413 Pricing 3 - 31 Marco

Pricing Strategies and Tactics
Luiz Afonso dos Santos Senna, PhD

lsenna@producao.ufrgs.br
Luiz Afonso dos Santos Senna - PhD
Fatores na fixao de Preo
Fatores Externos afetando as decises de preos

Fatores Externos incluem a natureza do mercado e da demanda, competio e outros elementos ambientais
Mercado e demanda
Custos definem o limite inferior e a demanda
define o limite de preo. As relaes preo-demanda so fuindamentais par aos teomadres de deciso em transportes
Preo em diferentes tipos de mercados
Mercados de Competio Pura

Bens/servios uniformes No existe um nico vendedor ou comprador com efeito significativo sobre o preo de mercado Marketing mix possui pouco impacto
Preo em diferentes tipos de mercados
Competio Monopolstica
Compradores e vendedores trocam sobre uma gama de preos nfase em diferenas por meio de diferenciao atravs de marketing mix Poucos vendedores altamente sensveis aos preos de cada um e de estratgias de marketing
Competio Oligopolstica
Objetivos de Pricing
Consideraes primrias na fixao de preos

Preo baseado em custos X baseado em valor
Cost-based versus value-based pricing

Source: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011)
Pricing, Competio e Estrutura de Mercado
Porters Five Forces Model (old)

How does our pricing strategy fit into this
framework? What economic principles apply?
New Entrants
Supplier Power
Internal Rivalry
Buyer Power
Substitutes and Complements
Market Structure Internal rivalry

Market structure and pricing decisions are closely
related. But how to define the market?

The degree to which the firm gets to choose price is
determined in large part by market structure

There are two extreme cases: perfect competition
and monopoly
Assessing and responding to a competitors price cut (depending on the market structure)
Perfect Competition
Conditions necessary:
Large
numbers of buyers and sellers product
Homogeneous Free
entry and exit information
Perfect
Perfect Competition
Demand curve for any given firm is
horizontal. Price is set by market at Pe

S Pe D Pe D
Firm can sell as much or as little as desired
at market price, but nothing if they raise P.

Monopoly
Conditions necessary Single seller of product No close substitutes Significant barriers to entry There are few examples of perfect
competition and pure monopoly. Most firms have a differentiated product, and there are substitutes.
Pricing in Perfect Competition

Do not choose price.
Choose output quantity. TC includes opportunity
cost of capital invested.

What will be our profit (loss) from our output
decision?

Should we produce now? (SR) Should we stay in the industry? (LR)
Costs at different levels of production
Cost per unit at different levels of production

Pricing in a Monopoly
Profit maximization will be achieved by setting
price so that MC=MR. It is not reached by setting price as high as possible. Like any firm, the monopolist is constrained by their demand curve. One cannot choose both P and Q.
The Shut-Down Rule

At what point should the firm cease
production of a certain item?

When might it pay to produce at a loss? In SR, many costs are fixed. Just because a
firm is making losses, it does not necessarily mean it should shut down (short run), or even go out of business (long-run).
The Shut-Down Rule cont.

Profit = TR TC; TR=P*Q, TC = VC + FC
(TR - VC) - FC = [(P - AVC)Q] FC
Separate out fixed costs, focus on variable elements
As long as P>AVC, there is a positive contribution to
fixed costs.
If firm shuts down (Q = 0), then Profit = - FC
If shut down: Firm has a loss of fixed costs.
The Shut-Down Rule cont.

