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PRICING POLICYIMBA Managerial Economics
Jack Wu
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NORTHWEST AIRLINESMINNEAPOLIS-NEW YORK
Business class $ 1711
Unrestricted economy
$ 1267
Advance purchase, with penalties
$ 765
Advance purchase, for senior
$ 692
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EMIRATES AIRLINE, DUBAI-MUMBAI, ECONOMY CLASS, MAY 2004
Fare Restrictions Price
Year KRTAE1 None AED 2250
(US$ 613)
Special Excursion QEE4MAE1
Min. 7 days, max. 4 mths stay
AED 1900
Basic Season Special Excursion LLE4MAE1
Low season; min. 7 days, max. 4 mths stay
AED 1550
Basic Season Special Excursion VLE4MAE1
Low season; min. 7 days, max. 4 mths stay
AED 1200
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EMIRATES AIRLINE, MUMBAI-DUBAI, ECONOMY CLASS, MAY 2004
Fare Restrictions Price
Economy unrestricted LRT
None INR 25,600
(US$ 557)
Economy restricted LRTIN1
None INR 22,700
Regular Excursion LEE3M1
Min. 7 days, max. 3 mths stay
INR 20,100
Special Excursion VEE3MIN1
Max. 3 mths stay. INR 17,000
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EMIRATES AIRLINE
Why does Emirates charge lower fare for passengers originating from Mumbai?
How is this discrimination possible?
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PRICING POLICY
uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling
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0
30
55
80
2500 5000
marginal revenue
marginal cost
demand
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
UNIFORM PRICING
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UNIFORM PRICING: PROFIT MAXIMUM
MR = MC Equivalently, set the incremental margin
percentage equal to the inverse of absolute value of price elasticity of demand,
(price - MC) / price = -1/e
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PRICE ELASTICITY
always set price so that demand is elastic if demand more elastic, then lower
incremental margin percentage (IM%) e = -2 IM% = 1/2
e = -1.5 IM% = 2/3
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PRICING PRIVATE-LABEL COLA
Suppose that WalMart learns that demand for private-label cola is less elastic than the demand for Coca Cola. Should WalMart set a higher price for private-label cola?
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UNIFORM PRICING: SHORTCOMINGSSHORTCOMINGS
leaves buyers with a lot of surplus
does not sell to every potential buyer
marginal cost
price
buyer surplus
potential buyers
$
0quantity
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COMPLETE PRICE DISCRIMINATION
price each unit at buyer’s benefit and sell quantity where MB = MC
� maximum profit -- theoretical ideal
� different from MR = MC implementation: must know entire marginal
benefit and marginal cost curves
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COMPLETE PRICE DISCRIMINATION: PRACTICE
bargaining auctions
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DIRECT SEGMENT DISCRIMINATION, I
price by segment implementation
� fixed identifiable characteristic --- basic for segmentation
� no re-sale
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DIRECT SEGMENT DISCRIMINATION, II
simple case: uniform price within each segment
� within each segment IM% = -1/e� for segment with more elastic
demand, then lower incremental margin percentage (IM%)
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0
30
55
80
25003000
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
(a) Men’s demand
0
30
50
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
(b) Women’s demand
marginal revenue
demand
40
1000
marginal revenue
demand
marginalcost
DIRECT SEGMENT DISCRIMINATION, III
marg.cost
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NYNEX TELEPHONE SERVICE
New York City residential -- $16/month business -- $23/monthHow is discrimination possible?
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ASIAN WALL STREET JOURNAL
Price for annual subscription, May 2006
Print: Hong Kong (HK$ 2,700)
US$ 348
Print: Singapore (S$ 525) US$ 331
Print: Tokyo (Yen 94,500) US$ 845
Interactive: Worldwide US$ 99
Why different prices for print edition but not interactive edition?
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INDIRECT SEGMENT DISCRIMINATION
structure choice to earn different incremental margins from each segment
implementation seller controls some variable to which segments
are differentially sensitive buyers cannot circumvent the variable
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Traveler
Segment
Unrestricted Travel ($)
Restricted Travel ($)
Maria Business 1000 200 Tom Business 900 180 Robin Vacation 500 400 Leslie Vacation 280 224
AIR TRAVEL: BENEFITS
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Product
Fare ($)
Sales
Total Rev. ($)
Total Cost ($)
Profit ($)
Unrestricted
900 2 1800 400 1400
Restricted 399 1 399 200 199
*MC=200
AIR TRAVEL: INDIRECT SEGMENT DISCRIMINATION
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CHINESE EMBASSY: VISA FEES
Application period
1 day 3 days 7 days
Single entry $75 $60 $25
Double entry $85 $70 $35
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Profitability Policy Information Requirement
Highest Complete price discrimination
Highest
Direct segment discrimination
Indirect segment discrimination
Lowest Uniform pricing Lowest
PRICING POLICIES: RANKING
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BUNDLING strategy
pure bundling mixed bundling
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CABLE TELEVISION: BENEFITS
“if every segment … was wild about one thing and hated the rest, they have done their job” (Economist) Segment Education
channel Music channel
Conservatives $20 $ 2
Middle of road $11 $11
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PURE OR MIXED BUNDLING
What is the profit-maximizing pricing policy if marginal cost per channel = 0 marginal cost per channel = $5
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PURE OR MIXED BUNDLING Generally, if item is costless, no loss from giving it to
every consumer --> pure bundling; if item is costly, then should avoid providing
it to low-benefit users --> use mixed bundling to screen out low-benefit users.
Mixed bundling is form of indirect segment discrimination
structured choice between bundle and separates
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DISCUSSION QUESTION
(A)Suppose that the marginal cost of the cable company providing a channel to the household is 0. Will you provide all channels to all types of household from the efficiency perspective? What is your profit-maximizing pricing strategy?
(B)Suppose that the marginal cost of the cable company providing a channel to the household is 50. Will you provide all channels to all types of household from the efficiency perspective? What is your profit-maximizing pricing strategy?