Description
The pro t maximizing price is the maximum price per unit that
Output is set at the point where marginal revenue equals marginal
There is a trade o⁄ between selling many units at a low price and
selling only a few units at a high price.
cost.
consumers will pay for this level of output.
Pricing Strategies
Sherif Khalifa, Ph.D.
Department of Economics
California State University, Fullerton
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 1 / 30
Basic Pricing Strategy
There is a trade o¤ between selling many units at a low price and
selling only a few units at a high price.
Output is set at the point where marginal revenue equals marginal
cost.
The pro…t maximizing price is the maximum price per unit that
consumers will pay for this level of output.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 2 / 30
Basic Pricing Strategy
Q
$
MC
D
MR
Q
1
P
1
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 3 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
MR = P
1 +E
F
E
F
P
1 +E
F
E
F
= MC
P =
E
F
1 +E
F
MC
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 4 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
If E
F
= 4.1, then
Markup =
E
F
1 +E
F
=
4.1
1 4.1
= 1.32
P = [1.32] MC
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 5 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
If a convenient store buys cola from a supplier for $1.25 per liter.
If the elasticity of demand for cola = 4, what is the pro…t maximizing
price?
P =
(4)
1 + (4)
5
4
=
5
3
= $1.67
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 6 / 30
Basic Pricing Strategy
Cournot Oligopoly
N: number of …rms.
E
M
: market elasticity of demand.
E
F
: …rm elasticity of demand.
P =
NE
M
1 +NE
M
MC
E
F
= NE
M
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 7 / 30
Basic Pricing Strategy
Cournot Oligopoly
N = 3, E
M
= 2, MC = 50
P =
(3) (2)
1 + (3) (2)
(50) = 60
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 8 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
Price discrimination is the practice of charging di¤erent prices to
consumers for the same good or service.
Firms can earn higher pro…ts by charging di¤erent prices for the same
product or service.
There are di¤erent types of price discrimination, …rst degree, second
degree, and thrird degree.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 9 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
A …rst degree price discrimination is to charge each consumer the
maximum price he would be willing to pay for each unit of the good
purchased.
A …rm extracts all surplus from consumers and thus earns the highest
possible pro…ts.
Is di¢cult to implement beacuse it requires the …rm to know the
maximum price eaxch consumer is willing and able to pay .
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 10 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
A second degree price discrimination is the practice of posting a discrete
schedule of declining prices for di¤erent ranges of quantities.
De…nition
A third degree price discrimination is to charge di¤erent groups of
consumers di¤erent prices for the same product.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 11 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
Q
P
Q
P
D
MC
5
4
D
MC
8
2
5
4
10 10
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 12 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
MR
1
= P
1
1 +E
1
E
1
= MC
MR
2
= P
2
1 +E
2
E
2
= MC
MR
1
= P
1
1 +E
1
E
1
= P
2
1 +E
2
E
2
= MR
2
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 13 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
If E
1
= 4, E
2
= 2, MC = 6
P
1
1 4
4
= 6
P
1
= 8
P
2
1 2
2
= 6
P
2
= 12
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 14 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
De…nition
A pricing strategy in which consumers are charged a …xed fee for the right
to purchase a product, plus a per-unit charge for each unit purchased.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 15 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Q = 10 P
C (Q) = 2Q
Q
$
MC
D
MR
4
6
Consumer surplus
Profits
10
2
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 16 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Fixed fee=$32 and a per unit price=$2.
Q
P
MC=AC
D
10
2
8
10
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 17 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Q = 20 P
MC = 1
Q = 20 1 = 19
Consumer surplus =
1
2
[(20 1) (19)] = 180.5
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 18 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
De…nition
A pricing strategy in which identical products are packaged together in
order to enhance pro…ts by forcing customers to make an all or none
decision to purchase.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 19 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
Q = 10 P
C (Q) = 2Q
Q
P
MC=AC
D
10
2
8
10
Charge for a block of 8 units
Profits
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 20 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
P = 0.2 0.04Q
MC = 0
What price to charge for a package of 5 pieces?
Q = 5 !P = 0
Q = 0 !P = 0.2
Consumer surplus =
1
2
[(0.2 0) 5] = 0.5 = P
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 21 / 30
Strategies that Yield Greater Pro…ts
Commodity Bundling
De…nition
The practice of bundling several di¤erent products together and selling
them at a single bundle price.
Consumer Computer Monitor
1 $2000 $200
2 $1500 $300
Bundle price=$1800.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 22 / 30
Strategies that Yield Greater Pro…ts
Commodity Bundling
Consumer AC Power Brakes
1 $1000 $500
2 $800 $300
3 $100 $800
Bundle price=$1100.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 23 / 30
Strategies that Yield Greater Pro…ts
Peak-Load Pricing
De…nition
A pricing strategy in which higher prices are charged during peak hours
than during o¤-peak hours.
