Unit 3 Research Proposal British Gas Pricing Strategy-Btechnd
Arbitrage Pricing Theory
In 1976 Stephen Ross introduced the Arbitrage Pricing Theory which deals with the practice of taking advantage of condition of difference thereby linking more than two markets and thus building a danger free profit. In this theory Ross argues that “if equilibrium prices oﬀer no arbitrage opportunities over static portfolios of the assets, then the expected returns on the assets are approximately linearly related to the factor loadings” (Ross, 1976).
This Arbitrage Pricing Theory sets a valuation which is important in the pricing of stocks. This theory argues that a financial advantage could be a linear role of different macro-economic factors or theoretical market indices and factor specific beta coefficient represents the sensitivity to changes in each factor. This theory was introduced to be used when the current price is too low or existing price is too high. Ross’s theory gives justification that by adopting a safe profit which is bereft of any risk through asset pricing could help a company or Organisation in maintaining a sustainable and competitive role. This theory can be measured well to recognize the ways in which a pricing strategy can resolve the necessary factors introduced in the current unstable market, even if the price is too low or too high (Huberman and Wang, 2005).
Theory of Price Elasticity
The Theory of Price Elasticity of Demand measures the effect of a change in the price to the demand and supply of a product. Products that are considered to be necessities are less affected by a change in the price as the consumers need the products and will continue to buy them. However, a product of less need will keep customers at bay owing to the high prices charged (Investopedia, 2011).
“To determine the elasticity of the supply or demand curves, we can use this simple equation:
|Elasticity = (% change in quantity / % change in price)|
If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic” (Investopedia, 2011).
Investopedia (2011) provides us with the factors that affect the demand elasticity. These are:
- The availability of substitutes: here consumers would readily substitute one product for another, if the price of the product is too high. For example, the substitution of coffee by tea.
- Amount of income to be spent on the product: an increase in the price of a commodity but not in the income of a consumer will force the consumer to lower his/her demand of the particular commodity. Here there is an elastic reaction to demand where demand is affected by the change in the price.
- Time: If the price of a commodity goes up and there are no substitutes, the consumer will continue buying the commodity which is here seen as inelastic. However, if the consumer cannot afford the high price of the commodity he/she will stop buying it for a period of time. Here the price becomes elastic for the commodity in the long run.
RATIONALE FOR STUDY
Entire world is facing a shortage of cheap and clean energy sources. Liquid petroleum products like petrol and diesel are getting rare and dearer. It has been observed in many studies that considering the depleting level of existing oil fields and abundance of gas in new discoveries gas could replace the other fuels in coming future. Gas is more cleaner and cheaper source of energy and can be used for domestic and commercial purposes easily. In current times a study on pricing theories of UK’S biggest gas supplier is relevant to understand the impact prices of gas will make on common population and economic growth. It is imperative for academicians’ industry’ competitors as well as government to keep a eye on the pricing structure and understand how a sustainable pricing formulae can be derived. This relevance makes the topic of study very interesting and attracted me to take this subject for my dissertation.
Dissertation on British Gas Introduction and Research methodology is next part of introduction and research proposal of british gas.
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