hubbard01_instructorppt15.ppt

Pricing Strategy,2 of 19,After studying this chapter,you should be able to:Define the law of one price and explain the role of arbitrage.Explain how a firm can increase its profits through price discrimination.Explain how some firms increase their profits through the use of odd pricing,cost-plus pricing,and two-part tariffs.,Getting into Walt Disney World:One Price Does Not Fit All,LEARNING OBJECTIVES,In this chapter,we will study some common pricing strategies,and we will see how Disney and other firms use these strategies to increase their profits.,3 of 19,Pricing Strategy and the Law of One Price,ArbitrageTransactions costs The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.,Is Arbitrage Just a Rip-off?Does eBay serve a useful economic purpose?Economists would say that it does.,15-1,4 of 19,Pricing Strategy and the Law of One Price,Why Dont All Firms Charge the Same Price?,15 1,5 of 19,Price Discrimination:Charging Different Prices for the Same Product,Price discrimination Charging different prices to different customers for the same product when the price differences are not due to differences in cost.,6 of 19,Price Discrimination:Charging Different Prices for the Same Product,The Requirements for Successful Price DiscriminationA firm must possess market power.Some consumers must have a greater willingness to pay for the product than other consumers,and the firm must be able to know what prices customers are willing to pay.The firm must be able to divide up or segment the market for the product so that consumers who buy the product at a low price are not able to resell it at a high price.In other words,price discrimination will not work if arbitrage is possible.,7 of 19,Price Discrimination:Charging Different Prices for the Same Product,The Requirements for Successful Price Discrimination,8 of 19,How Dell Computer Uses Price Discrimination to Increase Profits,15-2,9 of 19,Price Discrimination:Charging Different Prices for the Same Product,Airlines:The Kings of Price Discrimination,10 of 19,How Colleges Use Yield Management,15-1,Do colleges practice price discrimination?,Dont Confuse Price Discrimination with Other Types of Discrimination,11 of 19,Price Discrimination:Charging Different Prices for the Same Product,Perfect Price Discrimination,15-3,Profits increase.Consumer surplus decreases.,12 of 19,Price Discrimination:Charging Different Prices for the Same Product,Price Discrimination across Time,13 of 19,Other Pricing Strategies,Odd Pricing:Why Is the Price$2.99 Instead of$3.00?Many firms use what is called odd pricing.Do consumers have an illusion that a price of$9.99 is significantly cheaper than$10.00?There is some evidence that using odd prices makes economic sense.,14 of 19,Other Pricing Strategies,Why Do Firms Use Cost-Plus Pricing?Economists conclude that cost-plus pricing may be the best way to determine the optimal price when:Marginal cost and average cost are roughly equal.The firm has difficulty estimating its demand curve.,Dont Confuse Price Discrimination with Other Types of Discrimination,15 of 19,Cost-Plus Pricing in the Publishing Industry,15-2,How do publishers determine the price of books?,16 of 19,Other Pricing Strategies,Pricing with Two-Part TariffsTwo-part tariff A situation in which consumers pay one price(or tariff)for the right to buy as much of a related good as they want at a second price.,17 of 19,Other Pricing Strategies,Pricing with Two-Part Tariffs,15-5,18 of 19,Other Pricing Strategies,Pricing with Two-Part Tariffs,Because price equals marginal cost at the level of output supplied,the outcome is economically efficient.All of consumer surplus is transformed into profit.,19 of 19,Disneys Profit Rises 5%,Lifted by TV and Parks,20 of 19,Paying for the Right to Pay to See“Americas Team”,AN INSIDE LOOK,An NFL team owner can use a two-part tariff to increase profits.,The profit-maximizing monopoly price for a season ticket is$2,000.This assumes that tickets to individual games are sold for$200 each.If the team owner knew the maximum each season ticket buyer was willing to pay,he could charge a PSL fee that would result in a total amount paid by all season ticket buyers equal to area Athe total consumer surplus.,21 of 19,Price discriminationTransactions costsTwo-part tariff,