Topic 7

Question 1

What do market prices signal?

Answer 1

Where resources are required and where they are not, and scarcities and surpluses.

Question 2

What are the extensions of pricing strategy considered in the course?

Answer 2

1. Mark-up pricing (based on costs)
2. Non uniform pricing (discrimination)
3. Other pricing strategies
4. Multiple product pricing

Question 3

What is the formula for markup pricing?

Answer 3

MR = P(1-1/ε) = MC

Question 4

What is nonuniform or personalized pricing?

Answer 4

Firms with market power charge different prices for the same product. It’s price discrimination.

Question 5

Explain 1st, 2nd and 3rd degree price discrimination.

Answer 5

1st degree is perfect.

2nd degree is based on quantities. (buy one get one free)

3rd degree is when consumers are grouped (student tickets, ect)

Question 6

What is product line extension?

Answer 6

When consumers self select very similar products, dividing themselves into groups with different elasticities.

Question 7

What is peak-loud pricing?

Answer 7

People are charged more at times of peak demadn and less at off peak.

Question 8

What is inter-temporal pricing?

Answer 8

• Different gruops of customers have different price lasticities at different points in time
• When a productis launched, set a high price, later reduce it.

Question 9

What is predatory pricing?

Answer 9

Charging a below average cost in one market, to run out a competitor and charge high prices in the future.

Question 10

What is a two part tariff system?

Answer 10

A system where there is a initial lump sum to use the service, and a secondary per unit charge.

Question 11

What is strategic pricing?

Answer 11

Pricing through game strategy. An important thing is competition clauses.

Question 12

What is full range pricing?

Answer 12

The business assess all the prices of all its producs together and decides how it might improve its overall profit.

• Offer bargain buys to attract customers to their store/brand
• price elasticity of loss leader, more elastic the better

Question 13

What should a smart business do after buying another substitute?

Answer 13

Increase the prices of both, as your aggregate demand is now less elastic.

Question 14

What is interproduct canibalization?

Answer 14

When changes in quantity due to price of one good come at the cost to purchases of another good - if you own the good being cannibalized, this might not be great.

Question 15

Would should a smart business do after taking over a complimentary good?

Answer 15

Aquiring a complement makes aggregate demadn more elastic, with a more elastic demand you want to decrease prices.