Advanced Pricing Managerial Economics Kyle Anderson Additional pricing

Advanced Pricing Managerial Economics Kyle Anderson

Additional pricing strategies • • • 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 -1/2 P (Assume MC=0 (not true!) and ignore complementary products). • Monopoly (or MC) pricing: • P=16 – 2 Q • MR = 16 – 4 Q, MC = 0 • Q = 4, P = $8 • Profit per customer $32 Kyle J. Anderson

Monopoly pricing Price P = 16 – 2 Q MR = 16 – 4 Q Q=4, P=$8 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 05 December 2020

Kyle J. Anderson

Other Pricing Strategies • • • 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