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Pricing

Pricing. Overview Perfect competition Imperfect competition Legal restraints. Perfect Competition. Recall: prices are competed down to cost Exception: collusion Collusion needs to be enforceable, some commitment devices:. price-matching policies (supermarkets)

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Pricing

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  1. Pricing

  2. Overview Perfect competition Imperfect competition Legal restraints

  3. Perfect Competition Recall: prices are competed down to cost Exception: collusion Collusion needs to be enforceable, some commitment devices: price-matching policies (supermarkets) joint information systems (airlines) Westinghouse example

  4. Imperfect Competition Equate marginal costs and marginal revenue Costs Demand – Lack of data – Price perceptions – Vary prices across segments

  5. Costs • Interested in variable costs: • – Not fixed costs • – Definition depends upon the scope of the pricing decision • – Not sunk costs • Easier to determine than demand: • – Firms have cost data • – Additive not multiplicative Although data is available, most firms do not know their costs

  6. Lack of Data • Availability of data: • – No data available for some products • – Data only valid within relevant range • – Data may not capture all effects (e.g. store count)

  7. Price Perceptions • Customers do not know the prices in the future or at other stores: • Use prices they do know to form an overall price image • Customer use cues to evaluate prices: • – prices that they do know • – sale signs • – $9 endings

  8. Demand for Corduroy Duster Regular: 100 units Pre Season Sale: 157 units

  9. Sale Signs and Category Sales Frozen Juice Tuna Toothpaste Total Category Demand (Indexed to 1.00 at 0-5) Number of Items in the Category With Sale Signs

  10. $9 Endings • Same shirt • 3 price conditions: • – $44 • – $49 • – $54

  11. Impact of $9 Endings Percentage of Aggregate Demand Price

  12. Price Discrimination UPS Price Schedule: Rochester NY to Chicago Price Weight of Package

  13. Price Discrimination • Target marketing: • – different segments have different demands • – different segments have different competition (UPS) • Limited by ability to access segments separately • Must be able to restrict resale: • – can identify buyer (airline tickets) • – size of product prevents re-shipment (cars) • – FDA or regulatory controls (crimps on toothpaste) • – perceived difference (dental products)

  14. Can Managers Work All of This Out? Much to consider: costs demand elasticities cues (customer inferences) competitive reactions cost plus match competitors manufacturers' recommendation Begin simply: need detailed response information biased if feedback incomplete (store count) Fine tune:

  15. Legal Issues in Pricing • Collusion • price discrimination • predatory pricing

  16. Collusion Sherman Act: Every contract, ..., or conspiracy, in restraint of trade is illegal. Horizontal Agreements: price fixing market allocation • Vertical Agreements: • No longer per se illegal to have price ceilings • Price floors are more problematic: • – resale price maintenance: no longer per se illegal • – can suggest and advertise a retail price • – cannot obtain an agreement not to discount • – can refuse to sell to a known discounter (but get a lawyer) • – terminating a known discounter is also possible (but get a good lawyer)

  17. Price Discrimination • Robinson-Patman Act: • It shall be unlawful for any person ... to discriminate in the price between • different purchasers of commodities of like grade and quality ... where the • effect of such discrimination may be to substantially lessen competition or • tend to create a monopoly. • Defences: • – geographic price discrimination (but beware diversions) • – retail • – cost justification • – reacting to competition Promotional allowances must be offered proportionate to volume

  18. Predatory Pricing • Breach of Sherman Act (Section 2): attempt to monopolize • Wal-Mart case: pricing below cost • Defences: • – Prices are above average variable cost • – Defendant could not expect to recoup investment • – Only a small part of the plaintiff’s product line • – No anti-competitive intent

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