Managerial Economics Case Report 國貿二 黃德葶 經濟二 林尚賢 財政三 鄭雅文 NCCU Swimming Pool

Outline 1.Introduction of NCCU Swimming Pool 2.Pricing Policy 1)Package Deal 2)Direct Segment Discrimination 3.Externalities 4.Problems & Solutions

Introduction of NCCU Swimming Pool

NCCU Swimming Pool

Opening Hours Monday to Saturday 06:00 to 22:00 (No Entry after 21:30) Sunday06:00 to 18:00 (No Entry after 17:30) HolidaysClosed

Specifications 50 Meters, 8 Lanes Water Depth ： Depth of 130cm at Both Ends Depth of 150cm in the Middle

Pricing Policy

Economics Analysis Package Deal one time admission, monthly ticket, annual ticket…… Direct Price Discrimination discriminate among segments of buyers

Package Deal Charge buyer just a little less than her/his total benefit Leave buyer with almost zero surplus

When a student wants to go swimming ….. Though I do not swim well, I want to cool down in the pool in such a hot day. I am not busy in the first week of school, so why not go swimming Oh, how I love swimming! It can not only make me healthy but also help me lose some weight. I want to go swimming every day. one time admission monthly ticket annual ticket

Admission Fees for NCCU students per timemonthlysemiannuallyannually $ 40$ 250$ 1,000$ 1,600 XXX

Fare for Students: $ 40/time Suppose that the demand curve of student A is as the right D=MB= q 、 MC=40 when MB=MC, p*=40 、 q*=20-  Student A is willing to swim 20 times semiannually P Q (time/semi-year) MC D=MB 65 Willingness to Pay $1,050 Payment $800 Buyer Surplus $250

Benefit Ticket per Time NCCU Earning ： $40*20=$800 Ticket/Semiannually NCCU Earning ： $1, MC D=MB MC D=MB 65

Benefit Earning/semiannual($1,000)> Earning/time ($800) The difference between these two is the buyer surplus taken away by the supplier Package Deal leave buyer with almost zero surplus to increase the total profit Ticket/Semiannually NCCU Earning ： $1, MC D=MB 65 Total Profit Increases

Uniform Pricing Complete Price Discrimination Direct Segment Discrimination Which one of the policy is applied by NCCU?

Oh My God!!! What is the correct answer

Uniform Pricing Leave buyers a lot of surplus MR = MC Set the incremental margin percentage equal to the inverse of absolute value of price elasticity of demand (price ‒ MC) / price = ‒ 1/e Price Buyer Surplus MC Wrong

Complete Price Discrimination Know the entire individual demand curve Leaves no buyer with any surplus Sells to every potential buyer marginal cost marginal unit $ 0 quantity Wrong

Direct Segment Discrimination Price by segment Fixed identifiable characteristic – basis for segmentation age gender nationality location No re-sale Bingo NCCU applies direct segment discrimination poilcy

In reality, complete price discrimination cannot be realized as the sellers do not have sufficient information Segments Different incremental margin among segments -1/e Lower the IM% to segments with high demand elasticities Direct Segment Discrimination

Identity

On Campus Off Campus

NCCU Swimming Pool Regular Fares

Elasticity Students VS Faculties Students’price elasticities are relatively higher Faculties ‘ price elasticities are relatively lower Faculties have higher incremental margin percentage  set higher price

Law of Demand Faculties VS General Public FacultiesGeneral Public Encourage faculties to swim more at school’s swimming pool by setting a relative low price (lower than the market price) Control the numbers of general public by setting a relative high price, in order to keep the swimming quality at school

Comparison of the Prices of Swimming Pool Tickets in Taipei City Place Parks and Street Lights Office, Public Works Department, Taipei City Government Taipei Wen-shan Sports Center Taipei Chung- Cheng Sports Center NCCU Swimming Pool Fare $110 Faculties $60 General Public $150 Higher than $110 Lower

