Cycle Pricing
Cyclical pricing is based on the cyclical variations of economic activity overtime. Time series data reveals that economic/business activity exhibits cyclical variations that are termed as business/trade cycles. Each cycle has four phases as shown in Fig. 8.5. The trough is the point where national output is lowest relative to its full employment level (full employment level is defined as the total amount of goods and services that could have been produced if there had been full employment). The firm should reduce prices to operate when economic activity is at its ebb. Expansion is the subsequent phase during which national output rises. The peak occurs when national output is highest relative to its full employment level during which the firm should increase prices. Finally, recession is the subsequent phase during which national output falls.
The firm can set a standard (full) cost and adjust his mark-up according to macroeconomic changes. Discounts and allowances are sometimes used as a part of cyclical pricing. Apart from cost of production, the firm can take the industry price level, price of substitutes, disposable income, and competitive environment into account to set prices in various phases of business cycles. But it has been observed that under cyclical pricing cost is not the sole determinant. The firm may have to make adjustments in price despite no change in cost of production.
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