PRICING POLICY IMBA Managerial Economics Jack Wu PRICING
PRICING POLICY IMBA Managerial Economics Jack Wu
PRICING
NORTHWEST AIRLINES MINNEAPOLIS-NEW YORK
EMIRATES AIRLINE, DUBAI-MUMBAI, ECONOMY CLASS, MAY 2004 Fare Restrictions Price Year KRTAE 1 None AED 2250 (US$ 613) Special Excursion QEE 4 MAE 1 Min. 7 days, max. 4 mths stay AED 1900 Basic Season Special Excursion LLE 4 MAE 1 Low season; min. 7 days, max. 4 mths stay AED 1550 Basic Season Special Excursion VLE 4 MAE 1 Low season; min. 7 days, max. 4 mths stay AED 1200
EMIRATES AIRLINE, MUMBAI-DUBAI, ECONOMY CLASS, MAY 2004 Fare Restrictions Price Economy unrestricted LRT None INR 25, 600 Economy restricted LRTIN 1 None INR 22, 700 Regular Excursion LEE 3 M 1 Min. 7 days, max. 3 mths stay INR 20, 100 Special Excursion VEE 3 MIN 1 Max. 3 mths stay. INR 17, 000 (US$ 557)
EMIRATES AIRLINE Why does Emirates charge lower fare for passengers originating from Mumbai? How is this discrimination possible?
PRICING POLICY uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling
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 q = -2 IM% = 1/2 e = -1. 5 IM% = 2/3
PRICING PRIVATE-LABEL COLA Suppose that Wal. Mart learns that demand for privatelabel cola is less elastic than the demand for Coca Cola. Should Wal. Mart set a higher price for private-label cola?
UNIFORM PRICING: SHORTCOMINGS $ buyer surplus potential buyers price marginal cost 0 quantity 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 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) (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 -- $23/month How is discrimination possible?
ASIAN WALL STREET JOURNAL Price for annual subscription, May 2006 Print: Hong Kong (HK$ 2, 700) US$ 348 Print: Singapore (S$ 525) US$ 331 Print: Tokyo (Yen 94, 500) US$ 845 Interactive: Worldwide US$ 99 u Why different prices for print edition but not interactive edition?
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
AIR TRAVEL: INDIRECT SEGMENT DISCRIMINATION *MC=200
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
BUNDLING strategy pure bundling mixed bundling
CABLE TELEVISION: BENEFITS
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
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