunity for the owners and investors to work together and make decisions that are best for the company.

References

DOH (2014) “Food Safety Rules and Regulations” retrieved on March 8, 2014 from: http://www.doh.wa.gov/CommunityandEnvironment/Food/FoodWorkerandIndustry/FoodSafetyRules.aspx

G. Segal (2013) “WHAT ARE THE PROS AND CONS OF USING EQUITY CAPITAL?” retrieved on March 8, 2014 from: http://chironthebusinessdoctor.com/the-pros-and-cons-of-using-equity-capital/

Investopedia (2014) “Inelastic” retrieved on March 8, 2014 from: http://www.investopedia.com/terms/e/inelastic.asp

Investopedia (2014) “Price Discrimination” retrieved on March 8, 2014 from: http://www.investopedia.com/terms/p/price_discrimination.asp

M. Anson (2004) “ALIGNING THE INTERESTS OF AGENTS AND OWNERS: AN EMPIRICAL EXAMINATION OF EXECUTIVE COMPENSATION” retrieved on March 8, 2014 from: http://iveybusinessjournal.com/topics/governance/aligning-the-interests-of-agents-and-owners-an-empirical-examination-of-executive-compensation#.Uxuyo_ldUuc

Pearson Education (2010) “Reasons for Government Intervention in the Market” retrieved on March 8, 2014 from: http://wps.pearsoned.co.uk/ema_uk_he_sloman_econbus_3/18/4748/1215583.cw/

SBA (2014) “Automotive” retrieved on March 8, 2014 from: http://www.sba.gov/content/automotive

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