[MUSIC] Hello there students. Welcome to the price module. We are at the Mercado de San Miguel, one of the most emblematic markets in the heart of Madrid. Which is in the last years has become one of the tourist gastronomic hotspots of this city. You will ask yourself why is it that we are here today? The answer is very simple. In the past since very ancient times markets were physical places where sellers and buyers, supply and demand would meet to bargain and exchange products and services. These markets would be located in a prominent locations in order to attract the highest number of people, and this is why most of all European cities have the market square as one of the most important places in town. In the same way, Arab countries have the Souks, the zocos, and the Bazaars. We can mention a number of famous marketplaces in the world. From the agoras in ancient Greek cities, the Forum in ancient Rome, to the Grand Bazaar in Istanbul. From the floating market in Bangkok, to the big Tsukiji market in Tokyo, which is the largest fish market in the world. From the colorful and also floating, Bloemenmarkt, the flower market in Amsterdam, to the New York and the London stock exchanges. All of them are examples of these big places where people would meet to trade. As a result of the negotiation process among buyers and sellers, a number of transactions would take place defining the quantity of goods traded and the amount of money paid for them. Whose average was considered to be the market price of the day. In this session then, we will define what price is and we will describe what have been the main factors affecting price formation and/or price definition. We will also present different approaches to define prices. Cost based, value based, competition based. And we will discuss different strategies to set up prices for new products. We will also have one section devoted to exploring how the Internet is affecting the process of price formation. What is price? In a broad sense we can define price as the amount of resources normally expressed in monetary units we have to give to acquire a good or a service. And according to a British definition provided by Professor Kotler, in a narrow sense, price is the amount of money charged for a product or a service. We will now describe how prices have been traditionally defined over the last thousand years. And later we will analyze what is the impact of the Internet in the definition of prices. When the products to be exchanged are commodities of similar nature and condition, and they are traded in large quantities over the day, we can speak about a continuous market whose average price can be considered as the market price for that day. This is why big markets are preferred to be taken as reference. The larger the quantity of trades the more liquid they are. The higher the liquidity of a market, the better in order to reflect a more transparent and representative market price of a product. An example of this is when we asked what is the exchange rate of a euro in terms of the dollar, and we take the quotation in New York Orlando stock exchange as our reference or when we use the Chicago market prices as a reference for grains, wheat, corn etcetera. In these physical markets, we mentioned a few minutes ago, prices were defined dynamically. Although they could vary according to changes in different factors affecting supply and demand. Dynamic pricing means charging different prices depending on changing situations. A particular type of dynamic pricing is differential pricing which means to charge a different price, to a consumer based on his or her personal characteristics and individual conditions. Why is it that prices change? They change for several reasons. One is individual tastes. Goods have a different value for different people. Imagine two friends going shopping with the same amount of money, who see a pair of shoes. Friend A may not like the shoes, or find them too expensive, whereas friend B on the other side, may love them, and find them very cheap. And even if both friends agree that they love the shoes, and they have the same amount of money in their pockets, friend A may find it economic and affordable because he or she wants to buy nothing else or is rich. Whereas friend B may find them to be very expensive because he or she is not that rich, or he or she might have to buy a number of different items. Another reason might be scarcity, or excessive supply or demand. When goods are very abundant, prices tend to fall and when products are scarce, prices tend to go up. This is why theoretically the best way to define a price is by means of an auction, which is the quintessential example of dynamic pricing. In a conventional auction, known as English auction, the seller or the auctioneer representing the seller offers a product to a number of buyers who push prices up to buy the product. The buyer who offers the highest price ends up getting the product. Another type of auction is the reverse auction, known as Dutch auction, in which the auctioneer begins with a high price, and he or she will begin to push prices down, and then one of the buyers decides to get the product. Although an auction is considered as the best process to reflect the real value of a product in a market, until very recently, they were very costly and expensive to organize. This is the reason why auctions were limited to rare articles with a very high expected price and no transparent market price. Such as the auctions organized by Stockholms Auktionsverk, the oldest auction house in the world, founded in 1674 in Stockholm. Christie's, the biggest one founded in 1766 or Sotheby's established in 1744. Although dynamic pricing is the best way to establish the real price and value of a product, in the 19th century, fixed prices began to appear. This one price for all buyers appear as a consequence of the emergence of large-scale retailing in the United States. And the lack of ability to measure price sensitivity of large amounts of consumers. In a short period of time and in a cost-efficient way, but we will also see how the Internet is changing this landscape. This is all for the moment and in the following sections we will explore in depth many of the issues and questions we have been presenting in this introduction. Thank you very much, dear students, and I look forward to meeting you in the next sections of the module. [MUSIC]
