Innovative Pricing

Question 1

What is swans definition of innovative pricing

Answer 1

The activity of creating new pricing schemes or tariff structures that may be used to raise firm profit or increase market share

Novel pricing schemes attract new customers

Question 2

What is price discrimination

Answer 2

Charging different prices to different customers for the same product or service

Question 3

Who can use price discrimination

Answer 3

Monopolists- aim to capture consumer surplus

Question 4

What are the necessary conditions for price discrimination

Answer 4

Homegenous product - good or service is the same
Customer heterogeneity- must be differences in the willingness to pay
Must be barriers to prevent customers switching
The firm is a monopolist provider, consumers cannot but the same quality food cheaper from another provider

Question 5

What is meant by a monopolist

Answer 5

Have power to set prices
May be first to market
Dominant player within and established market
Could be a natural monopolist

Question 6

What is willingness to pay

Answer 6

Differences in reserve prices reflects willingness to pay and ability to pay
- differences in people’s tastes
Differences in income and wealth

Question 7

What is consumer surplus

Answer 7

The difference between he reserve price that individuals are willing to pay and the ruling market price

Question 8

When is first degree price discrimination clear

Answer 8

Depends on individuals having a different willingness to pay
The seller is able to capture all consumer surplus by charging each buyer the maximum they are willing to pay
The seller must know the reserve price for each buyer
Different prices are set along the demand schedule

Question 9

What are some examples of first degree price discrimination

Answer 9

A Dutch auction

Haggling

Question 10

Why is first degree price discrimination rate

Answer 10

It is unlikely the buyer is willing to disclose their maximum willingness to pay
Even if possible it would involve very high costs in terms of information collecting and processing

Requires a different price for each and every buyer and to exclude other buyers from this price

Question 11

What is second degree price discrimination

Answer 11

Where the producer sets a number of different price tags (price points) whereby the unit price is lower the larger the quantity purchased

Buyers self select themselves into market segments based on their WTP

Each purchaser will buy at the price that is at or below their WTP

Question 12

What are examples of second degree PD

Answer 12

Three for two
Buy one get one free
Loyalty cards
Two part tariffs

Question 13

What is third degree price discrimination

Answer 13

Depends on groups/ types of consumer having different WTP

According to; 
Age 
Student 
Gender
Citizenship 
Income

Question 14

What are some examples of third degree PD

Answer 14

Men and women for haircuts

Food coupons

Question 15

How is the internet of things being used

Answer 15

Increasingly using data in consumer characteristics to differentiate price

In turn comparison websites have been established to help customers in markets where there are many alternative prices being offered

Question 16

Why is preventing reselling crucial

Answer 16

To make third degree price discrimination work

Question 17

What are the various ways to prevent reselling

Answer 17

Sell at a unique moment in time
Student IDs
Software firms

Question 18

What are the other forms of price discrimination that can be used by non monopolists and doing firms with different products

Answer 18

Short term giveaway - where radically new products are offered or entering a market with one or more dominant firms

Pay what you want
Tie in sales
Anchoring

Question 19

What are the legal and ethical limits on PD

Answer 19

Against consumer interest
Anti competitive

How can different prices be charged for the same product or service that cost the same to produce

Environmental waste of bulk buying

Question 20

What may be ethical benefits

Answer 20

For third degree, wealthy buyers may subsidies the purchases of more financial strained buyers - cross subsidy

Question 21

What are the problems Swann identifies with PD

Answer 21

There is a presumption is law that Pd acts against consumer interests

Some argue that two different sales at different prices must represent different products and services

Ethical issue
Kantian and utilitarian
Could be discretionary to set equal prices e.g a postage stamp

Question 22

What does Swann say about two part tariffs

Answer 22

Fixed cost and usage cost
E.g domestic telephone subscriber
Entry fee to an amusement park

Question 23

What is pricing over time

Answer 23

Peak v off peak
Holidays
Price slimming

Lies between third and second

Question 24

What is noisy pricing

Answer 24

Suggested some retailers set different prices in different stores to sort out the searchers from the rest

Switching costs
Consumers with time to spare will switch when it makes sense to do so

Question 25

How did Netscape use innovative pricing

Answer 25

Could be used for a trial period of 90 days - links to networks as they wanted to set market standard

Question 26

What constrains price discrimination

Answer 26

Regulation 
Competition 
Arbitrage 
Commitment and reputation 
- consumers can get wise for inter temporal Pd

Question 27

What do Bryce, dyer and hatch (2011) say about the threats posed by entrants offering free offerings

Answer 27

If the user base of the free offering is growing by 40% or more a year or the customer deflection rate is 5% a year serious trouble may be looming

Question 28

When threat of free is high how must businesses respond

Answer 28

Respond with a free offering or radically change the business model

Question 29

What is a delayed threat

Answer 29

When entrants users are multiplying rapidly but established users are deflecting slowly

Offerings can coexist

E.g Microsoft and google docs
Microsoft has high switching costs

Question 30

What is an immediate threat

Answer 30

When deflectionnrate is high and but growth rate is low

Question 31

What is a business model threat

Answer 31

High deflection, high growth

E.g newspapers v online

Question 32

What is a minor threat

Answer 32

Both low and firms should monitor the situation

Question 33

What does Bryce say about offering a better free

Answer 33

Can utilise customer learning, brand equity, financial resources and knowledge of the market to introduce a better free offering

E.g Yahoo and google - matched and exceeeded Google’s storage offer

Question 34

What are the 4 tried and tested strategies for competing against free

Answer 34

Up sell
Cross sell
Charge third parties
Bundle

Question 35

What is upselling

Answer 35

Introduce a free basic offering to gain widespread use then charge for a premium version e.g iPhone apps

Question 36

What is cross selling

Answer 36

Sell other products not directly ties to the free product e.g Ryanair

Question 37

What is charging third parties

Answer 37

Provide a free product to user then charge a third party to access them e.g Google

Question 38

What is bundling

Answer 38

Offer a free product or service with a paid offering

Question 39

What two problems present managers from leaping to free

Answer 39

A deep belief that products must generate a respectable level of revenue and profit
Profit centre and accounting system it employs

Question 40

What is humble bumble an example of

Answer 40

Pay what you want e book

Made 1.1 million dollars in two weeks