pricing policy
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Pricing Policy. Managerial Economics Jack Wu. Pricing Policy. uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling. Northwest Airlines Minneapolis-New York. Asian Wall Street Journal . Uniform Pricing. 80. - PowerPoint PPT PresentationTRANSCRIPT
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Managerial EconomicsJack Wu
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Pricing Policyuniform pricingcomplete price discriminationdirect segment discriminationindirect segment discriminationbundling
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Northwest AirlinesMinneapolis-New York
Business class $ 1711 Unrestricted economy
$ 1267
Advance purchase, with penalties
$ 765
Advance purchase, for senior
$ 692
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Asian Wall Street Journal Price for annual subscription
Print: Hong Kong $294
Print: Singapore $173
Print: Tokyo $871
Interactive: Worldwide $59
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0
30
55
80
2500 5000marginal revenue
marginal cost
demand
Quantity (Units a year)
Price
(Tho
usan
d Ye
n pe
r uni
t)
Uniform Pricing
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Uniform Pricing: Profit MaximumMR = MCEquivalently, set the incremental margin
percentage equal to the inverse of absolute value of price elasticity of demand,
(price - MC) / price = -1/e
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Price Elasticityalways set price so that demand is elasticif demand more elastic, then lower
incremental margin percentage (IM%) e = -2 IM% = 1/2
e = -1.5 IM% = 2/3
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Pricing Private-Label Cola Suppose that WalMart learns that demand
for private-label cola is less elastic than the demand for Coca Cola. Should WalMart set a higher price for private-label cola?
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Uniform Pricing: Shortcomingsleaves buyers with
a lot of surplusdoes not sell to
every potential buyer
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Complete Price Discriminationprice each unit at buyer’s benefit and sell
quantity where MB = MC � maximum profit -- theoretical ideal� different from MR = MC
implementation: must know entire marginal benefit and marginal cost curves
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Complete Price Discrimination: Practice
bargainingauctions
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Direct Segment Discrimination, Iprice by segmentimplementation
� fixed identifiable characteristic --- basic for segmentation
� no re-sale
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Direct Segment Discrimination, IIsimple case: uniform price within each segment
� within each segment IM% = -1/e� for segment with more elastic
demand, then lower incremental margin percentage (IM%)
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0
30
55
80
25003000
Quantity (Units a year)
Price
(Tho
usan
d Ye
n pe
r uni
t)
(a) Men’s demand
0
30
50
Quantity (Units a year)
Price
(Tho
usan
d Ye
n pe
r uni
t)
(b) Women’s demand
marginal revenue
demand
40
1000marginal revenue
demand
marginalcost
Direct Segment Discrimination, III
marg.cost
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NYNEX Telephone ServiceNew York Cityresidential -- $16/month business -- $23/monthHow is discrimination possible?
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Indirect Segment Discriminationstructure choice to earn different incremental
margins from each segmentimplementation
seller controls some variable to which segments are differentially sensitive
buyers cannot circumvent the variable
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Traveler
Segment
Unrestricted Travel ($)
Restricted Travel ($)
Maria Business 1000 200 Tom Business 900 180 Robin Vacation 500 400 Leslie Vacation 280 224
Air Travel: Benefits
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Product
Fare ($)
Sales
Total Rev. ($)
Total Cost ($)
Profit ($)
Unrestricted
900 2 1800 400 1400
Restricted 399 1 399 200 199
*MC=200
Air Travel: Indirect Segment Discrimination
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Chinese Embassy: Visa Fees
Application period
1 day 3 days 7 days
Single entry $75 $60 $25
Double entry $85 $70 $35
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Profitability Policy Information Requirement
Highest Complete price discrimination
Highest
Direct segment discrimination
Indirect segment discrimination
Lowest Uniform pricing Lowest
Pricing Policies: Ranking
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Bundlingstrategy
pure bundlingmixed bundling
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Cable Television: Benefits
“if every segment … was wild about one thing and hated the rest, they have done their job” (Economist) Segment Education
channel Music channel
Conservatives $20 $ 2
Middle of road $11 $11
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Pure or Mixed BundlingWhat is the profit-maximizing pricing policy if marginal cost per channel = 0 marginal cost per channel = $5
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Pure or Mixed BundlingGenerally, if item is costless, no loss from giving it to every
consumer --> pure bundling; if item is costly, then should avoid providing it to
low-benefit users --> use mixed bundling to screen out low-benefit users.
Mixed bundling is form of indirect segment discrimination
structured choice between bundle and separates