P
Q
MC
D
High
MR
High
D
Low
MR
Low
P
L
Q
L Q
H
P
H
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 24 / 30
Strategies that Yield Greater Pro…ts
Cross Subsidies
De…nition
A pricing strategy in which pro…ts gained from the sale of one product are
used to subsidize sales of a related product.
Engage in cross subsidization as complementarities in demand and costs
make doing so pro…table.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 25 / 30
Strategies that Yield Greater Pro…ts
Transfer Pricing
De…nition
A pricing strategy in which a …rm optimally sets the internal price at which
an upstream division sells an input to a downstream division.
When both divisions mark up prices in excess of marginal cost, double
marginalization occurs.
MR
d
= MC
d
+MC
u
Setting the transfer price at the upstream’s division’s marginal cost, double
marginalization is avoided.
P
T
= MC
u
MR
d
= MC
d
+P
T
MR
d
MC
d
= MC
u
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 26 / 30
Strategies that Yield Greater Pro…ts
Transfer Pricing
P = 15000 Q
C
u
= 2.5Q
2
e
, C
d
= 1000Q
MR
d
= 15000 2Q
MC
d
= 1000, MC
u
= 5Q
e
15000 2Q
e
= 1000 + 5Q
e
!Q = 2000 !P
T
= 10, 000
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 27 / 30
Strategies that Yield Greater Pro…ts
Price Matching
De…nition
A strategy in which a …rm advertises a price and a promise to match any
lower price o¤ered by a competitor.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 28 / 30
Strategies that Yield Greater Pro…ts
Induced Brand Loyalty
De…nition
Brand loyal consumers will continue to buy a …rm’s product even if
another …rm o¤ers a slightly better price.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 29 / 30
Strategies that Yield Greater Pro…ts
Randomized Pricing
De…nition
A pricing strategy in which a …rm intentionally varies its price in an
attempt to hide price information from consumers and rivals.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 30 / 30
doc_872922395.pdf
The pro t maximizing price is the maximum price per unit that
Output is set at the point where marginal revenue equals marginal
There is a trade o⁄ between selling many units at a low price and
selling only a few units at a high price.
cost.
consumers will pay for this level of output.
Pricing Strategies
Sherif Khalifa, Ph.D.
Department of Economics
California State University, Fullerton
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 1 / 30
Basic Pricing Strategy
There is a trade o¤ between selling many units at a low price and
selling only a few units at a high price.
Output is set at the point where marginal revenue equals marginal
cost.
The pro…t maximizing price is the maximum price per unit that
consumers will pay for this level of output.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 2 / 30
Basic Pricing Strategy
Q
$
MC
D
MR
Q
1
P
1
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 3 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
MR = P
1 +E
F
E
F
P
1 +E
F
E
F
= MC
P =
E
F
1 +E
F
MC
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 4 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
If E
F
= 4.1, then
Markup =
E
F
1 +E
F
=
4.1
1 4.1
= 1.32
P = [1.32] MC
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 5 / 30
Basic Pricing Strategy
Monopoly and Monopolistic Competition
If a convenient store buys cola from a supplier for $1.25 per liter.
If the elasticity of demand for cola = 4, what is the pro…t maximizing
price?
P =
(4)
1 + (4)
5
4
=
5
3
= $1.67
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 6 / 30
Basic Pricing Strategy
Cournot Oligopoly
N: number of …rms.
E
M
: market elasticity of demand.
E
F
: …rm elasticity of demand.
P =
NE
M
1 +NE
M
MC
E
F
= NE
M
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 7 / 30
Basic Pricing Strategy
Cournot Oligopoly
N = 3, E
M
= 2, MC = 50
P =
(3) (2)
1 + (3) (2)
(50) = 60
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 8 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
Price discrimination is the practice of charging di¤erent prices to
consumers for the same good or service.
Firms can earn higher pro…ts by charging di¤erent prices for the same
product or service.
There are di¤erent types of price discrimination, …rst degree, second
degree, and thrird degree.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 9 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
A …rst degree price discrimination is to charge each consumer the
maximum price he would be willing to pay for each unit of the good
purchased.
A …rm extracts all surplus from consumers and thus earns the highest
possible pro…ts.
Is di¢cult to implement beacuse it requires the …rm to know the
maximum price eaxch consumer is willing and able to pay .
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 10 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
De…nition
A second degree price discrimination is the practice of posting a discrete
schedule of declining prices for di¤erent ranges of quantities.
