Pertemuan < 21 > Pricing Techniques and Analysis Chapter 16

1. Pertemuan < 21 >Pricing Techniques and Analysis Chapter 16 Matakuliah : J0434 / Ekonomi Managerial Tahun : 01 September 2005 Versi : revisi

2. Learning Outcomes Pada akhir pertemuan ini, diharapkan mahasiswa akan mampu : membuat analisis teknik penetapan harga (C4)

3. Outline Materi • Pricing Techniques and Analysis • Differential Pricing • Price Discrimination

4. Pricing Techniques and Analysis • Value-based more than cost-based pricing often helps build profits. • Firms charge different customers different prices, which is known as price discrimination. • This chapter also looks at pricing within a firm called transfer pricing. • Pricing techniques that are used by many multi-product firms, such as full-cost pricing and target return pricing. 2002 South-Western Publishing

5. Proactive Value-based Pricing • If the price doesn’t fit what customers are willing to pay, then the product may not be profitable. • Customer value is the focus for pricing, not just the costs associated with the product. • Apple Computer lost market share by ignoring this. • The Ford Mustang was a success, as Ford found that people wanted a sports car, but didn’t want it to be too expensive. The started with a price and designed the product. • The Mustang used value-based, not cost-plus pricing

6. Differential Pricing • If at peak rush hour, the toll is higher than at the off-peak, we are using different prices at different time periods. • The peak toll can encourage shifting travel patterns to off-peak times or discourage some commuting altogether. • Differential pricing appears more frequently than one thinks. This we call price discrimination.

7. Price Discrimination • Price Discrimination -- Goods which areNOT priced in proportion to their marginal cost, even though technically similar • Some Necessary Conditions: • 1. Some Monopoly Power • In Perfect Competition, P = MC • 2. Ability to Arbitrage • Separate Customers and Prevent Reselling

8. Arbitrage - Buy Low to Sell Higher • Arbitrage of Goodsis Easy • Price discrimination of goods is ineffective • Little price discrimination of grocery items • Arbitrage of Services is Difficult • Price discrimination of services is effective • Price discrimination at restaurants by age, a service • Lawyers charge different prices for wills, based on ability to pay

9. 1. Geography 2. Income 3. Gender 4. Age 5. Time 6. Race 7. Language 8. Transient / Resident 9. Ability to Haggle Many Ways to Separate Customers for Price Discrimination

10. In Simple Monopoly, there is only one price Consumers receive a consumer surplus In Price Discrimination, monopolists can SCOOP OUT all consumer surplus Why Practice Price Discrimination? MC Simple Monopoly CS PSM D Q QSM

11. Charge the MOST that a person is willing to pay for each good Zero consumer surplus Produce MORE than in Simple Monopoly Output the same as in Competition First Degree Price Discrimination Price Discriminating Monopoly MC D Q Q1st

12. Car Sales as First Degree Price Discrimination “How much do you plan to pay a month?” you inadvertently reply: “Only $200 per month, but I have $3,000 down payment!” Ahh, that is $9,887 for 60 months at our 7.9% financing, plus $3,000 Here’s one for only $12,887. It’s swell.

13. The conditions for First Degree price discrimination are seldom met Hence, some close approximations exist There are are a variety of ways to group units to attempt to scoop out consumer surplus Notice: Incentives to Understate One’s True Willingness to Pay Second Degree Price Discrimination: Units are Grouped

14. Second Degree Price Discrimination Methods • Block rate setting • Two part pricing • Unlimited access • Bundling methods We look at four examples:

15. Block Rate Pricing Second Degree Price Discrimination: • Price declines as the quantity purchased increased • Examples: • Tri-State Gas Company example (page 632) • TJ Maxx, second pair half price • telephone charges • foreign film festivals • Price declines similar to the demand curve D P Q

16. Two-Part Pricing: Another Second Degree Price Discrimination: • A price for the privilege of buying items • And a price per item • Examples: • Country Club Dues and Greens Fees • Cover Charge to Enter and a Price Per Drink Cover Charge MC Q

17. If P = 4.50 - Q and MC = .50Find Optimal Cover Charge • At P = $.50, he/she buys 4 mugs of root beer • Biggest cover charge is the area of a triangle • Height is 4 • Base is 4 • (1/2)Height•Base • Max cover charge is $8.00 Cover Charge $8.00 $4.50 PM=$2.50 Cover Charge $8 $.50 Q 4 QM Monopoly: QM = 2 & PM = $2.50

18. Unlimited AccessorAll-You-Can-Eat Pricing Second Degree Price Discrimination: A specified price for an unspecified quantity: Example: AOL unlimited access for $19.95/month Examples: Salad Bars, Legal Retainers, HMO’s Area under demand curves represent most willing to pay for an AYCE offer P ounces

19. Bundling (or Block Booking) Second Degree Price Discrimination: Often the pricing arrangement includes purchasing groups of dissimilar products. The products are bundled or sold as a block, as in theatrical or sporting tickets. Preferences are uncorrelated Preferences are correlated A B A B 1 2 250 270 150 100 80190 80 100 165 175 180 340 500 360 165 200 = 365 simple monopoly 160 200 = 360 simple monopoly

20. Third Degree Price Discrimination East West Market PM MC MR Example with a Simple Monopoly Price in both markets

21. Third Degree Price Discrimination East West Market PE PM PW MC MR MR MR Example with DifferentPrices in Each Market

22. Summary • Value-based more than cost-based pricing often helps build profits. • Firms charge different customers different prices, which is known as price discrimination. • This chapter also looks at pricing within a firm called transfer pricing. • Pricing techniques that are used by many multi-product firms, such as full-cost pricing and target return pricing.