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Advanced Pricing Managerial Economics Kyle Anderson
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Additional pricing strategies
Complementary product pricing Two part pricing Peak-load pricing Bundling Block pricing Implementing pricing strategies Kyle J. Anderson
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Sports pricing Elasticity of demand estimates of sporting events indicate that the own price elasticity of demand is Can this be profit-maximizing? Kyle J. Anderson
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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
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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
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Kyle J. Anderson
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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
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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
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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
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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
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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
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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
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Kyle J. Anderson May 4, 2018
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Kyle J. Anderson
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Other Pricing Strategies
Bundling Block Pricing Penetration pricing Price signaling Reference pricing Economies of Scale Brand loyalty Experience Curve Kyle J. Anderson
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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
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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
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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
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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
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