Innovative Pricing Flashcards
What is swans definition of innovative pricing
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
What is price discrimination
Charging different prices to different customers for the same product or service
Who can use price discrimination
Monopolists- aim to capture consumer surplus
What are the necessary conditions for price discrimination
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
What is meant by a monopolist
Have power to set prices
May be first to market
Dominant player within and established market
Could be a natural monopolist
What is willingness to pay
Differences in reserve prices reflects willingness to pay and ability to pay
- differences in people’s tastes
Differences in income and wealth
What is consumer surplus
The difference between he reserve price that individuals are willing to pay and the ruling market price
When is first degree price discrimination clear
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
What are some examples of first degree price discrimination
A Dutch auction
Haggling
Why is first degree price discrimination rate
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
What is second degree price discrimination
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
What are examples of second degree PD
Three for two
Buy one get one free
Loyalty cards
Two part tariffs
What is third degree price discrimination
Depends on groups/ types of consumer having different WTP
According to; Age Student Gender Citizenship Income
What are some examples of third degree PD
Men and women for haircuts
Food coupons
How is the internet of things being used
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
Why is preventing reselling crucial
To make third degree price discrimination work
What are the various ways to prevent reselling
Sell at a unique moment in time
Student IDs
Software firms
What are the other forms of price discrimination that can be used by non monopolists and doing firms with different products
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
What are the legal and ethical limits on PD
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
What may be ethical benefits
For third degree, wealthy buyers may subsidies the purchases of more financial strained buyers - cross subsidy
What are the problems Swann identifies with PD
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
What does Swann say about two part tariffs
Fixed cost and usage cost
E.g domestic telephone subscriber
Entry fee to an amusement park
What is pricing over time
Peak v off peak
Holidays
Price slimming
Lies between third and second
What is noisy pricing
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
