Ch. 12 More realistic and Complex Pricing Flashcards
for commonly owned substitutes
Commonly owned products add
a level of complexity to pricing that we can easily understand by using marginal analysis.
Common ownership of two substitutes
causes a change in simple pricing calculus
“cannibalizing”
when you have two brands and you steal the sales from the other brand which you own
-“cannibalizing” the sales of one product with increased sales of the other.
solution to cannibalizing
After the acquisition, you will find it profitable to eliminate such cannibalization. You do this by raising price on each brand.
“After acquiring a substitute good, raise price on both goods.”
common ownership of two substitute products
reduces the marginal revenue of each product, since some of the revenue gain for one product comes at the expense of the other.
With a single product, you price at . After acquiring a substitute product, MR falls below MC.
change in perspective that join ownership confers
Your concern changes from earning profit on an individual good to earning profit on both goods.
that aggregate demand (for both goods) is
less elastic than the individual demands that comprise the aggregate. With less elastic demand, prices should increase.
he optimal price for a single product is set so that the margin is
lower on more elastic products because consumers are more sensitive to the price of these products.
After acquiring a substitute product, raise price on both goods, but
raise price more on the more elastic (low-margin) product.
As you raise price on the low-margin product, some consumers
switch to the higher-margin substitute, thereby increasing profit.
to figure out how much price you
recalculate MR and MC—or simply check to make sure that profit increases—to see if further change is profitable.
repositioning
products so that they don’t directly compete with each other—provided that repositioning isn’t too expensive.