In SR, firm may minimize losses by continuing to
produce.
If losses are expected permanently, get out. Case of multiple products: C = FC + VC1 + VC2
The Shut-Down Rule

1. P = (TR1 - TVC1) + (TR2 - TVC2) - FC 2. P = (P1*Q1 - AVC1*Q1) + (P2*Q2 - AVC2*Q2) - FC 3. P = [(P1 - AVC1)*Q1]+ [(P2 - AVC2)*Q2] - FC
Results:
1. 2.
SR - each product should be produced if Pi>AVCi In LR, the firm should continue operating only if expected P>=0 (Profits are non-negative)
Price Discrimination
Selling the same good to different people at
different prices
Conditions necessary:
Identifiable customer groups with differing price elasticities

Maintain separation of groups--prevent resale.
Types of Price Discrimination

First degree
Identify
and charge each customer what they are willing to pay Limit: D = MR, no consumer surplus.
Second degree
Quantity
discounts. Volume purchases are given lower prices. Need to measure goods and services bought by consumers.
Types of Price Discrimination

Third degree
Segment
markets in some way. Charge all in the segment the same prices. Treat each segment as a separate market then do MR=MC in each Are coupons as a price discrimination mechanism?
Oligopoly Strategies
Common theme - Rivalrous behavior Pricing - limit pricing - set prices low as signal
to possible entrants or other competitors your willingness and ability to defend your market share.
Must
have credibility.
Trading
SR profit for more profits later
Use the legal / regulatory systems

File patent application Challenge business charter application
File regulatory challenge
Pre-emptive entry - Wal-Mart
Capacity and production
Announce
capacity expansion
Revise/modify
products - more difficult to copy
Advertising
Raise
cost of entry for others
Oligopoly and Monopolistic Competition

Oligopoly
Few
sellers - usually large ones Recognized interdependence in pricing and output decisions Need to consider response of rivals in pricing decisions Typically significant barriers to entry

Monopolistic Competition
Large
number of interdependent sellers
Differentiated
Good
product
substitutes
Easy
entry and exit

Most industries are one or the other
Oligopoly: many heavy manufacturing
Autos, steel, chemicals, pharmaceuticals
Monopolistic Competition
Service companies, retail stores, large corporations (McDonalds, Wendys) The important point is that demand is downward sloping
Cartels
Illegal in most countries but encouraged in
others Conditions helpful:

Small
number of firms Homogeneous product Entry barriers Similarity of members
Cartels
Problems with cartels:
Cheating
Price
on agreement
cutting behaviour
Tend
to fall apart
Note: When might firms in an industry ask for
(demand) regulation?
Pricing Strategies
Profit maximizing rule:
Set production at level where MR = MC
Non - Maximizing pricing rules

there are a variety of these
Pricing for Multi-Product Firm

Two products, x and y. TRfirm = TRx + TRy
If there are any spillovers from x to y, then you
may get complications.
dTR dTRx dTRy MRx = = dQx dQx dQx
dTR dTRy dTRx MRy = = dQy dQy dQy

Multi-Product Firm cont.

The two terms on the right side of the
equation represent interactions. They can be either positive or negative.

If x and y are complementary goods, the
effect is positive.
If x and y are substitutes, the effect is
negative. One units gain is the others loss.
Two part pricing

Charge P = MC
charge a fixed fee to extract some of the
consumer surplus Examples:
country clubs health clubs electricity providers
Declining block pricing

Charging different prices according to how
much is purchased Attempt to extract consumer surplus and transfer value to company
Auction pricing models

Standard auction model multiple bidders compete with each other start at some low price, then successive bids raise price until someone wins
Dutch auction model start at a high price, lower it until someone bids ex: dutch flower auctions How to extract consumer surplus?
Porters Five Forces Model

How does the development of online business
affect this analytic tool? How does the Internet change the economic principles that apply?
New Entrants
Supplier Power
Internal Rivalry
Buyer Power
Market structure and the Internet

Traditional industry structure paradigm?
Structure, time and place? Firm size, customer access and service?
Pricing, and reputation online

Who is competing with whom?
Internet and demand issues

Role of customer service and customer loyalty
online: e-loyalty? Consumer demand issues - which goods to buy online, which in person? How to price online? Does this signal the end of the Brand?
Pricing and the Internet

Traditional pricing paradigm?
Access to demand data... Measurement of demand elasticities?
Ability to conduct pricing experiments

Ability to spot market changes - and
move quickly (perhaps) Access to bigger customer base Will prices be lower online?
Firm structure and the Internet

