Online pricing Flashcards
what is dynamic pricing? give an example
the practice of charging different prices to consumers based on their profiles
e.g. Amazon used to use dynamic pricing depending on whether a customer was new (low price) or loyal (high price) for same good.
What is meant by the term versioning?
a form of indirect price discrimination based on self-selection.
providing consumers with the choice of purchasing different models of good/service with different features
e.g. windows home, professional, student
What is meant by the term bundling?
when two or more products are offered as a package
pure bundling - customer can only buy bundle
joint bundling - two products
leader bundling - leader product offered at a discount if purchased with non-leader product
mixed bundling - consumers able to buy bundle or products separately
why is ecommerce a competitive market?
low barriers to entry for new firms
price transparency - comparison sites
what are information goods and some potential problems with markets
= goods that can be packaged in digital form.
- low or zero marginal cost of production
problems;
- consumption is non-rival - many people can use same good at once (piracy)
- easy to duplicate (hard to exclude, piracy)
- value of good is unknown - can only be found out by reading/watching/listening to it
- market transactions are difficult
- trading often based on reputation
what is price discrimination and conditions?
selling at different prices to different people
- market power is required - seller must be able to set prices
- ability to sort customers
- segregate markets to avoid re-selling e.g. geographical
what is direct discrimination?
first degree. individual pricing
- requires enough info about consumers
- can be done online through building up profile (cookies, primary/secondary info)
what is indirect discrimination?
self-selection
- when customers are not so easily identifiable and collecting info is expensive
- e.g. versioning and bundling
Section B: 3. what pricing strategy turned out to be deadly for many ecommerce ventures during the early days of ecommerce? Why?
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is price discrimination different from versioning? How?
versioning is a form of price discrimination. It is second-degree price discrimination meaning that customers select the version of the product that suits them best.
versioning is different from first degree price discrimination as this involves selecting individuals to charge them different prices whereas versioning involves self-selection based on how much they are willing to pay for the product/service. This pricing strategy seeks to extract the greatest possible consumer surplus from consumers.
Typically there will be three versions of a product/service for a customer to choose from. A basic version with few features, an intermediary version and a deluxe version with additional features. This is known as goldilocks pricing and seeks to push customers towards purchasing the intermediary option (where profit may be the greatest)
Versioning still qualifies as being price discrimination as it involves different customers paying different amounts for the same/similar products
will dynamic pricing be a vital part of ecommerce?
Definition
Already an important part e.g. Amazon
Economics - efficiency
Why it is easier in ecommerce
Problems - customer anger/distrust
Will it become vital part?
In the future algorithms could be built to incorporate information from social media profiles. This could be seen as a privacy infringement.
How consumers can counteract
Play the game
trick the algorithms. go onto website, spend a long time browsing then leave.
- a. what is meant by switching costs
b. name two types of lock in
a. switching cost is the cost incurred by a consumer as a result of changing supplier, brand or products. This cost may be monetary in nature and/or time-based.
b. lock-in occurs when the switching costs are so high that consumers are deterred from changing supplier. Therefore they are ‘locked-in’ to one specific supplier. Dynamic pricing may be employed to lock-in customers. One type of lock-in for example, is achieved through charging new customers large discounts and older, loyal customers higher prices. This is first degree price discrimination
Another type of lock-in is achieved through group pricing. Firms may charge students lower prices to lock them into their product whilst they are young.
Achieving lock-in through ecommerce is difficult because switching costs are very low and there is an abundance of information available. e.g. price comparison sites. It is virtually no effort for a customer to use a price comparison and find/switch to a lower cost supplier.
Orbitz dynamic pricing example
Data showed that mac users would spend 30% more per night on hotels.
In search results, Orbitz shows pricier options to mac users
Orbitz share price has decreased 74% since 2007
Some customers vowed never use the site again.
price discrimination is not a new concept
A 2006 study of Fulton fish market in New York found that dealers charged Asians significantly less than whites because they believed that Asians were readier to walk away if the prices were too high—and better than whites at ganging together to boycott any dealer who ripped them off.
what is a shopbot?
On the internet, a comparison shopping website (also known as price comparison service or price engine, shopbot) allows individuals to see different lists of prices for specific products. Most price comparison services do not sell products themselves, but source prices from retailers from whom users can buy. In the UK, these services made between £780m and £950m in revenue in 2005
Data is gathered through feeds and then aggregated and shown on a site
e.g. mysupermarket.co.uk, kelkoo.co.uk
