Digressions 14

Question 1

Measuring Willingness to pay:
Which pricing strategy do most firms use?

Answer 1

Intuitive pricing

Question 2

Measuring Willingness to pay:
Which are the two categories of techniques to measure the willingness to pay?

Answer 2

Broadly speaking they fall inwo these two categories:
- revealed
- and stated preference models

Question 3

Measuring Willingness to pay:
What are revealed-preference models techniques?

Answer 3

They infer a customer’s willingness to pay from observed data.

Question 4

Measuring Willingness to pay:
Which data types are being observed in the revealed-preference models techniques?

Answer 4

• Market data,
• Data that is generated while browsing the internet
• or data generated in experiments

Question 5

Measuring Willingness to pay:
What are stated-preference techniques?

Answer 5

They are based on surveys that are designed to elicit information about the willingness to pay.

Question 6

Measuring Willingness to pay:
What are examples for stated-preference techniques?

Answer 6

• Expert or customer surveys
• and conjoint analysis

Question 7

Measuring Willingness to pay:
What is a conjoint analysis?

Answer 7

A statistical analysis where a product is patitioned into different attributes that together generate value for the customer.

Customers are then asked to rank or rate different bundles of these attributes. The results are used for the design and pricing of future products.

Question 8

Price elasticities:
Which factors determine Price elasticities?

Answer 8

• The customer’s purchasing power (when the good becomes more expensive, customers can ceteris paribus afford less of it)
• and the willingness and possibility to substitute the good with another one.

Question 9

Price elasticities:
This second determinant makes the model applicable to which markets?

Answer 9

To markets with close but imperfect substitutes e.g. different brands of jeans

Question 10

Price elasticities:
What does the model say about markets with close substitutes?

Answer 10

The model’s implication for markets with close substitutes is that markups have to be relatively moderate.

Question 11

Price elasticities:
What is the markup rule?

Answer 11

Cost-plus pricing indicates that the markup in a market is negatively related to the price elasticity of demand.
==> A marketing campaign should hence aim at making demand less elastic.

Question 12

Price elasticities:
What does the market rule gives first clues about?

Answer 12

The markup rule also gives one a first clue about how firms should invest in advertising and public relations.

Question 13

Price elasticities:
What does the firm have to know when it wants to determine the optimal advertising budget?

Answer 13

In order to determine the optimal advertising budget, the firm needs to know the marginal revenues and marginal costs of advertising.

==> The marginal revenues are determined by the change of the price elasticity of demand that is induced by another unit of advertising.

Question 14

User fees and Facebook:
What strategy does Spotify use in terms of ads? What does the suc

Answer 14

One could argue that an aggressive placement of ads on platforms reduces user experience, so a user-free-based business model with ad-free service (and no data collection) could be a viable alternative.
And some platforms like Spotify do indeed offer so-called premium services as an option.

==> Whether this strategy can work depends on the specific services the platform offers.

Question 15

User fees and Facebook:
Why should Facebook not charge any user-fees?

Answer 15

In 2017 Facebook’s average revenue per user in North America was 84.41 US dollars.
==> To replace that revenue with an ad-free service, Facebook would need to charche each user at least that amount.
A recent survey of US Facebook users found that less than 10% would be willing to pay such a user fee for an ad-free service. Taking this figure at face value, the community would collabse dramatically.
==> This would have two negative effects for the remaining users.
1. Due to the importance of network externalities, they would perceive Facebook less attractive.
2. Maintaining Facebook’s revenue would mean that user fees would also have to increase dramatically, which would likely drive away even more users.

Question 16

Pricing and Bounded Rationality:
Finding ways to more effectively discriminate prices is a key topic in many industries.
What are strategies to discriminate called?

Answer 16

• “dynamic pricing”
• “power pricing”
• or “yield management”

Question 17

Pricing and Bounded Rationality:
What is the basic problem behind all of these strategies to discriminate?

Answer 17

How can a firm segment its customers into groups, which differ in their willingness to pay, and charge group-specific prices?

Question 18

Pricing and Bounded Rationality:
How can strategies to discriminate lead to win-win-situations?

Answer 18

Such strategies can actually lead to win-win-situations between firms and customers, if there are close substitutes to the offered products (customers do not have to accept the offer, which is why they have to be better off if they accept it) and customers economize on search costs (e.g. finding an appropriate hotel for the planned trip to vienna).

Question 19

Pricing and Bounded Rationality:
What is the anchoring effect?

Answer 19

A pricing strategy that is based on the anchoring effect:

The rule of thumb on how to sell a good, for which customers have an unclear willingness to pay, is to place it right next to a similar but much more expensive good.

==> Various experiments show that customers react to the pricing brackets in which products are displayed. Most people go for the “middle” option, which gives firms a lot of leeway in manipulating choices by developing adequate contexts for their products.

Question 20

Parallel imports in the European Union (EU):
What did the EU make possible?

Answer 20

Firms that sell in different markets have an incentive to discriminate prices according to the market-specific elasticities of demand.

However, the creation of a common market within the EU has made it possible for parallel imports to move freely across the EU.

Question 21

Parallel imports in the European Union (EU):
What are parallel imports?

Answer 21

Parallel imports are sales by authorized or unauthorized distributors to another country without the permission of the initial property owner.

Question 22

Parallel imports in the European Union (EU):
What do Parallel importers do?

Answer 22

Parallel importers use price differences between markets to make a profit out of price arbitrage.
==> This puts pressure on high prices and, thereby creates a tendency towards uniform prices within a common market.

Question 23

Parallel imports in the European Union (EU):
What is one industry specific example from the general competition principles?
What is the purpose of this exemption?

Answer 23

The only industry-specific exemption from the general competition principles is the automotive industry.

The purpose of the so-called block exemptions is to restrict competition between car dealers.

Nevertheless even with these special agreements, EU rules require the car dealers to sell their products to any EU citizen regardless of where they live.