Are traditional firm structure concepts now
irrelevant? Economies of scale? Scope? How does this affect firm incentives to vertically integrate (or de-integrate)? Central role of transaction costs...
The Determinants of Demand

Demand The relationship between the
quantity of a good desired by people in a market and the factors that affect that the quantity desired is referred to as the demand for the product. We can express the demand for a product in the form We have some precise definitions related to how income and prices of other goods affect the demand for a good/service
Factors that we expect to affect the demand for the good include:

Population (n) Price of the good (pi) Price of other goods (pj) Income (y) Expectations of future prices Tastes (T)

Two goods, x and y, are said to be substitutes if an
increase in the price of x (y) increases the demand for good y (x) and a decrease in the price of x (y) decreases the demand for y (x) (Butter and margarine) Two goods, x and y, are said to be complements if an increase in the price of x (y) decreases the demand for good y (x) and a decrease in the price of x (y) decreases the demand for y (x) (Sugar and coffee)
Income and Demand
A good is said to be normal if an increase (decrease) in income increases (decreases) the demand for the good. A good is said to be inferior if an increase (decrease) in income decreases (increases) the demand for a good
The Demand Curve

The relationship between the quantity demanded of a good and the
price of that good is referred to as the demand curve.
Figure 5
10
6
Price ($)
0 0 10 20 30 40 50 Quantity 60 70 80 90 100
The demand curve gives the relationship
between price and the quantity consumers will desire to purchase at that price Note the demand curve is drawn given that no other factors affecting the demand for the product, such as income, population, or tastes, change
Demand for the product is based on
specific, unchanging values for the other factors that affect demand
The Law of Demand
As the price of a good decreases (increases), more (less) of it will be purchased
That is, the demand curve is downward sloping
There are two relationship:
factors
that
explain
this
As the price of a good increases, consumers will substitute into other goods (substitution effect); .As the price of a good increases, consumers will have less real income to purchase all goods (income effect).
Changes in Demand versus Changes in Quantity Demanded

A movement along a demand curve is referred to as a change in
quantity demanded.
The quantity demanded changes because of a price change. A shift in the demand curve is referred to as a change in demand. Demand changes (the demand curve shifts) because of a change in one of the factors affecting demand other than price (income, price of other goods, tastes, population) changes.
Demand for steaks

D1 represents the demand for steaks (lbs/day) given the price of chicken is $3.50; the number of customers is 1,500 a day; and the average annual household income is $40 thousand. Then we might expect the following:
A decrease in demand for steak if the price of chicken, a substitute for steak, fell
from $3.50 to $2.00. This is shown by a shift in of the demand curve from D1 to D2 An increase in demand for steak if the annual income increases from $40 to $60 thousand, since steak is a normal good. This is shown by a shift out of the demand curve from D1 to D3
Figure 1
10
Price ($)
0 0 10 20 30 40 50 Quantity 60 70 80 90 100
D2
5
D3
4
Price ($/lb)
D1
D4
1
0 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000
Quantity (lbs of Steak/Day)
Algebraic Representation
The preceding figure that follows is given by
QD = 100 - 10P Linear relationship we can graph by choosing two points.
Easiest points: Q = 0 0 = 100 - 10P or P = 10, Q = 0 P = 0 implying Q = 100 - 10(0) = 100 and therefore P = 0, Q = 100
Slope, dQ/dP = -10
The Determinants of Supply

Number of Firms
Price of Product
Cost of inputs
Wages Capital Materials
Price of other goods
Expectations of Future Prices

Technology
The Supply Curve

The relationship between the quantity supplied of a good
and the price of that good is referred to as the supply curve The supply curve gives the relationship between price and the quantity produces will wish to sell at that price Note the supply curve is drawn given that no other factors affecting the supply for the product Supply of the product is based on specific, unchanging values for the other factors that affect supply
Figure 3
16
14
12
10
0 0 10 20 30 40 50 Q 60 70 80
The Law of Supply

As the price of a good increases (decreases), more (less) of it will be
produced and offered for sale. The supply curve is upward sloping.
This is explained by the assumption that marginal (incremental) cost increases as output increases.
Changes in Supply versus Changes in Quantity Supplied

