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GROUP 8Cruz, Melanie
Dela Cruz, Charle- son
Gamboa , Jezzarene
PRICING TECHNIQUES ANDANALYSIS
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Advanced Pricing Techniques
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Price discrimination
Multiple products
Cost-plus pricing
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Capturing Consumer Surplus
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Uniform pricingCharging the same price for every unit of
the productPrice discriminationMore profitable alternative to uniform
pricingMarket conditions must allow this practice
to be profitably executed
Technique of charging different prices forthe same productUsed to capture consumer surplus
(turning consumer surplus into profit)
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The Trouble with Uniform Pricing(Figure 1)
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Price Discrimination
Exists when the price-to-marginal cost ratiodiffers between two products:
A B
A B
P P
MC MC
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Price Discrimination
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Three conditions necessary to practiceprice discrimination profitably:
1) Firm must possess some degree ofmarket power
2) A cost-effective means of preventingresale between lower- and higher-pricebuyers (consumer arbitrage) must beimplemented
3) Price elasticities must differ betweenindividual buyers or groups of buyers
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First-Degree (Perfect) PriceDiscrimination
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Every unit is sold for the maximumprice each consumer is willing to payAllows the firm to capture entire
consumer surplusDifficultiesRequires precise knowledge about every
buyers demand for the goodSeller must negotiate a different price for
every unit sold to every buyer
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First-Degree (Perfect) PriceDiscrimination (Figure 2)
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Second-Degree PriceDiscrimination
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Lower prices are offered for largerquantities and buyers can self-select the price by choosing how
much to buyWhen the same consumer buys
more than one unit of a good orservice at a time, the marginalvalue placed on additional unitsdeclines as more units areconsumed
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Second-Degree PriceDiscrimination
Two-part pricingCharges buyers a fixed access charge (A) to
purchase as many units as they wish for aconstant fee (f) per unit
Total expenditure (TE) for q units is:
TE A fq= +
10
Af
q= +
TE A fqpq q
+= =Average price ( ) is:p
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Second-Degree PriceDiscrimination
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When consumers have identicaldemands, entire consumer surpluscan be captured by:
Settingf = MCSettingA = consumer surplus (CS)Optimal usage fee when two
groups of buyers have identicaldemands is the level for which MRf=MCf
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Inverse Demand Curve for Each of 100Identical Senior Golfers (Figure 3)
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Demand at Northvale Golf Club(Figure 4)
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Second-Degree PriceDiscrimination
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Declining block pricingOffers quantity discounts over
successive discrete blocks of quantities
purchased
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Block Pricing with Five Blocks(Figure 5)
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Third-Degree PriceDiscrimination
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If a firm sells in two markets, 1 & 2
Allocate output (sales) soMR1= MR
2
Optimal total output is that for whichMRT=
MCFor profit-maximization, allocate sales of
total output so that
MRT
= MC = MR1
= MR2
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Third-Degree PriceDiscrimination
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Equal-marginal-revenue principle
Allocating output (sales) soMR1= MR
2which
will maximize total revenue for the firm (TR1
+ TR2)More elastic market gets lower priceLess elastic market gets higher price
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Allocating Sales Between Markets(Figure 6)
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Constructing the Marginal RevenueCurve (Figure 7)
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Profit-Maximization Under Third-DegreePrice Discrimination(Figure 8)
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PRICING OF MULTIPLEPRODUCTS
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Multiple Products
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Related in consumption
For two products,X& Y, produce & selllevels of output for which
MRX = MCX and MRY = MCY
MRXis a function not only ofQ
Xbut also of
QY (as isMRY) -- conditions must be satisfiedsimultaneously
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Multiple Products
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Related in production assubstitutesFor two products,X& Y, allocate production
facility so that
MRPX
= MRPY
Optimal level of facility usage in the long run
is whereMRPT= MCFor profit-maximization:
MRPT= MC = MRP
X= MRP
Y
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Multiple Products
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Related in production ascomplementsTo maximize profit, set joint marginal revenue
equal to marginal cost:
MRJ
= MCIf profit-maximizing level of joint production
exceeds output whereMRJkinks, units beyond
zeroMR are disposed of rather than soldProfit-maximizing prices are found using
demand functions for the two goods
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Profit-Maximizing Allocation ofProduction Facilities (Figure 9)
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Profit-Maximization with JointProducts (Figure 11)
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Cost-Plus Pricing
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Common technique for pricingwhen firms do not wish to estimatedemand & 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
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Cost-Plus Pricing
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Does not generally produce profit-maximizing priceFails to incorporate information on demand &
marginal revenue
Uses average, not marginal, cost
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Practical Problems with Cost-PlusPricing (Figure 13)
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