Advanced Pricing Managerial Economics Kyle Anderson

Additional pricing strategies Complementary product pricing Two part pricing Peak-load pricing Bundling Block pricing Implementing pricing strategies Kyle J. Anderson

Sports pricing Elasticity of demand estimates of sporting events indicate that the own price elasticity of demand is -0.9. Can this be profit-maximizing? Kyle J. Anderson

Complementary Pricing TR Unit elastic 100 Elastic Unit elastic 60 1200 Inelastic 40 20 800 10 20 30 40 50 Q 10 20 30 40 50 Q MR MR Elastic Inelastic Kyle J. Anderson

Complementary Pricing If you sell multiple products that are complements, it is profit maximizing to sell one or more products below the otherwise profit maximizing price. Foregone profits on one lead to higher sales (and profits) on other product(s). Sometimes called a loss leader. Discounted product should be more “visible.” A few legal concerns. Kyle J. Anderson

Kyle J. Anderson

Movie Pricing problem Frequent movie-goers have a demand curve of Q=8-1/2P (Assume MC=0 (not true!) and ignore complementary products). Monopoly (or MC) pricing: P=16 – 2Q MR = 16 – 4Q, MC = 0 Q = 4, P = $8 Profit per customer $32 Kyle J. Anderson

Monopoly pricing 16 D MC 8 Price P = 16 – 2Q MR = 16 – 4Q Q=4, P=$8 Monopoly Profits = $32 D MC 8 Quantity Kyle J. Anderson

Two part pricing 16 D MC 8 Price 1. Set price at marginal cost. 2. Compute consumer surplus. 3. Charge a fixed-fee equal to consumer surplus. 16 Fixed Fee = Profits* = $64 D MC 8 Quantity Kyle J. Anderson

Both Monopoly and Two part pricing Price 1. Set price at marginal cost. Compute consumer surplus. Calculate CS under monopoly ($16) Charge a fixed-fee that leaves enough CS for customers to choose that option. 16 Fixed Fee = $32 - $48 No Deadweight Loss D MC 8 Quantity Kyle J. Anderson

Two Part Pricing Potential gains for both consumers and sellers. Works when consumers have similar demand curves. Subscription services may work: (Netflix, utilities) Kyle J. Anderson

Peak-Load pricing MC When demand during peak times is higher than the capacity of the firm, the firm should engage in peak-load pricing. Charge a higher price (PH) during peak times (DH). Charge a lower price (PL) during off-peak times (DL). Price DH MRH PH MRL DL PL QL QH Kyle J. Anderson

Kyle J. Anderson May 4, 2018

Kyle J. Anderson

Other Pricing Strategies Bundling Block Pricing Penetration pricing Price signaling Reference pricing Economies of Scale Brand loyalty Experience Curve Kyle J. Anderson

Fairness in pricing - Is this fair? A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price $20. Please rate this action as: completely fair, acceptable, unfair, or very unfair. 82% of respondents view this as unfair or very unfair. Kyle J. Anderson

What determines a fair price? Economic/Business point of view Expectations Social norms Price increases should be due to cost changes, not changes in demand. Loyal customers should get a discount. Buying in volume should lead to lower per-unit prices. Some items should be free Kyle J. Anderson

Strategies for price discrimination & price changes Make it invisible. (Carefully) Make it conform to social norms (i.e. discounts for certain groups.) Frame differential pricing as discounts rather than a price premium. Justify price changes by cost changes. Use inventory strategies to charge differential pricing. (But don’t bait and switch) Kyle J. Anderson

Kyle’s Managerial Economics Books: The Art of Strategy (Game Theory Bible) Why Popcorn Cost So Much at the Movies (pricing) The Informant (Price fixing, Cournot) The Winners’ Curse (General economics) Predictably Irrational (Behavioral economics) Switch (Personal and Organizational Change) Podcasts: Planet Money Kyle J. Anderson