De…nition
A third degree price discrimination is to charge di¤erent groups of
consumers di¤erent prices for the same product.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 11 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
Q
P
Q
P
D
MC
5
4
D
MC
8
2
5
4
10 10
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 12 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
MR
1
= P
1
1 +E
1
E
1
= MC
MR
2
= P
2
1 +E
2
E
2
= MC
MR
1
= P
1
1 +E
1
E
1
= P
2
1 +E
2
E
2
= MR
2
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 13 / 30
Strategies that Yield Greater Pro…ts
Price Discrimination
If E
1
= 4, E
2
= 2, MC = 6
P
1
1 4
4
= 6
P
1
= 8
P
2
1 2
2
= 6
P
2
= 12
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 14 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
De…nition
A pricing strategy in which consumers are charged a …xed fee for the right
to purchase a product, plus a per-unit charge for each unit purchased.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 15 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Q = 10 P
C (Q) = 2Q
Q
$
MC
D
MR
4
6
Consumer surplus
Profits
10
2
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 16 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Fixed fee=$32 and a per unit price=$2.
Q
P
MC=AC
D
10
2
8
10
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 17 / 30
Strategies that Yield Greater Pro…ts
Two-Part Pricing
Q = 20 P
MC = 1
Q = 20 1 = 19
Consumer surplus =
1
2
[(20 1) (19)] = 180.5
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 18 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
De…nition
A pricing strategy in which identical products are packaged together in
order to enhance pro…ts by forcing customers to make an all or none
decision to purchase.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 19 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
Q = 10 P
C (Q) = 2Q
Q
P
MC=AC
D
10
2
8
10
Charge for a block of 8 units
Profits
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 20 / 30
Strategies that Yield Greater Pro…ts
Block Pricing
P = 0.2 0.04Q
MC = 0
What price to charge for a package of 5 pieces?
Q = 5 !P = 0
Q = 0 !P = 0.2
Consumer surplus =
1
2
[(0.2 0) 5] = 0.5 = P
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 21 / 30
Strategies that Yield Greater Pro…ts
Commodity Bundling
De…nition
The practice of bundling several di¤erent products together and selling
them at a single bundle price.
Consumer Computer Monitor
1 $2000 $200
2 $1500 $300
Bundle price=$1800.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 22 / 30
Strategies that Yield Greater Pro…ts
Commodity Bundling
Consumer AC Power Brakes
1 $1000 $500
2 $800 $300
3 $100 $800
Bundle price=$1100.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 23 / 30
Strategies that Yield Greater Pro…ts
Peak-Load Pricing
De…nition
A pricing strategy in which higher prices are charged during peak hours
than during o¤-peak hours.
P
Q
MC
D
High
MR
High
D
Low
MR
Low
P
L
Q
L Q
H
P
H
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 24 / 30
Strategies that Yield Greater Pro…ts
Cross Subsidies
De…nition
A pricing strategy in which pro…ts gained from the sale of one product are
used to subsidize sales of a related product.
Engage in cross subsidization as complementarities in demand and costs
make doing so pro…table.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 25 / 30
Strategies that Yield Greater Pro…ts
Transfer Pricing
De…nition
A pricing strategy in which a …rm optimally sets the internal price at which
an upstream division sells an input to a downstream division.
When both divisions mark up prices in excess of marginal cost, double
marginalization occurs.
MR
d
= MC
d
+MC
u
Setting the transfer price at the upstream’s division’s marginal cost, double
marginalization is avoided.
P
T
= MC
u
MR
d
= MC
d
+P
T
MR
d
MC
d
= MC
u
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 26 / 30
Strategies that Yield Greater Pro…ts
Transfer Pricing
P = 15000 Q
C
u
= 2.5Q
2
e
, C
d
= 1000Q
MR
d
= 15000 2Q
MC
d
= 1000, MC
u
= 5Q
e
15000 2Q
e
= 1000 + 5Q
e
!Q = 2000 !P
T
= 10, 000
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 27 / 30
Strategies that Yield Greater Pro…ts
Price Matching
De…nition
A strategy in which a …rm advertises a price and a promise to match any
lower price o¤ered by a competitor.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 28 / 30
Strategies that Yield Greater Pro…ts
Induced Brand Loyalty
De…nition
Brand loyal consumers will continue to buy a …rm’s product even if
another …rm o¤ers a slightly better price.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 29 / 30
Strategies that Yield Greater Pro…ts
Randomized Pricing
De…nition
A pricing strategy in which a …rm intentionally varies its price in an
attempt to hide price information from consumers and rivals.
Sherif Khalifa, Ph.D. Department of Economics California State University, Fullerton () 30 / 30
doc_872922395.pdf