Session 20 Pricing Practices

Session 20 Pricing Practices - Transcript

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Copyright 2007 by Oxford University Press Inc

Slide 1

Pricing in Practice Cost Plus Pricing
Markup or Full Cost Pricing Fully Allocated Average Cost C
Average variable cost at normal output Allocated overhead

Markup on Cost m P C C Price P C 1 m
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Slide 2

Pricing in Practice Optimal Markup
1 MR P 1 EP EP P MR Ep 1 MR C EP P C Ep 1
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Slide 3

Pricing in Practice Optimal Markup
EP P C Ep 1 P C 1 m EP C 1 m C Ep 1 EP m 1 EP 1
PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 4

Pricing in Practice Incremental Analysis
A firm should take an action if the incremental increase in revenue from the action exceeds the incremental increase in cost from the action

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Copyright 2007 by Oxford University Press Inc

Slide 5

Price Discrimination
Charging different prices for a product when the price differences are not justified by cost differences Objective of the firm is to attain higher profits than would be available otherwise
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Slide 6

Price Discrimination
1 Firm must be an imperfect competitor a price maker 2 Price elasticity must differ for units of the product sold at different prices 3 Firm must be able to segment the market and prevent resale of units across market segments
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Slide 7

First Degree Price Discrimination
Each unit is sold at the highest possible price Firm extracts all of the consumers surplus Firm maximizes total revenue and profit from any quantity sold

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Slide 8

Second Degree Price Discrimination
Charging a uniform price per unit for a specific quantity a lower price per unit for an additional quantity and so on Firm extracts part but not all of the consumers surplus

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Slide 9

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Slide 10

First and Second Degree Price Discrimination
In the absence of price discrimination a firm that charges 2 and sells 40 units will have total revenue equal to 80

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Slide 11

First and Second Degree Price Discrimination
In the absence of price discrimination a firm that charges 2 and sells 40 units will have total revenue equal to 80 Consumers will have consumers surplus equal to 80

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Copyright 2007 by Oxford University Press Inc

Slide 12

First and Second Degree Price Discrimination
If a firm that practices first degree price discrimination charges price from 6 to 2 and sells 40 units then total revenue will be equal to 160 and consumers surplus will be zero

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Slide 13

First and Second Degree Price Discrimination
If a firm that practices second degree price discrimination charges 4 per unit for the first 20 units and 2 per unit for the next 20 units then total revenue will be equal to 120 and consumers surplus will be 40

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Slide 14

Third Degree Price Discrimination
Charging different prices for the same product sold in different markets Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production

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Slide 15

Third Degree Price Discrimination
Q1 120 10 P1 or P1 12 0 1 Q1 and MR1 12 0 2 Q1 Q2 120 20 P2 or P2 6 0 05 Q2 and MR2 6 0 1 Q2 MR1 MC 2 MR1 12 0 2 Q1 2 Q1 50 P1 12 0 1 50 7 MR2 MC 2 MR2 6 0 1 Q2 2 Q2 40 P2 6 0 05 40 4

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Slide 16

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Slide 17

Pricing of Multiple Products
Products with Interrelated Demands Plant Capacity Utilization and Optimal Product Pricing

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Slide 18

Pricing of Multiple Products
Products with Interrelated Demands
For a two product A and B firm the marginal revenue functions of the firm are

TRA TRB MRA QA QA TRB TRA MRB QB QB
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Copyright 2007 by Oxford University Press Inc

Slide 19

Pricing of Multiple Products
Plant Capacity Utilization
A multi product firm using a single plant should produce quantities where the marginal revenue MRi from each of its k products is equal to the marginal cost MC of production

MR1 MR2 L MRk MC

PowerPoint Slides Prepared by Robert F Brooker Ph D

Copyright 2007 by Oxford University Press Inc

Slide 20

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Slide 21

International Price Discrimination
Dumping
Sale commodities below its production cost Designed to bankrupt competitors Trade restrictions apply

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Slide 22

Transfer Pricing
Pricing of intermediate products sold by one division of a firm and purchased by another division of the same firm Made necessary by decentralization and the creation of semiautonomous profit centers within firms

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Slide 23

Pricing in Practice
Two Part Tariff initial fee price for each unit of the product e g electricity charge Tying Consumer who buys or leases a product also purchases another product e g McDonald forced its franchises to purchases their raw materials and supplies Bundling Selling the product or service as a package e g Package Tour

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Slide 24

Pricing in Practice
Peak load Pricing Higher price for a good or service during peak times e g Air ticket during day time

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Slide 25