1. IMBA Managerial Economics Jack Wu
Pricing Policy
IMBA Managerial Economics
Jack Wu

2. Pricing

3. Northwest Airlines Minneapolis-New York

4. 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

5. 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

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

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

8. 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)

9. 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

10. 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

11. 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?

12. 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

13. 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

14. Complete Price Discrimination: Practice
bargaining
auctions

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

16. 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%)

17. 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)

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

19. 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?

20. 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

21. AIR TRAVEL: BENEFITS
Air Travel: Indirect Segment Discrimination

22. AIR TRAVEL: INDIRECT SEGMENT DISCRIMINATION
*MC=200

23. 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

24. PRICING POLICIES: RANKING

25. Bundling
strategy
pure bundling
mixed bundling

26. Cable Television: Benefits

27. 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

28. 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