Part III: Analysis of firm strategy Pricing SLIDESHOW 9

Question 1

What is the form of cost plus pricing principle?

Answer 1

Price is determined by adding a percentage mark-up to average variable cost

Question 2

Why is cost plus pricing may produce greater price stability?

Answer 2

Because it shouldn’t change every time there is a minor variation in demand

Question 3

How is valued price stability?

Answer 3

By consumers : reduces their search costs.

By producers : reduces likelihood that destructive price competition may break out.

Question 4

What are the 3 advantages of cost plus pricing?

Answer 4

1\ EZ to understand, need less information to be implemented
2\ Greater price stability
3\ Sense of fairness

Question 5

What does the firm need to do in order to put in place a cost plus pricing?

Answer 5

Average Variable Cost, thus estimate demand function

Question 6

When is cost plus pricing equivalent to profit-maximizing pricing?

Answer 6

If AVC is approximately constant, and the mark-up is set to a value of 1/(PED-1)

Question 7

What if the firm’s demand is price inelastic?

Answer 7

The larger the mark-up is required for profit-maximization

Question 8

What happens in difficult economic periods?

Answer 8

PED is high an the mark-up is small. Same when competition is intense

Question 9

What happens in great economic periods?

Answer 9

Mark-up is larger. Same when competition is weak

Question 10

What are the various objectives that might be considered when formulating prices?

Answer 10

1\ Target profitability
2\ Target sales revenue
3\ Target market share, price stability
4\ Stability of sales volume
5\ Comparability of own prices with those of competitors
6\ Prices perceived as fair by customers

Question 11

When does price discrimination happen?

Answer 11

When there are variations in the prices charged for a product that is supplied under an identical cost structure no matter the buyers or # units produced and sold

Question 12

Due to difference in costs, prices might be different, is it price discrimination?

Answer 12

No. Contrary yes !

Question 13

What are the 3 types of price discrimination?

Answer 13

1\ 1st degree = perfect price discrimination. Indentity of purchase and # of units purchased matters.
2\ 2nd. Depends on # units purchased.
3\ 3rd. Depends on identity of purchaser.

Question 14

What is dumping?

Answer 14

Charging a lower price to consumers in poorer countries than those in richer ones.

Question 15

What are the 2 conditions for a policy of price discrimination to be possible?

Answer 15

1\ Price discriminating firm must enjoy some degree of market power
2\ Market for the product must be divisible into sub-markets with different demand conditions (or different price elasticities also)

Question 16

What is the reservation price?

Answer 16

The maximum price the consumer is willing to pay

Question 17

Give a first polar case of 1st degree price discrimination.

Answer 17

The market demand function represents a large number of consumers

Question 18

Give a second polar case of 1st degree price discrimination

Answer 18

One consumer, whose willingness to pay decreases as the number of units purchased increases

Question 19

What is worthwhile for the monopolist?

Answer 19

To supply all consumers whose reservation prices exceed the monopolist’s marginal cost. –> Surplus

Question 20

How could a monopolist also obtain a surplus?

Answer 20

By charging a two-part tariff (fixed fee + additional uniform price for each unit purchased)

Question 21

Why is the outcome superior on allocative efficiency criteria for 1st degree price discrimination?

Answer 21

In non-discriminating case, possible to make someone better off without making anyone else worse off. In 1st degree price discrimination, not possible.

Question 22

What is better if the monopolist can distinguish between consumers?

Answer 22

Offer the same menu of prices and quantities to all consumers

Question 23

What is the 3rd price discrimination?

Answer 23

Offering different prices to different consumers

Question 24

With what must the nature of the individual’s demand function be correlated?

Answer 24

The identifying characteristic

Question 25

What does the monopolist do in a third degree price discrimination?

Answer 25

1\ segments market into groups
2\ charges same price/unit sold within each group
3\ charges different prices to members of different groups

Question 26

What are the 2 unequivocal conclusions that can be drawn of the 3rd degree discrimination?

Answer 26

1\ monopolist’s abnormal profit is always higher than in non-discriminating case
2\ When 2 sub-markets, one price will always be higher and the other lower than the uniform monopoly price in the non-discriminating case

Question 27

What is intertemporal price discrimination?

Answer 27

When products are more expensive now than later

Question 28

How could the practise of intertemporal price discrimination be limited?

Answer 28

By the strategic behaviour on the part of consumers

Question 29

Give other examples of price discrimination

Answer 29

1\ Brand labels
2\ Loyalty discounts
3\ Coupons
4\ Stock clearance ; Dutch auction also

Question 30

What is a peak load pricing?

Answer 30

When demand varies at different times of the period

Question 31

From where does transfer pricing come?

Answer 31

When a division of a firm uses the output of another division as one of its inputs

Question 32

In which firm’s form does transfer pricing usually take place?

Answer 32

M-form and H-form

Question 33

What is the goal of transfer pricing?

Answer 33

Determining the prices of intermediate products

Question 34

Why is transfer pricing a crucial decision?

Answer 34

Because it affects the imputed revenues of the selling division, the imputed costs of the buying division and therefore the imputed profitability of both divisions and of the firm as a whole

Question 35

What are the 3 cases in transfer pricing?

Answer 35

1\ all production output passed to distribution
2\ Competitive external market, production surplus intermediate output can be sold or distribution division can obtain additional supplies through external market
3\

Question 36

In the second case, how should the transfer pricing be?

Answer 36

Perfectly competitive price in order to buy and sell in the firm

Question 37

Why is transfer pricing a controversial topic in the case of multinational firms?

Answer 37

There are strong incentives for firms to set their transfer prices in such a way as to shift profits towards divisions located in countries with low rates of corporation tax (tax on company profits) –> vertically integrated multinationals