Week 7- More realistic and complex pricing Flashcards
Why do firms not always price at the profit maximising point (MR=MC)
pricing is often more complex than mr=mc. Businesses will use pricing strategies to attract customers
What is a loss leader?
a product that is sold at a loss to the business in the hope that its low price will attract customers to buy other things once they are in the store/on the website. loss leading maximises total profit rather than individual product profit
How can pricing commonly owned substitutes increase profit for a firm?
If two businesses are competing in a town, reducing the price of one steals sales from the other. If one business buys the other business then they can raise the prices of both businesses.
Is demand for a bundle of substitutes less or more elastic than demand for individual products?
less elastic
After acquiring a substitute what is it necessary to do so that the two products don’t compete with each other and cause cannibalization?
You should move the two products further apart geographically or separate them by attributes (second-hand car dealership and new car dealership)
As you acquire more complements is it necessary to raise or lower prices?
lower eg. a car park next to a supermarket will see an increase in demand in both facilities if they both lower prices.
is the demand for a bundle of complements less or more elastic than demand for individual products?
more elastic
do price-related promotions (coupons, end of aisle displays etc) make demand more or less elastic?
More elastic so best to reduce the price to increase demand
do product-related promotions (quality advertising, celeb endorsements) tend to make demand more or less elastic?
less elastic so firms can often raise prices while running the promotion
Explain prospect theory
Prospect theory states that people are loss averse. They use their current position as a reference point and anything that is taken away from them hurts more that than the joy of a new benefit eg. airline snack in 2008 were stopped but led to cheaper tickets
what is price discrimination?
the practice of charging different prices that are not cost-justified to different groups of consumers
Explain why firms use price discrimination?
Customers who are not prepared to pay the profit maximising price for a product create unconsummated wealth-creating transactions as long as marginal cost is below the profit maximising price. Therefore if a lower price is set for this group then more customers can be served and profit increases
what is the rule for price discrimination for it to be successful and prevent arbitrage?
It must be possible to separate the two groups in some way otherwise the higher value group will buy at the low-value group prices
what is an example of price discrimination?
student discount. Students must produce a student card to get the discount
what are the three requirements of DIRECT price discrimination?
1) Your able to identify members of the low value group
2) Charge them a lower price
3) Prevent them from reselling to higher-value consumers
