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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
• 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
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
• 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