IMBA Managerial Economics Jack Wu Pricing Policy IMBA Managerial Economics Jack Wu

Pricing

Northwest Airlines Minneapolis-New York

Emirates Airline, Dubai-Mumbai, Economy class, May 2004 Fare Restrictions Price Year KRTAE1 None AED 2250 (US$ 613) Special Excursion QEE4MAE1 Min. 7 days, max. 4 mths stay AED 1900 Basic Season Special Excursion LLE4MAE1 Low season; min. 7 days, max. 4 mths stay AED 1550 Basic Season Special Excursion VLE4MAE1 AED 1200

Emirates Airline, Mumbai-Dubai, Economy class, May 2004 Fare Restrictions Price Economy unrestricted LRT None INR 25,600 (US$ 557) Economy restricted LRTIN1 INR 22,700 Regular Excursion LEE3M1 Min. 7 days, max. 3 mths stay INR 20,100 Special Excursion VEE3MIN1 Max. 3 mths stay. INR 17,000

Emirates Airline Why does Emirates charge lower fare for passengers originating from Mumbai? How is this discrimination possible?

Pricing Policy uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling

UNIFORM PRICING marginal cost demand marginal revenue 80 Price (Thousand Yen per unit) 55 marginal cost 30 demand marginal revenue 2500 5000 Quantity (Units a year)

Uniform Pricing: Profit Maximum MR = MC Equivalently, set the incremental margin percentage equal to the inverse of absolute value of price elasticity of demand, (price - MC) / price = -1/e

Price Elasticity e = -1.5  IM% = 2/3 always set price so that demand is elastic if demand more elastic, then lower incremental margin percentage (IM%) e = -2  IM% = 1/2 e = -1.5  IM% = 2/3

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?

Uniform Pricing: Shortcomings marginal cost price buyer surplus potential buyers $ quantity leaves buyers with a lot of surplus does not sell to every potential buyer A new picture from IP’s presentation

Complete Price Discrimination price 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

Complete Price Discrimination: Practice bargaining auctions

Direct Segment Discrimination, I price by segment implementation fixed identifiable characteristic --- basic for segmentation no re-sale

Direct Segment Discrimination, II simple case: uniform price within each segment within each segment IM% = -1/e for segment with more elastic demand, then lower incremental margin percentage (IM%)

DIRECT SEGMENT DISCRIMINATION, III (a) Men’s demand (b) Women’s demand demand 80 Price (Thousand Yen per unit) Price (Thousand Yen per unit) 55 50 marginal revenue marginal cost 40 marg. cost 30 30 demand marginal revenue 2500 3000 1000 Quantity (Units a year) Quantity (Units a year)

NYNEX Telephone Service New York City residential -- $16/month business -- $23/month How is discrimination possible?

Asian Wall Street Journal Price for annual subscription, May 2006 Print: Hong Kong (HK$ 2,700) US$ 348 Print: Singapore (S$ 525) US$ 331 Print: Tokyo (Yen 94,500) US$ 845 Interactive: Worldwide US$ 99 p.241, IP Why different prices for print edition but not interactive edition?

Indirect Segment Discrimination structure choice to earn different incremental margins from each segment implementation seller controls some variable to which segments are differentially sensitive buyers cannot circumvent the variable

AIR TRAVEL: BENEFITS Air Travel: Indirect Segment Discrimination

AIR TRAVEL: INDIRECT SEGMENT DISCRIMINATION *MC=200

Chinese Embassy: Visa Fees Application period 1 day 3 days 7 days Single entry $75 $60 $25 Double entry $85 $70 $35 Source: Chinese Embassy, Singapore, September 2000

PRICING POLICIES: RANKING

Bundling strategy pure bundling mixed bundling

Cable Television: Benefits

Pure or Mixed Bundling What is the profit-maximizing pricing policy if marginal cost per channel = 0 marginal cost per channel = $5 Generally, 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

Pure or Mixed Bundling Generally, 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