Chapter 07 - Pricing with Market Power

Topics: Supply and demand, Pricing, Price discrimination Pages: 12 (3577 words) Published: February 12, 2013
Chapter 07 - Pricing With Market Power


PRICING WITH MARKET POWER CHAPTER SUMMARY This chapter extends the analysis in previous chapters to examine pricing decisions in greater detail. It starts by reviewing the benchmark case of charging one price to all customers. It then examines more sophisticated pricing policies that can be used to increase profits. CHAPTER OUTLINE PRICING OBJECTIVE BENCHMARK CASE: SINGLE PRICE PER UNIT

Profit Maximization Relevant Costs Price Sensitivity Estimating the Profit-Maximizing Price Linear Approximation Cost-Plus Pricing Markup Pricing On the Importance of Assumptions Potential for Higher Profits Managerial Application—Parker Hannifin Increases Profits by Adopting and Economically Sound Pricing Policy Managerial Application—Microsoft’s Market Power and Pricing HOMOGENEOUS CONSUMER DEMANDS Block Pricing Managerial Application—Block Pricing at Hickey-Freeman Two-Part Tariffs PRICE DISCRIMINATION — HETEROGENEOUS CONSUMER DEMANDS Managerial Application—Two-Part Pricing for Capital Goods Managerial Application—As Cigarette Prices Soar, A Gray Market Booms Exploiting Information about Individual Demands Personalized Pricing Managerial Application—Tuition Pricing Group Pricing Managerial Application—Virtual Vineyards Managerial Application—Pricing of Books Using Information about the Distribution of Demands Menu Pricing Coupons and Rebates Managerial Application—Harry Potter: An Example of Price Discrimination 7-1

Chapter 07 - Pricing With Market Power

BUNDLING Managerial Application—Budling Videogames OTHER CONCERNS Multiperiod Considerations Future Demand Managerial Application—Early Use of the Free Sample Managerial Application—Apple Apologizes for Its Pricing of iPhones Future Costs Storable Products Strategic Interaction Legal Issues Managerial Application—Market Segmentation Managerial Application—Apple Settles Antitrust Case by Lowering iTune Prices in Britain IMPLEMENTING A PRICING STRATEGY SUMMARY TEACHING THE CHAPTER A popular teaching tool is to ask students to discuss during class several examples of alternative pricing schemes they encounter and then discuss the characteristics of these goods, and their markets, that allow for such pricing schemes to exist. This exercise provides a good opportunity to relate back to the material earlier in the text on the topic of demand and elasticity. The Managerial Applications throughout the chapter are also good discussion starters. This chapter presents many topics that are usually of interest to students. Students often recognize that the single-price model presented in chapter 6 does not apply for many of the goods they purchase so they are typically interested in understanding how alternative pricing schemes can be implemented. The material is relatively straightforward, however, some students might struggle with the mathematical examples in the text. Instructors will want to spend more or less time on this content based on the relevance to their particular course and their students’ backgrounds. The Self-Evaluation Problems or the Review Questions, both located at the end of the chapter, could be assigned as a group exercise during class to determine whether students understand the material (particularly the mathematical questions), or could be covered during class by the instructor. There are three Analyzing Managerial Decisions scenarios in this chapter. The first, ―Profit Potential for a Microbrewery‖, asks students to calculate the profit-maximizing price when only a single price is charged to all customers and then asks students to consider alternative pricing policies that might increase profits. This scenario is a relatively straight-forward application of microeconomic theory, particularly for students with prior coursework in intermediate microeconomics or managerial economics.


Chapter 07 - Pricing With Market Power

The second scenario, ―Cell Phone Pricing‖, focuses on implementing a pricing...
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