Price Flashcards
Two kinds of surplus
Consumer surplus
Producer surplus
Common ways to cut costs
Hold overall package price constant, but shrink total quantity
“Shrinkflation”
Ex: Toblerone chocolate gets more gappy
Increase price (cut into consumer surplus)
Perceived price fairness
Acceptable for a firm to raise prices when profits are threatened
Also fine to maintain prices when costs decrease
Unfair to exploit shifts in demand by raising prices
Pricing patterns
Prices are often maintained during disasters (when supplies are limited)
Price changes are more responsive to increases in costs than to increases in demand
Price changes are more responsive to cost increases than to cost decreases
Third option to increase consumer surplus is increasing both WTP and price
Ex: a college increases tuition to prove they provide good education
Selling a product/service at multiple prices
1st degree ≈ Seller charges each buyer their maximum willingness to pay (theoretical ideal for sellers)
2nd degree ≈ Seller charges less to buyers who buy in bulk
3rd degree ≈ Seller charges different amounts to different “classes” of buyers (often based on willingness or ability to pay)
Same product, but different prices for different types of consumers
“A/B testing”
Price experiments
Ex: every 10th customer gets a 5% off coupon
Factors Leading to Less Price Sensitivity
Consumers become attached to a well-marketed, well-differentiated brand
When buyers are less aware of substitutes
The purchase is small compared to buyer’s income/budget
Prestige products
Left digit bias
The tendency to focus on the left-most digit of a number while partially ignoring other digits
Loss leader pricing
Offer good at or below cost to entice customers to come in and buy other, higher-margin goods
Also see loss leader pricing for products that require constant part-replacement
free trial as a type of loss leader
Competitive pricing
Using price primarily to steal share (rather than increase surplus)
Markup pricing
Adding a markup to the product’s cost
Often ignores current demand, perceived value
Costs easier to determine than demand
Despite non-optimality, remains popular
Markup can also be a point of differentiation
How do we know our WTP?
price can act as a suggestion that influences our WTP
Precise anchors have a stronger pull than rounded anchors
Buyers pay higher prices when residential real estate prices are more precise
Traditional vs. behavioral economics
Traditional economics: what am I giving up later?
Behavioral economics: how much will this hurt?
