Inelastic Demand
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$
Elastic Demand
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$
TR = Price * Qtty
If demand is elastic then change in price causes an opposite change in the total revenue.
If demand is inelastic then change in price causes the same change in the total revenue.
The less elastic the demand, the more beneficial it is for the seller to increase price.
Cost issues: different levels of product (learning curve issues), (dis)economies of scale, fixed/variable, breakeven issues, marginal analysis
Marginal Analysis:
What happens to the costs and revenues as production increases by one unit. This will determine at which point profit will be maximized. Need to distinguish between:
Fixed Costs
Average Fixed Costs, FC/units produced
Variable Costs (materials labor etc.)
Average Variable Cost, VC/Unit produced
Total Cost = (AFC+AVC)*QTTY
Marginal cost = the extra cost to the firm for producing one more unit.
Marginal revenue = the extra revenue with the sale of one additional unit.
MR - MC tells us if it is profitable to produce one more unit.
Profit maximization at MR = MC
To produce/sell more units than the point MR = MC the additional cost of producing one more unit is greater than the additional revenue from selling one more unit. At any point prior to MR = MC, MR will be greater than MC, therefore the additional revenue from selling one more unit will be greater than the additional cost of producing one more unit, therefore forgoing the opportunity to generate additional profits. Therefore MR = MC = Profit Maximization; assuming all products are sold.
Due to the environment, it is difficult to predict costs and revenues etc.
Cost structures can influence pricing objective: high low fixed variable make-up has significant impact on contribution margins.
Competitors pricing
Pricing method:
Cost Plus:
Guarantees contribution
simple to calculate
not optimal
Competition
par with market
price war implications?
not optimal
Value
optimal
difficult to determine
Final price selection: odd / even etc.
Financing issues.
Life-cycle Pricing issues. Especially w/ services, two tier pricing etc.
Price Segmentation/Discrimination: Varying prices due to market conditions, different consumers:
"cost to serve" are different
value of product are different
service demands differ
Methods of segmentation/discrimination:
Price negotiation (second hand car examples, online auctions)
Geography
Price and quantity discounts: seasonal discounts, trade discounts, trade-ins
Promotion pricing: loss leader (lock-in etc.), special event, rebates, low interest financing, warranties
Discriminatory pricing: customer segment pricing, product form pricing, time pricing
Product mix pricing: line pricing, optional feature, two part pricing, product bundling
Product bundling: office suite etc.
Price changing issues (reducing or increasing) also relevant for establishing a price, at above or below market:
Customer reactions
Competitor reactions
Collaborator reactions
Game theory implications of adopting prices in competitive markets.
Signal value of price changes to competitors and customers.
Price transparency issues for establishing and changing prices.
Dealing with competitor price changes.
Discussion Topic: What are the potential long run consequences of a price promotion designed to attract competitors customers?
Discussion Topic: Relate examples of products that are "free" ... and if they are free, what is the objective of the company?
Discussion Topic: Access E-bay and describe your experiences as a buyer / seller. What type of products would work well under a dynamic pricing model? Does the life cycle stage of a product impact its attractiveness for dynamic pricing?
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