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Pricing Chapter 7

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Pricing Chapter 7 Collect Assignment 2 Pricing to capture maximum value Linear Approximation Cost-plus Pricing Mark-up pricing Price Discrimination – PowerPoint PPT presentation

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Title: Pricing Chapter 7


1
Pricing Chapter 7
  • Collect Assignment 2
  • Pricing to capture maximum value
  • Linear Approximation
  • Cost-plus Pricing
  • Mark-up pricing
  • Price Discrimination
  • SnowCity Ski Resort - Question 7-9 - Page 186
  • A Mickey Mouse Solution for a Disneyland Dilemma
  • Block booking and bundling
  • Why are Hotel Minibars So Expensive?

2
Questions?
  • How does pricing contribute to profits?
  • Why does Disneyland charge 249 for a 5 day pass
    instead of pricing each ride?
  • They used to charge a price for each ride.
    (lets say 8 per ride)
  • Why did movie studios want to engage in
    block-booking (bundling)?
  • Why are Hotel Minibars So Expensive?
  • How can firms make money selling commodity memory
    on the internet?

3
Linear approximation
  • Requirements estimates of current price (P1),
    quantity sold (Q1), possible new price (P2),
    quantity sold with price change (Q2), and
    marginal cost
  • A linear demand curve is approximated by
  • P1a-( )Q1
  • solve for a
  • More generally, Pa-bQ

4
Purple Man Project Problem
  • At Purple Man Project Vegas, the audience is
    entertained by purple performers in Sin City.
  • The Project has experimented with two prices 50
    and 70. They carefully tried to hold all other
    factors constant during the experiment.
  • At the 50 price they averaged an audience of
    500. At the 70 price the averaged an audience
    of 450.
  • The marginal cost of filling another theater seat
    is zero.
  • What is the demand curve facing the Purple Man
    Project ?
  • What is the optimal price and quantity of tickets
    to sell for the Purple Man Project?

5
Cost-plus pricing
  • Add a markup to average total cost to yield
    target return
  • Does this ignore incremental costs and price
    sensitivity?
  • not if managers have a fundamental understanding
    of their markets
  • consistently bad pricing policies are not good
    for the firms long term fiscal health

6
Mark-up pricing
  • Optimal mark-up rule of thumb
  • where indicates estimated value
  • Requires knowledge or awareness of both marginal
    costs and elasticity

7
Problem
  • As an internet memory sales company Glenn Ellison
    has told you your own-price elasticity of demand
    for low quality 128MB PC100 memory modules is 25
    in absolute value.
  • Why is your demand so elastic for the low quality
    128MB PC100 memory modules?
  • What is your optimal markup???

8
Price discrimination
  • Different prices charged to different customers
    for essentially the same product
  • examples
  • Demand curve shows willingness to pay
    subjective valuation
  • Price discrimination tries to turn
    willingness-to-pay into profit

9
Price discrimination heterogeneous consumers
  • Necessary conditions
  • identify submarkets
  • no transfers across submarkets
  • Degrees of discrimination
  • Group pricing (market segmentation)
  • Personalized pricing

10
Optimal pricing at Snowfish different demand
elasticities
11
Snow City Ski Resort
  • Page 186 Question 7-9
  • Snow City Ski Resort
  • Out of town Qo 600 - 10P
  • P60- (1/10) Qo
  • Local Ql 600 - 20P
  • P30- (1/20 )Ql
  • Combined Qt 1200 30P
  • P40 (1/30)Qt

12
Snow City Ski Resort
  • a. Marginal revenue (40 1/30Q) equal to
    marginal cost (10).
  • Price can be found by substituting this quantity
    into the demand curve. The optimal
  • quantity is 450 tickets (100 local 350
    nonlocal), price 25, and profits 6,750.

13
Snow City Ski Resort
b. The local skiers have more elastic demand.
The point elasticity for the local-skier market
is 5 versus .714 for the out-of-town
market. Hint point elasticities are covered
in the appendix to chapter 4
14
Snow City Ski Resort
  • c. What are the optimal price and quantity for
    each market segment???
  • Snow City should charge 35 to out-of-town skiers
    and sell 250 tickets.
  • The price and quantity for local skiers are 20
    and 200 tickets.
  • Total Revenue from OT PQ352508750
  • Total Revenue from Locals202004000
  • Total cost 104504500
  • Total profits are 87504000-45008,250
  • d. What techniques might the resort use to
    implement such a pricing policy?

15
A Mickey Mouse Solution for a Disneyland Dilemma
  • Two-part tariffs
  • up-front (entry) fee for the right to purchase
  • additional fee per unit purchased equal to
    marginal cost
  • At Disneyland MC0 per ride approximately
  • best when customers have relatively homogenous
    demand for product
  • Must be able to prevent resale!!!! So it works
    for the Mouse!

Price
Quantity
0
16
EA Sports Its in the game.
  • Consider the following information about the
    demand for last years video games. There are an
    equal number of consumers in each group. This
    table shows that maximum that each type of
    consumer is willing to pay for each game

Product Group 1 consumers Group 2 consumers
Madden 2004 20 14
Tiger Woods 2004 13 18
  1. Why is EA Sports still selling old versions of
    its video games?
  2. As Vice-President for EA Sports explain your
    optimal bundling and pricing strategy to maximize
    EA Sports profits from the sale of 2002 games.
    Be sure to explain why your strategy is optimal.

17
Application Smart Pricing Case
  • What is smart pricing?
  • Any similarities to price discrimination?
  • How does it capture willingness-to-pay?
  • Infrastructure needs
  • Benefits costs

18
Add-on Pricing
  • Glenn Ellisons cool research
  • Why are Hotel Minibars So Expensive?
  • How can firms facing vigorous price competition
    mark-up prices above marginal cost to stay in
    business???
  • Even in the face of highly elastic demand for
    commodity products (computer memory) on the
    internet??

19
Looking Forward
  • Return and Review Assignment 2
  • Readings Game Theory
  • Managerial Economics Chapter 9
  • Holland Sweetener versus Monsanto, p. 245
  • Please bring lots of change to next weeks class
    for fun and games
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