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Year 2 Managerial Economics (AUT EXAM) > Pricing Decisions > Flashcards

Pricing Decisions Flashcards

Week 9 & 10

1
Q

How are Pricing decisions made?

A
  • Based on theories of demand, cost and market structure
  • Pricing decisions can be aspirational or strategical
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2
Q

What is the definition of a Market?

A
  • Consists of al firms willing to sell to consumers wiling to buy a product at a given price
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3
Q

What is competition?

A
  • How readily available substitutes
  • Substitutes have similar performance, occurrence, sales in the market, characteristics
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4
Q

How can market structures be determined? How does this affect the firms?

A
  • Number of firms
  • Size of firms
  • Distribution of firms
  • Freedom of entry
  • The extent of product differentiation
  • Determines how firms interact with each other and how firms can set prices
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5
Q

What is the monopolist price setting condition?

A
  • MC = MR
  • This is the profit maximisation point
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6
Q

What is the perfectly competitive price setting condition?

A
  • P = MC
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7
Q

Name some characteristics of Perfect Competition

A
  • Homogenous goods
  • No economic profit in the LR
  • Many firms
  • 0 barriers to entry
  • Perfect Knowledge
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8
Q

Name some characteristics of Monopolies

A
  • One seller
  • Supernormal profit
  • High barriers to entry
  • Few substitutes
  • High market power
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9
Q

Name some characteristics of Oligopolies

A
  • A few firms
  • Collusion may occur
  • High barriers to entry
  • Preditory pricing
  • Partial market power
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10
Q

Name some characteristics of Monopolistic Competition

A
  • Somewhat heterogenous goods
  • Many firms
  • Some barriers to entry
  • Can set some prices
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11
Q

What markets are pricing strategies most likely to be in?

A
  • Markets where power can be exercised
  • Oligopoly/Monopoly
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12
Q

How can advertisement help in competition strategy? What are the two advertisement types?

A
  • Non-Pricing strategy
  • Incentive to attract more customers at the expense of others
  • 2 types; advertisement to make demand more/less elastic
  • MORE: Coupons, weekly ads in papers, end-of-aisle display
  • LESS: Quality and experience focus (usually luxury)
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13
Q

What is Price Discrimination? How can it be achieved?

A
  • Price Discrimination: The business of selling the sam e good at different prices to different consumers
  • High PED, high Price Discrimination
  • Firms must have perfect information on PED
  • Firms must have some market power
  • Resale market must not be present
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14
Q

What is 1st Degree Price Discrimination?

A
  • Seller knows maximum price that each individual is willing to pay
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15
Q

What is 2nd Degree Price Discrimination?

A
  • Consumers are offered different packages at different prices
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16
Q

What is 3rd Degree Price Discrimination?

A
  • Seller can identify two or more separate markets based on time/location …
17
Q

What is predatory pricing?

A
  • Large incumbent firms set prices deliberately high to drive out other firms (rivals or entrants)
  • This is illegal in many countries and UBER was charged with this
18
Q

What is limit pricing?

A
  • Incumbent firms charge lower prices to deter others from entering a market
  • Entrants see a low price and believe prices will lower when they enter a market- won’t cover sunk costs
  • Incumbent believes it is better to be a monopoly at limit price than share at duopoly price
  • This is seen in a lower AC curve
19
Q

What are the factors that determine a limit price?

A
  • Cost differences
  • Demand level
  • Elasticity
  • Extent of economies of scale
  • Expected reaction of other firms
20
Q

When should limit pricing be pursued?

A
  • PV(LP) > PV(profit max)
  • Dependant on discount rate and a firm’s objective
  • Limit pricing if there is a lot of uncertainty about the entrant, incumbent and imperfect information
21
Q

What is bundling?

A
  • Combination of goods sold at below market price than if they were sold separately
  • Meal deal, Netflix Bundles
  • Incumbent firm could be a monopoly in one market, but feel threatened in another market
22
Q

What is new product pricing? What are the two different strategies?

A
  • The firm must price the product and find a promotional mix that will maximise profits, with the difficulty of estimating demand and costs
  • The two strategies are skimming prices and penetrating prices
23
Q

What are Skimming Prices? Provide a small outline of this

A
  • The firm intially set a high price to satisfy high demand levels and then reducing the price over time
  • This recovers costs quickly and allows for large SR profits
  • Demand is more inelastic in the SR, so setting high initial prices ‘skims’ market segments
  • The firm must intent to leave the market in the SR
24
Q

What are Penetration Prices? Provide a small outline of this

A
  • Setting a low price to gain market share and deter any entry, hence making low (possibly negative) profits in the LR
  • High PED in the SR
  • Significant EoS, entering at a large scale reduces LRAC
  • Firm’s objective is to stay in the market in the LR
25
Q

What does the Product Life Cycle Framework suggest?

A
  • Different pricing points within a product life-cycle
  • It should always above the Vc
  • Changes in the price is reflected by changes in firm’s objectives
26
Q

What happens in practice when firms try to price?

A
  • Often firms do not use marginalist principles, do not seek to maximise profits and operate in oligopoly markets
  • This means: P = AVC + FC (overheads) + Profit Margin
  • AC pricing might be consistent with the profit maximisation model if the profit margin added varies with elasticity
  • This isn’t always the case: the method is convenient/simple, safe/reliable and doesn’t account for inflation
27
Q

How does pricing on the internet work?

A
  • E-business cuts distribution costs, reduces retail margins and introduces effective differential pricing
  • Issues include anonymity of buyers/sellers, fraud, poor quality
28
Q

What are Learning Curves? Describe the graph

A
  • Knowledge gained from experience that can be used to improve the production process, increasing efficiency and reducing costs
  • Learning curves reflects AC reduction over time
  • This means that the curve shifts downwards and the difference between the curves are the Learning effects
  • DMR on AC curve
  • Learning Curves help forecast costs, improve pricing decisions and give big firms chances to learn
29
Q

What are learning rates? Give the formula for this

A
  • Learning Rates: A constant % in AC as cumulative output rises
  • This % represents the proportion by which unit costs decline as cumulative output doubles
  • L = (1 - AC2/AC1) x 100%
  • OR; AC2 = AC1 x (1 - L/100%)
  • If the cost function C=aQ^b, it must be made log-linear
30
Q

When are learning curves the most efficient?

A
  • Learning effects are high
  • New industries, new tech/products
  • Markets with standardised goods
  • Where management controls costs and monitor potential sources of increased productive efficiency

Year 2 Managerial Economics (AUT EXAM) (5 decks)

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