A movement along a supply curve is referred to as a
change in quantity supplied.
The quantity supplied changes because of a price change.
A shift in the supply curve is referred to as a change
in supply.
Supply changes (the supply curve shifts) because of a change in one of the factors affecting supply other than price changes.
Comparisons
What happens to Price & Quantity when:
Incomes increase Wages fall Prices of other goods change Making predictions of the impact on the market of these types of changes is referred to as Comparative Statics
Comparisons
These changes are all changes in demand or changes in
supply
Shifts in demand or supply curve
4 possibilities:
Increase in demand (shift out demand curve) Decrease in demand (shift in demand curve) Increase in supply (shift out supply curve) Decrease in supply (shift in supply curve)
The Impact of Market Condition Changes on Equilibrium Price and Quantity Market Impact on Impact on Examples Change Equilibrium Equilibrium Price Quantity Increase in + + Increase in Income (normal Demand good); increase in price of substitute; decrease in price of complements; increase in population Decrease Opposite of increase in in Demand demand Increase in + Technological innovation; Supply increase in suppliers; decreases in costs Decrease + Increase in costs or wages; in Supply increase in price of alternative product produced by firms
Pricing Strategy
How does a company decide what price to
charge for its products and services? What is the price anyway? doesnt price vary across situations and over time? Some firms have to decide what to charge different customers and in different situations They must decide whether discounts are to be offered, to whom, when, and for what reason
Why is Pricing Important?

In a company with average economics*, 1% increase in volume = 3.3% increase in profit 1% increase in price = 11.1% increase in profit Improvements in price typically have 3-4 times the effect on profit as proportionate increases in volume.
*Based on average of 2,463 companies
Price vs. Nonprice Competition

In price competition, a seller regularly offers
products priced as low as possible and accompanied by a minimum of services In non price competition, a seller has stable prices and stresses other aspects of marketing With value pricing, firms strive for more benefits at lower costs to consumer With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm
Nonprice Competition
Some firms feel price is the main competitive
tool, that customers always want low prices Other firms are looking for ways to add value, thereby being able to avoid low prices Sometimes prices have to be changed in response to competitive actions Many firms would prefer to engage in non price competition by building brand equity and relationships with customers
The Process: An Illustration

SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone
DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances
Freight payments One price vs. flexible price Psychological pricing
Leader pricing Everyday low vs. high-low pricing Resale price maintenance
Steps for Determining Prices

Establish Pricing
Objectives

Increase sales volume? Prestigious image? Increase market share?

Study Costs Can you make a profit? Can you reduce costs without affecting quality or image?

Estimate Demand

What do customers expect to pay? Prices usually are directly related to demand.

Study Competition

Decide on a
Pricing Strategy
Price higher than the competition because your product is superior Price lower, then raise it once your product is accepted

Set Price Monitor and evaluate its effectiveness as conditions in the market change
Pricing Technology
Smart Pricing decisions are based on an
enormous amount of data that Web-based pricing technology crunches into timely, usable information. Communicating Prices to Customers electronic gadgets that provide real-time pricing information such as electronic shelves, digital price labels
Pricing Technology
RFID Technology wireless technology that
involves tiny chips imbedded in products. The chip has an antenna, a battery, and a memory chip filled with a description of the item Toll technology
Geographic Considerations
Geographic Considerations
FOB (free on board) plant or FOB origin: Price quotation that does not include shipping charges. Buyer pays all freight charges to transport the product from the manufacturer Freight absorption: system for handling transportation costs under which the buyer may deduct shipping expenses from the costs of goods
Uniform-delivered price: system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses Zone pricing: system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region Basing-point system: system for handling transportation costs in which the buyers costs included the factory price plus freight charges from the basing-point city nearest the buyer. Seeks to equalize competition between distant marketers
Product and Pricing Strategies
Product Characteristics
Types of Products Stages of Products
Other Pricing Strategies

Price-Based
Optimization Skimming Penetration
Price Adjustment Strategies

Discount Pricing Bundling Dynamic Pricing
Pricing Strategies
Penetration Pricing
Penetration Pricing
Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars,
food stuffs, household goods, etc.

