Chapter 14 Flashcards
Hedonic pricing
Hedonic pricing is a model that identifies price factors according to the premise that price is determined both by internal characteristics of the good being sold and external factors affecting it.
Vertical product differentiation
Allows firms to segment a market and reduce intensity of price competition
Product positioning (+ effects)
Place that a product has in the market and customers minds, how it is distinguished between other products.
Direct effect: Positive effect, corresponds to the change in the profit that takes place if prices remain constant at their equilibrium level (more demand –> quality at same price)
Strategic effect: negative, as you become closer to a competitor pricing becomes more aggressively.
Horizontal differentiation
The physical product is the same, and consumers choose amounts based on price and location.
Even though we refer to location and transportation costs, the ideas developed in the context of spatial product differentiation can also be applied to differentiation according to some other product characteristic.
Hotelling model
Timing is similar to Bertrand, firms simultaneously set prices p; consumers choose which firm they want to buy from; and firms produce and supply the amount demanded
Horizontal product differentiation - conclusions (2)
The greater the degree of product differentiation, the greater the degree of market power.
If price competition is very intense, then firms tend to locate far apart. If price competition is not very intense, then firms tend to locate closer to each other.
Strategic trade policy
When oligopoly competitors belong to different countries import tariffs to foreign competitors or subsidies to domestic competitors may have the effect of increasing the domestic firm’s profits at the expense of the foreign firms
Search good
One whose features the consumer can ascertain before purchase
Experience good
One whose features can only be ascertained upon consumption
Informative advertising
The product;s existence and selling terms
Persuasive advertising
Designed to change consumers’ perception about the product’s value
Branding
Series of memories, of social and psychological associations. It defines a series of images and expectations that are bundled with a physical product.
Advertising can be seen as an investment that creates and maintains a stock of goodwill, brand value.
Estimating the value of advertising and branding
Almost as tricky as estimating consumer demand, because there are many variables at play; and not all correlations correspond to casual relations.
Advertising density
Some industries spend more on advertising than others.
Advertising density: a/R = etha / - demand elasticity
advertising elasticity of demand (etha) = (dq/da)* (a/q)
The advertising to sales ratio is greater the greater the advertising elasticity of demand and the lower the price elasticity of demand
Advertising and price competition
Advertising product characteristics tend to soften price competition. Advertising prices tends to intensify price competition
