Session 4 - Price Optimisation

Question 1

moving prices- volume hurdle

Answer 1

change in price

required changed in volume such that price change laves one better of or at least indifferent as before

Question 2

% DELTA Q

Answer 2

equal or greater

-% delta P /(%CM + %delta P)

Question 3

% DELTA Q

Answer 3

Qfinal - Qinitial / Q initial

Question 4

% DELTA P

Answer 4

Pfinal - Pinitial / Pinitial

Question 5

% CM

Answer 5

Pinitial - VCu / (Pinitial)

Question 6

Decision Implication

price reduction% delta P <0

Answer 6

Total is positive
expected increase in Volume associated with price reduction it will overcome volume hurdle
price reduction will increase profitability

Question 7

Decision Implication

price reduction% delta P >0

Answer 7

Total is negative < VH

Question 8

Price Elasticity

Answer 8

independent of scale
measure of the change in Volume delivered with change in prices
moving prices and see reaction of Demand
compering diff. products, bands, markets

Question 9

Interval Elasticity

Answer 9

delta q/delta p *
average p/ q at average p
p = price at average level in the interval
q= level of demand- quantity at average p

Question 10

Point Elasticity

Answer 10

elasticity of demand in an interval at a certain level of demand
(assumed linear) sloped * p/q
p = price at certain level of D.
q= quantity at specific price

Question 11

Volume Hurdle

Disadvantages

Answer 11

does NOT consider LT changes in Customer Demand as well as competitor´s reaction

Question 12

Volume Hurdle

Disadvantages

Answer 12

does NOT consider
a) LT changes in C. Demand
b) competitor´s reaction
temporary price reductions may change customer´s expectations

Question 13

Inelastic Markets

Answer 13

0 – < -1 Normal Markets
Infinity –> -1 (IE Markets)
demand changes little with price change (per unit)
tend to favour price increase to improve profitability (revenues will be greater)

Question 14

Elastic Markets

Answer 14

-1 –> - infinity
demand changes drastically (very price sensitive) when price changes (per unit)
extreme - commodity

Question 15

Elasticity

Characteristics

Answer 15

better measured in matured &commodities (we assume future is very similar to past - thus use historical data to calculate elasticity)
less well for branded markets
firm level (brand choice) >= category level (switch brand to reduce purchases)
LT (uncover substitutes) < ST (customer locked)

Question 16

Profit Optimisation

Linear Price response curve

Answer 16

average of variable cost + max w.t.p
assumes changes in demand per price unit change in constant (not matter what the base price might be)
elasticity = slope
1. w(x)= 1/10 (if x (0,10)) &0 (otherwise) –> UNIT DISTRIB.
2. d(p) = D - mp
LINEAR DEMAND

Question 17

constant elasticity price response

Answer 17

distribution of wtp which is highly concentrated near 0
demand does not drop to 0 at any time (close)
d(p) = C*p^-1 (hyberbola)
Both WTP &Price Response are hyperbolic, but Price Reponse is more to the left (asymptote)

Question 18

Logit Price Response

Answer 18

most popular
Wtp corresponse to Gausch
Price Response is logic
closest to market price

Question 19

Constant Elasticity

Moving Prices

Answer 19

moving prices using elasticity assumes demand curve is hyperbolic
good enough if we move them around the point calculated

Question 20

Profit Optimisation

Elasticity

Answer 20

p optimal = (VCu * e)/(1+e)
problems: 
industry vs product level
LT total cost Unitary
ST Variable cost Unitary

Question 21

Log Linear Model

Answer 21

exponential Regression Model
slope coefficient of Log-linear regression gives us elasticity of y in respect to x
e.g 1% increase in Quantity will result in a decrease about X% in Price