Suitable for products with long anticipated life cycles May be useful if launching into a new market
Market Skimming
Market Skimming
High price, Low volumes Skim the profit from the market Suitable for products that have
short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)
Examples include: Playstation,
jewellery, digital technology, new DVDs, etc.
Market Skimming
Many are predicting a firesale in laptops as supply exceeds demand Plasma screens: Currently at high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images, available from Education Image Gallery
Value Pricing
Value Pricing
Price set in accordance with
customer perceptions about the value of the product / service

Examples include status
products/exclusive products
Companies may be able to set prices according to perceived value.

Title: BMW At The Frankfurt Auto Show. Copyright: Getty Images, available from Education Image Gallery
Loss Leader
Loss Leader
Goods/services deliberately sold below cost to
encourage sales elsewhere

Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at 3 in the hope that people will be attracted to the store and buy other things
Purchases of other items more than covers loss on
item sold e.g. Free mobile phone when taking on contract package
Psychological Pricing
Used to play on consumer perceptions Classic example - $9.99 instead of $10.00!
Odd-even: $5.95, $.79, $699 OR $12, $50

Multiple Unit-3 for !1.00 better than $.34 each
Odd-Even Pricing Odd numbers convey a bargain image -- $.79, $9.99, $699
Even
numbers convey a quality image -- $10, $50, $100
Prestige Pricing sets a higher than
average price to suggest status
Multiple-Unit Pricing 3 for $.99 Suggests a bargain and helps
increase sales volume. Better than selling the same items at $.33 each.
Everyday Low Prices (EDLP)
set on a consistent basis
Going Rate (Price Leadership)
Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on
price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
May follow pricing leads of rivals especially where those rivals
have a clear dominance of market shar

Where competition is limited, going rate pricing may be
applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets
Tender Pricing
Tender Pricing
Many contracts awarded on
a tender basis
Firm (or firms) submit their
price for carrying out the work

Purchaser then chooses
which represents best value

A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF priced at 13 billion!
Most government contracts
Charging a different price for
the same good/service in different markets

Requires each market to be
impenetrable
Requires different price
Prices for rail travel differ for the same journey at different times of the day
elasticity of demand in each market Air/rail
First class Business class Economy class
Discounts and Allowances

Cash Discounts offered to
buyers to encourage them to pay their bills quickly.

2/10,
net 30
Quantity Discounts offered for
placing large orders Trade Discounts the way manufacturers quote prices to wholesalers and retailers.
Promotional Pricing -- Used with sales
promotion
Loss Leader Pricing offering very
popular items for sale at below-cost prices Special-Event Back-to-school specials Dollar days Anniversary sales Rebates and Coupons

Seasonal Discount offered
outside the customary buying season

Allowances go directly to the
buyer. Customers are offered a price reduction if they sell back an old model of the product they are purchasing
Destroyer Pricing/Predatory Pricing
Destroyer/Predatory Pricing
Deliberate price cutting or
offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants
Anti-competitive and illegal if
it can be proved
Typical of oligopoly with
Microsoft have been accused of predatory pricing strategies in offering free software as part of their operating system Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market
collusion
The Legality and Ethics of Price Strategy

Unfair Trade Practices
Price Fixing
Issues That Limit Pricing Decisions
Predatory Pricing
114
Unfair Trade Practice Acts
Laws that prohibit wholesalers and retailers from selling below cost
Price Fixing
An agreement between two or more firms on the price they will charge for a product (usually in oligopolistic
markets)
The Robinson-Patman Act of 1936 (USA):
Prohibits any firm from selling to two or
more different buyers at different prices if the result would lessen competition
Robinson-Patman Act Defenses
Seller Defenses
Cost
Market Conditions
Competition
118
Predatory Pricing
The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
Discussion: Impact of Ethics on Pricing

