Definition
A rigid price, also known as an administered price, is a pricing strategy where the price of a product or service is maintained at a fixed level despite changes in market demand and supply conditions. This type of pricing is common in industries where companies seek to establish a stable and predictable pricing environment, potentially for reasons such as customer loyalty, regulatory compliance, or long-term strategic planning.
Examples
- Transportation Industry: Public transit companies often adopt rigid pricing to ensure fare stability for passengers, regardless of fluctuating fuel costs or other operational expenses.
- Pharmaceutical Industry: Medication prices are often administered to remain constant due to regulations and agreements with government health agencies.
- Utilities Sector: Electricity and water supply companies might maintain fixed rates, necessitating regulatory approval for any price changes.
Frequently Asked Questions
Q1: Why do companies use rigid pricing?
A: Companies use rigid pricing to maintain price stability, which can simplify forecasting and budgeting, enhance customer loyalty, and comply with regulations or contracts that stipulate fixed pricing.
Q2: How does rigid pricing affect competition?
A: Rigid pricing can reduce competition by setting a price floor that competitors must adhere to, potentially leading to less price-based competition and more focus on service and quality differentiation.
Q3: Can rigid pricing be harmful in any way?
A: It can be harmful if it leads to inefficiencies, such as producing goods at a cost higher than the market price, which might not be sustainable long-term.
Q4: Are rigid prices common in modern markets?
A: Rigid prices are less common in highly competitive and dynamic markets but can still be prevalent in industries with regulatory oversight or monopolistic tendencies.
Q5: What is the difference between rigid prices and flexible prices?
A: Rigid prices remain constant over time, whereas flexible prices adjust in response to market demand and supply conditions.
Related Terms
- Administered Price: Prices set by regulatory agencies or firms, not strictly determined by the free market.
- Price Fixing: An agreement between competitors to maintain prices at a certain level, often illegal in competitive markets.
- Market Demand: The quantity of a good or service that consumers are willing and able to purchase at various prices.
- Supply Conditions: The factors that determine the availability and production capacity of goods and services.
References
- “Price Rigidity.” Investopedia. https://www.investopedia.com/terms/p/pricerigidity.asp
- “Administered Pricing.” Economic Times. https://economictimes.indiatimes.com/definition/administered-pricing
Further Reading
-
“The Theory of Industrial Organization” by Jean Tirole
A fundamental resource covering the structures of markets and the strategies firms use to compete, including pricing strategies. -
“Economics: Principles, Problems, and Policies” by Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn
This textbook offers a broad introduction to economic principles, including in-depth discussions about price rigidity and administered prices. -
“Priceless: The Myth of Fair Value (and How to Take Advantage of It)” by William Poundstone
This book explores the psychology behind pricing strategies, including why certain prices remain rigid.
Fundamentals of Rigid Price: Economics Basics Quiz
Thank you for exploring the concept of rigid pricing and trying out our quiz questions. Your engagement in understanding refined economic terms is commendable!
