Neoclassical Pricing Model : Central Objective Of Short Term Profit Maximisation

2230 Words Oct 15th, 2014 9 Pages
The aim of this essay is to argue that the neoclassical pricing model’s central objective of short-term profit maximisation largely fails to capture the realities of a corporation’s marketing processes. Although some argue that modern-day corporations are perhaps more closely aligned to the neoclassical ideal than companies of a smaller size, it is clear that an abundance of other factors play an integral role in a corporation’s pricing process, never mind the marketing process.

The essay will first principally address the neoclassical pricing model, providing a summary of the model’s main ideas. This will be followed by a critique of the model in which there will be an insight into the extent in to which real marketing strategy is not
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‘Cost-plus pricing’ (also known as ‘full cost pricing’) is a production-orientated management approach. It involves calculating the total cost per unit of output and adding a percentage to the cost known as the ‘percentage mark-up on cost’ or put simply, the profit (Weetman 2006, p. 550).

Price = Total cost per unit of output + Profit

In contrast to this, ‘target costing’ has a more customer-orientated philosophy and integrates desired product design, price, profit and cost into a four-step process (Drury 2008, p. 539):

1. The first step involves determining the target price which customers are willing to pay for the product.
2. The second step entails figuring out the target cost by deducting a profit margin from the target price.
3. The company then estimates the product’s actual cost.
4. If actual cost is greater than target cost, the company should engineer ways of narrowing the gap between actual and target costs.

Put in simple equation form, 'target costing’ can be written as follows:

Cost = Price - Profit

Critique

General criticism of neoclassical economics is broadly based on the unrealistic and rather unfounded assumptions that it makes. The neoclassical model seems to adopt a ‘utopian’ vision in which ‘Pareto efficiency’ applies (The Economist 2014) rather than a vision that focuses on describing actual, real life economies.

All three assumptions of the model can be viewed as incompatible with
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