Chapter 14 - Advanced pricing techniques. In this chapter we have looked at a lot of special situations for which pricing decisions are more complicated than for the simple firm that we studied in the first four parts of this text. We showed you why uniform pricing does not maximize the total revenue a pricesetting firm can collect from consumers.
Managerial Economics ninth edition Thomas Maurice Chapter 14 Advanced Pricing Techniques McGrawHill/Irwin McGrawưHill/Irwin ManagerialEconomics,9e ManagerialEconomics,9e Copyrightâ2008bytheMcGrawưHillCompanies,Inc.Allrightsreserved ManagerialEconomics Advanced Pricing Techniques Price discrimination • Multiple products • Cost-plus pricing 142 Managerial Economics Capturing Consumer Surplus • Uniform pricing • Charging the same price for every unit of the product • Price discrimination • More profitable alternative to uniform pricing • Market conditions must allow this practice to be profitably executed • Technique of charging different prices for the same product • Used to capture consumer surplus (turning consumer surplus into profit) 143 Managerial Economics The Trouble with Uniform Pricing (Figure 14.1) 144 Managerial Economics Price Discrimination • Exists when the price-to-marginal cost ratio differs between two products: PA MC A 145 PB MCB Managerial Economics Price Discrimination Three conditions necessary to practice price discrimination profitably: 1) 2) 3) 146 Firm must possess some degree of market power A costeffective means of preventing resale between lower and higherprice buyers (consumer arbitrage) must be implemented Price elasticities must differ between individual buyers or groups of buyers Managerial Economics First-Degree (Perfect) Price Discrimination • Every unit is sold for the maximum price each consumer is willing to pay • Allows the firm to capture entire consumer surplus • Difficulties • Requires precise knowledge about every buyer’s demand for the good • Seller must negotiate a different price for every unit sold to every buyer 147 Managerial Economics First-Degree (Perfect) Price Discrimination (Figure 14.2) 148 Managerial Economics Second-Degree Price Discrimination • Lower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buy • When the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumed 149 Managerial Economics Second-Degree Price Discrimination • Two-part pricing • Charges buyers a fixed access charge (A) to purchase as many units as they wish for a constant fee (f) per unit • Total expenditure (TE) for q units is: TE = A + fq Average price ( p) is: TE A + fq p= = q q A = +f q 1410 Managerial Economics Second-Degree Price Discrimination • Declining block pricing • Offers quantity discounts over successive discrete blocks of quantities purchased 1414 Managerial Economics Block Pricing with Five Blocks (Figure 14.5) 1415 Managerial Economics Third-Degree Price Discrimination • If a firm sells in two markets, & • Allocate output (sales) so MR1 = MR2 • Optimal total output is that for which MRT = MC • For profit-maximization, allocate sales of total output so that MRT = MC = MR1 = MR2 1416 Managerial Economics Third-Degree Price Discrimination • Equal-marginal-revenue principle • Allocating output (sales) so MR1 = MR2 which will maximize total revenue for the firm (TR1 + TR2) • More elastic market gets lower price • Less elastic market gets higher price 1417 Managerial Economics Allocating Sales Between Markets (Figure 14.6) 1418 Managerial Economics Constructing the Marginal Revenue Curve (Figure 14.7) 1419 Managerial Economics Profit-Maximization Under Third-Degree Price Discrimination (Figure 14.8) 1420 Managerial Economics Multiple Products • Related in consumption • For two products, X & Y, produce & sell levels of output for which MRX = MCX and MRY = MCY • MRX is a function not only of QX but also of QY (as is MRY) conditions must be satisfied simultaneously 1421 Managerial Economics Multiple Products • Related in production as substitutes • For two products, X & Y, allocate production facility so that MRPX = MRPY • Optimal level of facility usage in the long run is where MRPT = MC • For profitmaximization: MRPT = MC = MRPX = MRPY 1422 Managerial Economics Multiple Products • Related in production as complements • To maximize profit, set joint marginal revenue equal to marginal cost: MRJ = MC • If profitmaximizing level of joint production exceeds output where MRJ kinks, units beyond zero MR are disposed of rather than sold • Profitmaximizing prices are found using demand functions for the two goods 1423 Managerial Economics Profit-Maximizing Allocation of Production Facilities (Figure 14.9) 1424 Managerial Economics Profit-Maximization with Joint Products (Figure 14.11) 1425 Managerial Economics Cost-Plus Pricing • Common technique for pricing when firms not wish to estimate demand & cost conditions to apply the MR = MC rule for profit-maximization • Price charged represents a markup (margin) over average cost: P = (1 + m)ATC Where m is the markup on unit cost 1426 Managerial Economics Cost-Plus Pricing • Does not generally produce profitmaximizing price • Fails to incorporate information on demand & marginal revenue • Uses average, not marginal, cost 1427 Managerial Economics Practical Problems with Cost-Plus Pricing (Figure 14.13) 1428 ... Less elastic market gets higher price 14 17 Managerial Economics Allocating Sales Between Markets (Figure 14. 6) 14 18 Managerial Economics Constructing the Marginal Revenue Curve (Figure 14. 7) 14 19 Managerial Economics. .. MRf = MCf 14 11 Managerial Economics Inverse Demand Curve for Each of 100 Identical Senior Golfers (Figure 14. 3) 14 12 Managerial Economics Demand at Northvale Golf Club (Figure 14. 4) 14 13 Managerial Economics. .. functions for the two goods 14 23 Managerial Economics Profit-Maximizing Allocation of Production Facilities (Figure 14. 9) 14 24 Managerial Economics Profit-Maximization with Joint Products (Figure 14. 11) 14 25 Managerial Economics