Pasar Modern vs Pasar Tradisional
Harga tertera/tetap vs Harga tawar-menawar
Modern Market vs Traditional Market
Fixed Price vs Bargain Price
Economics Study Case
Type of Product: Orange
pricing strategy in pdf version
By Romora Edward Sitorus
The most distinguished feature that contrasts modern market vs traditional market in Indonesia is fixed price for (modern market) and bargain price (traditional market). How the process does actually happen? Why both features can still survive the modern day. Which way of pricing is better? Hmm…Seems like an interesting mind exercise. Another case to overcome for the power-puff economists….
– Romora –
A: Why merchant in traditional market sell in bargain price. In other side, supermarket or store usually sell in fixed price? Who will make the most profit?
B: Interesting questions. Let us see by looking to a simulation of modern vs traditional market.
Let’s for instance, we have a competitive market. A perfectly competitive market in economic means that the price is given. However, I believe in the real world the price should be distorted by many circumstances. Therefore, in this very case, we try to simulate using different assumptions from perfectly competitive market assumption. This is meant to give more realistic view about the real market condition.
To simplify the problem, there are three (3) bases or assumptions:
1st assumption:
The buyer is three different women. Each woman has 10 $ budget for oranges and desired to use the entire budget when buying.
2nd assumption:
She usually buys oranges in a bundle of 20. Then, she usually keeps oranges in refrigerator for one week. The usual demand is 20 in a week.
3rd assumption:
There are three type of customer who buys:
- - Naïve customer (have no information about market) and eager to buy in whatever price (high wealth individuals).
- - Modest customer (have limited information about the price, understand market mechanism in the market) but buy only occasionally
- - Savvy customer. A very frequent buyer. Usually have complete information about the market just like the merchant does.
In modern market,
- Ø Take for instance: merchant usually tag the price of orange: 0.5 $ /each (fixed price). However, the cost that merchant must incur for each oranges is 0.35$. So for each orange, the merchant will get net profit 0.15$.
- Ø Buyers have no choice but follow the price. All he can do is to take the price or leave it.
The Results in modern market:
Restricted with both assumptions, the woman will buy as much as 20 fruits each week she comes to the modern market. The merchant will get total net profit from one buyer as much 20 times 0.15$ which equals to 3 $ for the sales. If he got three women come to the store that day with equal demands 20 oranges, he can easily make 9$ profits for 60 oranges.
In traditional market,
- Ø Take for instance: buyer usually asks the price first. Remember there is no price tag. The merchant usually offer for price higher than 0.5 $, for example 0.7 $.
- Ø A. The inexperienced buyer (Naïve buyer) would just agree (usually high-class tourist/or extreme strangers) and buy for 20 oranges. This lead to spending as much 14 oranges for 9.8$.
B. The modest buyer would know that bargain price needs bargain process (Sure!). So she try to bargain for lower price 0.3 $ (which is not possible, because even lower than the cost). Finally, because the merchant is as good as ever, the price gets lower just to 0.6 $. So with the demand of 20 oranges but only 10$ budget, the women can only buy 9.6 $ which equals to 16 oranges.
C. The great buyer (frequent buyer/savvy buyer) defines as a buyer who knows almost equally well like the seller about the market price (almost perfect information). After a long process of bidding, the price get as low as 0.35 $ or equal the cost. The buyer will stop bidding and start buying. She will buy for 20 oranges which equals 20 times 0.35$j or 7 $. The seller ended which zero profit.
The Result in traditional market:
As we simulate from above. The market will end with three women in traditional market buy in total 50 oranges. They spend as much as 26.4$. The merchant ended up with 10 oranges unsold and total net profit (0.7-0.35) x14 + (0.6-0.35) x16 + 0 which equals to 8.9 $. This actually lacks 0.1$ profit from the modern market merchant.
The traditional market merchant, however, have 10 oranges left to sell. If he follows modern market practice by selling on fixed price. He might end up with 0.15 times 10 oranges or equals to 1.5$ additional profit. However, this switch is not as easy as flipping hand as we would see in a moment.
Conclusion about Fixed Price vs. Bargain Price
There is no clear-cut winner. Even though we might tend to say that traditional market has better favor because there is better possibility to earn more than modern market (8.9 +1.5 = 10.4 $ profit), it is not likely to happen as easy as that. It is difficult for several reasons: First, customer already perceived traditional market with bargain price. Without extreme change of situation, they will still ask to bargain the price. Second, 0.5 $ price could only apply if the merchant happen to sell to naïve buyer and modest buyer but not with savvy buyer.
More than that, we should understand that traditional market actually requires some more and some less resources to be like modern market. What are they? Some more to add is a person to perform the bargain. This person (merchant) has to perform bargaining to each costumers come to the store. There is opportunity cost that we should have been measured for this activity. In other side of the coin, traditional market also need less resource than modern market which is price tag. Price tag is a resource that should be convincing toward customers. It is something critical and more than just a silly display. Therefore, some values need to be invested to have a well-promoting price tag.
So what kind of pricing is the best?
First, I would say it depends…
- If you have great skills, stamina, you should try to use bargain price. It will give you more fortune. Of course, there is a restriction to this. First, it was expected only naïve buyer and modest buyer that come to you store. Second, it is quite impossible if you want to handle multiple buyers in the same time. You need to invest for hiring and training other skillful sellers so that they help selling for your store. However, I won’t really recommend this way for you, at least for mass product and for long term.
- If you have preference of less noisy selling, and better control of your selling, you will want to choose fixed price. You don’t need to ask your sellers how much they sold for each items. Choosing fixed price usually means that you opt for larger business. Because in large scale store, we can hardly make price discrimination between customers. Only when customers come one by one that we may usually deal with them in different price offers. Instead you may have to start thinking about price planning. You will want to talk about pricing strategies and start thinking about selling before you even selling.
- However, this would be different when we talk about services market or customized product market. In that case, bargaining is very important. Consultant market would involve bargaining about fee. A dress from well-known designer will be sold by having previous discussion with customers.
However, as we come to end, I would say a rule like this..
Your Pricing strategy is determined largely by your selling ability, your business scale preferences and type of product.
