#### Transcript Complementary Pricing

```Advanced Pricing
Managerial Economics
Kyle Anderson
Additional pricing strategies
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Complementary product pricing
Two part pricing
Peak-load pricing
Bundling
Block pricing
• Implementing pricing strategies
Kyle J. Anderson
Sports pricing
• Elasticity of demand estimates of sporting
events indicate that the own price elasticity of
demand is -0.9. Can this be profit-maximizing?
Kyle J. Anderson
Complementary Pricing
P
100
TR
Unit elastic
Elastic
Unit elastic
1200
60
Inelastic
40
800
20
0
10
20
30
40
50 Q
0
10
20
30
40
MR MR
Kyle J. Anderson
Elastic
Inelastic
50 Q
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
Kyle J. Anderson
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
Monopoly pricing
P = 16 – 2Q
MR = 16 – 4Q
Q=4, P=\$8
Price
16
Monopoly Profits = \$32
D
Kyle J. Anderson
8
MC
Quantity
Two part pricing
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
Kyle J. Anderson
8
MC
Quantity
Both Monopoly and Two part pricing
Price
16
1.
2.
3.
4.
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.
Fixed Fee = \$32 - \$48
No Deadweight Loss
D
Kyle J. Anderson
8
MC
Quantity
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
Peak-Load pricing
• When demand during
peak times is higher
than the capacity of the
firm, the firm should
engage in peak-load
pricing.
MC
Price
PH
DH
PL
MRH
• Charge a higher price (PH)
during peak times (DH).
• Charge a lower price (PL)
during off-peak times (DL).
MRL
QL
Kyle J. Anderson
DL
QH
Kyle J. Anderson
April 5, 2017
Kyle J. Anderson
Other Pricing Strategies
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Bundling
Block Pricing
Penetration pricing
Price signaling
Reference pricing
Kyle J. Anderson
• Economies of Scale
• Brand loyalty
• Experience Curve
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
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
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
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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