No Resale Among Segments Students Faculties Student ID Faculties General Public Faculty ID

Some Extensions Homogeneous segments Heterogeneous segment

Situation 1 all consumers identical within segment Suppose NCCU Swimming Pool provides service for faculties and students at the same marginal cost of $30 Students are willing to pay $50, while faculties are willing to pay $90 for swimming per time. The willingness to pay of both segments exceed NCCU Swimming Pool’s MC. Therefore, it should set the price at $50 for students and $90 for faculties NCCU Swimming Pool would earn incremental margin of $20 from each student, and $60 from each faculty NCCU Swimming Pool is able to achieve complete price discrimination through direct segment discrimination

Situation 2 uniform price within segment If buyers within each segment are heterogeneous and NCCU lacks sufficient information to identify sub-segments, then it could apply uniform pricing within segments. Let the demand be as shown in figure1 and 2 next page: 1. Suppose that the profit-maximizing price of faculties is X, the price elasticity of demand is -1.5, then NCCU Swimming Pool should set the price at X Suppose the IM=1/1.5, (X-30)/X=0.67; thus, the price of a faculty fare is $90, which the quantity demanded is 5 tickets (per week) 2. Suppose that the profit-maximizing price of students is Y, the price elasticity of demand is -8/3, then NCCU Swimming Pool should set the price at Y Suppose the IM=3/8, (Y-30)/Y=3/8 ; thus, the price of a student is $48, which the quantity demanded is 3 tickets(per week)

On Campus ： Students VS Faculties FacultyStudent Figure 1 Figure 2

The faculty demand is less elastic. Therefore, NCCU should set a relatively high incremental margin percentage on faculty fares Profit Contribution(Faculties) ： (90-30)*150=9000 Profit Contribution(Students) ： (48-30)*500=12000 Total Profit Contribution=$21000

Externalities

What kind of property is NCCU Swimming Pool Belong to?

Quasi-public Goods ExcludabilityNon-excludability RivalPrivate Goods Ex: Food, Clothing Common Resource Ex: Ocean resources Non-rivalClub Goods Ex: Swimming Pool Public Goods Ex: National Defense

Externality?

Positive Externality Swimming Increase Income Lower the medical expenditure

Income VS Health The curve labeled y(h) shows the impact of health on the level of income per capita. For higher values of h, workers are able to produce more output, so the curve is upward sloping.

Negative Externality Summer Demand for swimming increases More people CROWED One cannot enjoy swimming Negative Externality

Due to the heat, people’s preference on swimming increases Demand curve shifts to the right (D1 →D2), equilibrium price increases(P1 →P2)

Problems & Solutions

How to solve the externalities? Swimming Pool (non-rival) Crowed in summer Germs are likely reproduce in the crowed pool Affect the consumers’ right of swimming

Problem ： Same prices in both summer and winter

Solution Set different prices among different seasons

Different prices in summer and winter Fewer demand in winter Excess Supply More demand in summer Excess Demand D S D S 40

Lower the price in winter Raise the price in summer D S D S This can solve the problem of excess demand and supply, which makes the price and quantity back to the equilibrium. Thus, it solves the problems caused by the externalities, for instance, crowded swimming pool in summer Different prices in summer and winter

Other Suggestions Increase swimming pool profit!!!

How to increase the profit? Set up swimming classes Sell some swimming equipment

Set up swimming classes This can encourage those who don’t swim originally to consume, which increases the consumers in NCCU swimming pool.  more profit

Sell some swimming equipment Swimming Pool Rules ： Those who don’t wear swimming suit, goggles and swimming cap aren’t allowed. People who do not have the swimming outfit with them have lower price elasticity of demand to these swimming equipment. Therefore, swimming pool can increase its profit by selling these products. Swimming cap goggles Swimming Suit

Last but not least, …..

Improve Facilities

Enjoy Swimming Time!!