Transcript Unit 8.
Unit 8. Economics of Other Business Management Strategies (Ch. 9, 10, 11, 13) LR Competitive Market Equilibrium SR profits lead to entry S Mkt P Df shifts down P = MR = MC (socially efficient) P = Min ATC 0 excess profits efficient plant size Managing a Price Taking Firm Understand market forces to anticipate changes in input and output prices Use cash market contracts, futures markets, etc. to establish favorable prices at times other than delivery Costs must be minimized Look into specialty products, niche markets, forming cooperatives,etc. Managing a Price Setting Firm Create barriers to entry Advertise Proliferate new products (introduce first) Maintain excess production capacity Seek out sustainable niches Guard trade secrets/plans Obtain and/or extend patents Entry limit pricing Managing a Price Setting Firm (contd) Pursue pricing strategies that: Decrease competitive P rivalry Match P Random P Non price competition Attempt to capture more consumer surplus Price discrimination 2-part block (package) pricing Bundling Entry Limit Pricing Third Degree Price Discrimination The practice of charging different groups of consumers different prices for the same product Examples include student discounts, senior citizen’s discounts, regional and international pricing Profit-Maximizing Prices P where MR = MC E 0 1 P MC E0 E0 P MC E 0 1 E0 E 1 ' markup' factor applied to MC 0 Profit-Maximizing ‘Markup’ Factors E0 E0 E 1 0 -1.05 21 -1.1 11 -1.2 6 -1.4 3.5 -1.6 2.67 -1.8 2.25 -2.0 2 -2.5 1.67 -3.0 1.5 -4.0 1.33 Assume: Q = QUS = QJ = QT = total demand for Kodak film US demand = 15 – PUS PUS = 15 – QUS MRUS = 15 – 2QUS Japan demand = 18 – 2PJ PJ = 9 - .5QJ MRJ = 9 – QJ QUS + QJ = 33 – 3P (for P 9) P = 11 – 1/3Q MR = 11 – 2/3Q MC = ATC = 3 in both the US & Japan Profit Max Example (with P Discrimination) max max US + max J QUS to max US MRUS = MC 15 – 2QUS = 3 QUS* = 6 PUS* = 9 max US = TRUS – TCUS = (9)(6) – (3)(6) = 54 – 18 = 36 Profit Max Example (with P Discrimination) QJ to max J MRJ = MC 9 – QJ = 3 QJ* = 6 PJ* = 6 max J = TRJ – TCJ = (6)(6) – (3)(6) = 36 – 18 = 18 max = max US + max J = 36 + 18 = 54 P Discrimination Differential Markup Pricing E0 in US at PUS = 9 Q P 9 ( 1) 150 . P Q 6 E0 150 . 15 . 3 markup E0 1 150 . 1 .5 E0 in J at PJ = 6 Q P 6 ( 2) 2 P Q 6 E0 2 2 markup E 0 1 2 1 Max if PU = PJ MRT = MC 11 – 2/3Qr = 3 2/3QT = 8 QT = 12 P = 11 – 1/3(QT) = 11 – 1/3(12) =7 = (P-ATC)(QT) = (7-3)(12) = 48 NOTE: QU = 15 - PU = 15 – 7 = 8 U =(4)(8) = 32 QJ = 18 – 2PJ = 18 – 2(7) = 18 – 14 =4 J = (4)(4) = 16 Peak-Load Pricing 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) Extracting Consumer Surplus: 1. 2. Block Pricing: For items sold in a package (block), add units up to point where consumer willingness to pay = MC of adding last unit. Charge P = consumer surplus value at that point. Two-part Pricing: For items sold where the seller can limit buyer access to the product, charge P = MC and also charge a ‘fee’ = to remaining consumer surplus. An Algebraic Example Typical consumer’s demand is P = 10 – 2Q C(Q) = 2Q Optimal number of units in a package? Optimal package price? Results with Standard MR = MC Profit Max P = 10 – 2Q MR = 10 – 4Q TC = 2Q MC = 2 Max MR = MC 10 – 4Q = 2 Q = 2, P = 6 TR – TC = (6)(2) – (2)(2) = 12-4 = 8 Optimal Quantity to Package: 4 Units Optimal Price for the Package: $24 Costs and Profits with Block Pricing Costs and Profits with Two-Part Pricing Price Charge fee = CS 10 8 ½ (4) (10-2) = $16 6 Costs = $8 4 2 D 1 2 3 4 5 Set P = MC = $2 Quantity Commodity Bundling The practice of bundling two or more products together and charging one price for the bundle. Examples Vacation packages Computers and software Film and developing An Example that Illustrates Kodak’s Moment Total market size is 4 million customers Four types of consumers 25% will use only Kodak film 25% will use only Kodak developing 25% will use only Kodak film and use only Kodak developing 25% have no preference Zero costs (for simplicity) Maximum price each type of consumer will pay is as follows: Reservation Prices for Kodak Film and Developing by Type of Consumer Type Film Developing F $8 $3 FD $8 $4 D $4 $6 N $3 $2 Demand for Kodak Film Revenue-Maximizing Film P? P Buyers TR 8 F, FD 8 x 2 = 16 4 F, FD, D 4 x 3 = 12 3 F, FD, D, N 3 x 4 = 12 Demand for Kodak Developing Revenue-Maximizing Developing P? P Buyers TR 6 D 6x1=6 4 D, FD 4x2=8 3 D, FD, F 3x3=9 2 D, FD, F, N 2x4=8 Maximum TR Pricing Items Separately? = Max Film TR + Max Developing TR 16 + 9 = 25 Pricing a “Bundle” of Film and Developing Demand for Film & Developing ‘Bundle’ Revenue-Maximizing ‘Bundle’ P? P Buyers TR 12 FD 12 x 1 = 12 11 FD, F 11 x 2 = 22 10 FD, F, D 10 x 3 = 30 5 FD, F, D, N 5 x 4 = 20 Note: previous Max TR pricing items separately = 25. Cross-Subsidies Prices charged for one product are subsidized by the sale of another product. May be profitable when there are significant demand complementarities effects. Examples Browser and server software Drinks and meals at restaurants Principal-Agent Problem Problem agent has incentive to pursue their own goals which hinders principal’s ability to achieve their goals. Principal = individual who employs or supervises others (agents) • stockholders • management • business owner • defendant • team owner Agent = individual employed to assist a principal • management • employees • sub contractor • lawyer • team player Principal-Agent Solutions Supervision of Agent Time clock Spot check Internal Incentives Profit sharing (e.g. bonus) Revenue sharing (e.g. tips, commissions) Piece rate pay External Incentives Reputation concerns Takeover threat