Transcript How? When? What? The economics of competitive advantage Why?

100
80
Where?
How? When?
What?
Why?
2016-17
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Product valuation and pricing
decisions by buyers/users
The economics of competitive advantage
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Topic 3: Product valuation by buyers/users
Consumer surplus and
pricing decisions
Topic Contents
3.1
Managerial
perspective
3.4
3.2
Product valuation
and willingness
to pay
Business and
economic
forecasting
3.5
Questions for
review and selfassessment
3.6
Further reading
3.3
Valuation of
intangibles
2.1 Managerial perspective
Identify
Develop
Provide
Marketplace Needs
Market Offer
Customer Satisfaction
MARKETING
Achieve
Organisational Goals
Coordinate
Production
Source
Inputs
3.3 Product valuation and
willingness to pay
• Ordinary demand schedule shows the (average)
market price the buyer is prepared to pay for an
indicated quantity of a good or service
• Demand price is the highest price a consumer is
willing to pay for an indicated quantity of a good
if faced with a take-it-or-leave-it offer
• All-or-nothing demand schedule shows the
demand price
• Willingness to pay is a buyer’s maximum offer
price (say a price the buyer is willing to offer at
an auction)
• Consumer surplus is the difference between
demand price and market price – an area under
the ordinary demand schedule above market
price
3.3 Product valuation and
willingness to pay
Benefit vs price
Price ($)
15
12
9
Consumer surplus (shaded)
6
Market price
3
1
0 2 4
All-or-nothing demand
6
8 10 12 14 16 Quantity
3.3 Product valuation and
willingness to pay
• Market demand curve is a graph showing total
(market) quantities that (all) buyers are willing
to buy at each indicated price
• It is a horizontal summation of individual
demand curves
P
a
b
a+b
Q
• Market demand may fragment into demands
facing individual sellers
3.3 Product valuation and
willingness to pay
• Government price hike: increasing prescription
charges from $4 to $7 a prescription. Thus, an average
buyer makes fewer purchases (down from 12 a year to 6)
and pays extra $3 per prescription. Initial expenditure $48
= 12 x $4, post-hike $42 (6x$7), and the CS loss of
0.5x$3x6=$9 (shaded area)
P
7
4
6
•
12
Net loss $9 + (6x$4) – ($48-$42) = $27
Q
3.3 Product valuation and
willingness to pay
• Two-part tariff – a pricing scheme which consist
of, say, an upfront fixed payment and a charge
based on usage (e.g., golf club membership of
$1000 per year plus a charge of $20 for each
use of the golf course)
• The seller may try to soak up consumer surplus
by offering a two-part tariff product package
Example, a phone company tariff
• Under standard pricing of 50 cents per minute, the phone
user buys 30 calls (minutes) a month at $15. His/her
consumer surplus is 0.5 x 30 x (200-50) = $22.50. Total
consumer benefit $37.50 (see below)
3.3 Product valuation and
willingness to pay
Price (cents/minute)
200
150
100
50
0
10
20
30
minutes/
month
The telco may offer a package of 30 minutes of calls/month
for say $30 on a take-it-or-leave basis; or a two-part tariff of
$15 per month plus 50 cents a minute (cost to the user $15
plus $15). Both capture most of the consumer surplus
3.3 Valuation of intangibles
• Stated Preference (SP) methods have been
developed to value non-transacted goods (e.g.,
new product to be launched or environmental
amenities)
• The SP technique most widely used is the
Contingent Valuation Method (CVM), i.e., eliciting
willingness to pay from the public for some well
specified good, service, or activity (e.g.,
converting a wasteland into a free-access nature
park)
• How to value a national park with free access for
all? Or a bike path?
3.4 Business and economic
forecasting
• Forecasting involves making estimates now of
future variables
– Qualitative forecasting
– Quantitative forecasting
• Qualitative forecasting
– the Delphi method
– market surveys/opinion polls
– life cycle analogies
Problems with bias (is the sample
representative?), validity (are people telling
the truth?), and reliability (is the sample large
enough to give reliable results?)
3.4 Business and economic
forecasting
• Quantitative forecasting
– Auto-regressive/time-series methods
(extrapolating past experiences, e.g.,
exponential smoothing)
– Structural modelling (cause-and-effect, e.g.,
regression analysis)
– Barometric methods (leading, coincidental,
and lagging indicators of change)
3.5 Questions for review
and self-assessment
Basic concepts and applications
(1) What is the relationship between the demand schedule
and the demand curve?
(2) Why does the 'ordinary' demand curve slope downwards?
(3) Give an example of event that would shift this demand
curve
(4) Define:
• (own-) price elasticity of demand
• income elasticity of demand
• cross-elasticity of demand
3.5 Questions for review
and self-assessment
(5) If the demand is inelastic, how will an increase in (own)
price of a good affect the consumer spending on that good?
Why?
(6) Can you give an example of an upward-sloping demand
curve?
(7) What happens to the demands for lubricating oil and for
car engines if the price of petrol increases:
(a) for three weeks and declines to its previous level?
(b) and decreases at regular intervals in a cyclical fashion?
(c) and remains at the higher level for at least two years?
(8) Explain the relationship between the revenue that a
petrol station derives from petrol sales and the (own) price
elasticity of demand for (regular) unleaded petrol?
3.5 Questions for review
and self-assessment
(9) Explain the difference between certain and expected
demands.
(10) Why some people buy home content insurance while
others, in apparently similar circumstances, elect not to?
(11) Sketch a straight-line demand curve that is inelastic
over the likely price range for the product.
(Although you do not need to draw the figure to scale, be
sure to label your axes and indicate why the figure
illustrates the situation.)
3.6 Further reading
Baye (2010): chs. 3-4