Transcript Pricing Policy

Managerial Economics
Jack Wu
Pricing Policy
 uniform pricing
 complete price discrimination
 direct segment discrimination
 indirect segment discrimination
 bundling
Northwest Airlines
Minneapolis-New York
Business class
$ 1711
Unrestricted
economy
Advance purchase,
with penalties
Advance purchase,
for senior
$ 1267
$ 765
$ 692
Asian Wall Street Journal
Price for annual subscription
Print: Hong Kong
$294
Print: Singapore
$173
Print: Tokyo
$871
Interactive: Worldwide
$59
Price (Thousand Yen per unit)
Uniform Pricing
80
55
marginal cost
30
marginal revenue
0
2500
Quantity (Units a year)
5000
demand
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
 always set price so that demand is elastic
 if demand more elastic, then lower incremental
margin percentage (IM%) e =

e = -1.5  IM% = 2/3
-2  IM% = 1/2
Pricing Private-Label Cola
Suppose that WalMart learns that demand for privatelabel cola is less elastic than the demand for Coca Cola.
Should WalMart set a higher price for private-label
cola?
Uniform
Pricing:
Shortcomings
 leaves buyers with a lot
of surplus
 does not sell to every
potential buyer
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
demand
80
55
30
(b) Women’s demand
marginal
revenue
marg.
cost
Price (Thousand Yen per unit)
Price (Thousand Yen per unit)
(a) Men’s demand
50
marginal
cost
40
30
demand
marginal revenue
0
2500 3000
Quantity (Units a year)
0
1000
Quantity (Units a year)
NYNEX Telephone Service
New York City
 residential -- $16/month
 business -- $23/month
How is discrimination possible?
Indirect Segment Discrimination
 structure choice to earn different incremental margins
from each segment
 implementation
 seller controls some variable to which segments are
differentially sensitive
 buyers cannot circumvent the variable
Air Travel: Benefits
Unrestricted Restricted
Traveler Segment Travel ($)
Travel ($)
Maria
Business
1000
200
Tom
Business
900
180
Robin
Vacation
500
400
Leslie
Vacation
280
224
Air Travel: Indirect Segment
Discrimination
Product
Unrestrict
ed
Restricted
*MC=200
Fare
($) Sales
900
2
399
1
Total
Rev.
($)
1800
Total
Cost
($)
400
Profit
($)
1400
399
200
199
Chinese Embassy: Visa Fees
Application period
1 day
3 days
7 days
Single entry
$75
$60
$25
Double entry
$85
$70
$35
Pricing Policies: Ranking
Profitability
Policy
Highest
Complete price
discrimination
Direct segment
discrimination
Indirect segment
discrimination
Uniform pricing
Lowest
Information
Requirement
Highest
Lowest
Bundling
 strategy
 pure bundling
 mixed bundling
Cable Television: Benefits
“if every segment … was wild about one
thing and hated the rest, they have done
their job” (Economist)
Segment
Conservatives
Education
channel
$20
Music
channel
$2
Middle of road
$11
$11
Pure or Mixed Bundling
What is the profit-maximizing pricing policy if
 marginal cost per channel = 0
 marginal cost per channel = $5
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 lowbenefit users --> use mixed bundling to screen out lowbenefit users.
 Mixed bundling is form of indirect segment discrimination
 structured choice between bundle and separates