Competitive Pricing & Price Discrimination

Topics: Price point, Supply and demand, Price elasticity of demand Pages: 2 (807 words) Published: January 15, 2011
Pricing Assignment #1Mihir Bhojwani
61110636 – Sec. A
Question 1
As shown in the Excel Worksheet (Question #1), the best course of action following a competitors price decrease is to not change prices. I reduction in price by 10% leads to a subsequent reduction in Margins by 25%, but this is only offset by an increase in sales of 20%. As a result, holding prices constant sees a Total Margin of 32,000,000 which is preferable to the 30,000,000 Total Margin that a price reduction would see. Question 2

Adios Junk Mail is currently charging $15 per year with a variable cost of $10. This gives the product a margin of 33%. We are assuming that there are no fixed costs. It is in Adios Junk Mail’s interest thus to prioritize higher price over higher volume, as long as demand is inelastic. Elasticity has been calculated in Column J of the Excel Sheet for all price points and from this we gain the following insights: * At some very low prices Price elasticity of demand is a positive number: as price increases demand also increases (or at least stays the same). This is true from $13-$15, $19-$20, $24-$25 and $28. Furthermore, elasticity at low prices are generally very low. From the data we see that up to $30 the prices can be increased without total margins coming down at any single price increment. The ideal price we can deduce will at least be $30. * Multiples of $5 tend to see very high elasticity figures. This implies that consumers have psychological barriers to certain prices and the likely optimal price will have to be just before hitting such a Price. For better understanding we have added Column K in the excel spreadsheet elasticity at $5 increments between each of the relevant price points. Column K shows us that the first time elasticity goes above being unit elastic (where the adverse impact on demand exceeds that positive impact of a price increase) is at the $50 price point. Examples of Impact of Price Increase:

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