Chapter 12 Flashcards
After acquiring a substitute product, you should…
- raise price on both products to eliminate price competition between them.
- raise price more on the low-margin (more price elastic demand) product.
- reposition the products so that there is less substitutability between them.
What does common ownership of two substitute products do to marginal revenue?
It reduces the marginal revenue of each product
Why do acquisitions raise the price on substitute products
(What should you remember from Chapter 6)
Aggregate demand (for both goods) is less elastic than the individual demands that comprise the aggregate.
With less elastic demand, prices should increase.
What is the pricing strategy when acquiring a complementary product?
After acquiring a complementary product, reduce price on both products to increase demand for both products.
What should you do when
- Fixed costs are large relative to marginal costs
- Capacity is fixed, and
- MR > MC at capacity
If fixed costs are large relative to marginal costs, capacity is fixed, and MR > MC at capacity, then set price to fill available capacity.
How should you handle pricing if demand is unknown?
If the costs of underpricing are smaller than the costs of over-pricing, then underprice, on average
If the costs of overpricing (unused capacity) are smaller than the costs of under-pricing(lower margins), then overprice, on average
What should you do if promotional expenditures make demand more elastic?
If promotional expenditures make demand more elastic, then reduce price when you promote the product
If promotional expenditures make demand less elastic, then increase** **price when you promote the product
Explain Loss Aversion
People feel worse about losing than they do better about winning.
Psychological biases suggests “framing” price changes as gains rather than as losses
What can you do to avoid cannibalizing product profits?
Reposition the products so that they don’t directly compete with each other (provided the repositioning isn’t too expensive)
How do you use Marginal Analysis for pricing substitutes?
As you raise price on a low-margin product, and some consumers switch to the higher margin substitute, remember that…
This tells you which direction to go,
but not how far to go
How does Marginal Analysis inform Revenue or Yield Management
How much capacity to build is an extent decision, so we use Marginal Analysis
Keep adding more as long as LRMR > LRMC
Once “adding” (e.g., construction) is done, those capacity costs are sunk costs
What are the relevant costs and benefits of setting a price in the short run?
short-run Marginal Revenue
&
short-run Marginal Cost
How should we think about utilizing a large capital asset once the initial cost is sunk?
If MR > MC at capacity, then price to fill available capacity
Define a reference price
How much we expect something to cost
People perceive how good a price is based on its distance from the “reference price”
What are some behavioral regularities as put forth in “Prospect theory” (Daniel Kahneman, Amos Tversky)
- People perceive how good a price is based on its distance from a “reference price” - consumers are not motivated by the price of something, but by its comparison to something else
- Multiple losses or multiple gains do not obey simple arithmetic - we feel worse about losses than we do good about wins
Ch 6: Simple pricing, 1 firm, 1 product, 1 price
Explain the concept of “Fairness” in pricing
Not raising prices in the midst of an “opportunity” when it would be perceived negatively by consumers. Many retailers make deliberate pricing decisions so as not to appear unfair
Explain “Hyperbolic pricing”