How should you price if your product is a life-
saving drug? What are the ethical considerations?
Customers have no choice Need to pay for the research When cheaper options doesnt work Competition decides
120
Some other pricing strategies

These all involve the use of some numerical
understanding.
Absorption/Full Cost Pricing
Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to
cover both fixed and variable costs
Absorption Cost Pricing Price set to
absorb some of the fixed costs of production
Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer
item of production MC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively high
Allows variable pricing structure e.g. on a flight from London to
New York providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Example:
Aircraft flying from Bristol to Edinburgh Total Cost (including normal profit) = 15,000 of which 13,000 is fixed cost* Number of seats = 160, average price = 93.75 MC of each passenger = 2000/160 = 12.50 If flight not full, better to offer passengers chance of flying at 12.50 and fill the seat than not fill it at all!
*All figures are estimates only Luiz Afonso dos Santos Senna - PhD
Contribution Pricing
Contribution Pricing
Contribution = Selling Price Variable (direct costs)
Prices set to ensure coverage of variable costs and a
contribution to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances
Target Pricing
Target Pricing
Setting price to target a specified profit level Estimates of the cost and potential revenue at
different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100
This strategy is used by many clothes
retailers where they can add upto 60% markup on the basic cost of the clothes. So even with a 50% sales offer they still make a profit!
Cost-Plus Pricing
Cost-Plus Pricing
Calculation of the average cost (AC) plus a
mark up
AC = Total Cost/Output
Influence of Elasticity
Price Inelastic:
% change in Q < % change in P

e.g. a 5% increase in price would be met by a
fall in sales of something less than 5%

Revenue would rise A 7% reduction in price would lead to a rise in
sales of something less than 7%

Any pricing decision must be mindful of the impact of
price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes
PED = % Change in Quantity demanded
% Change in Price
Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by
something more than 4%

Revenue would fall
A 9% fall in price would lead to a rise in sales of
something more than 9%

Revenue would rise
Select a Pricing Method

Mark-up Pricing - Cost Plus
Target Return Pricing

Perceived Value Pricing
137
Device Pricing vs. Whole Product Pricing

Value of any product to its market is strongly
influenced by prices of competitive products Competitive devices are analyzed, but products are priced Product features have different values:

Customer service Warranties Distribution channels (e.g., convenience)
The sum of the features makes up the
product
Determining Perceived Value

What value is placed on the end result? The cost of alternative solutions to the
customer. A function of:

Prices of comparable (though not identical) products The value (+/-) of the products differences vs. the competitive offering The value of the Whole Product
Economic Value Analysis

Identify the cost of the competitive product or process (i.e., the reference value) Identify all the factors that differentiate the product. Determine the value to the customer of these differentiating factors (i.e., the differentiation value) Sum the reference value and the differentiation value to determine the total economic value.
Economic Value vs. Perceived Value

Product Performance Marketing Effort*
*A key task of marketing is to translate
the economic value into high customer perceived value
Economic Value
Customers Perceived Value
Pricing Decision
Select a Pricing Method

Mark-up Pricing - Cost Plus
Target Return Pricing

Perceived Value Pricing Value Pricing Going Rate Pricing (market price) Reference Pricing (comparison w/substitutes) Sealed-Bid Pricing
142
Select the Final Price

Desired/Required Distributor Margins
Psychological pricing Influence of other marketing mix elements
Company pricing policies

Impact of price on others
Conjoint Analysis Stated Preference Methods Trade-off Analysis and Behavioural models
Behavioural Models -Logit Model-
e= basis of the logarithm neperiano i- alternative being considered J= set of alternatives where i is one of them Ui= utility function of altarnative i Uj= utility function of alternative j
Ui = utility function = parameters to be estimated Xi= attributes
Data Collection
Revealed Preference
Data gained from experience Good to know about previous experience and existing products/services
Data gainded from hipothetical questions in selected scenarios Good to gain information about new services/products
Stated preference


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Pricing Strategies and Tactics

Luiz Afonso dos Santos Senna, PhD

Luiz Afonso dos Santos Senna - PhD

Fatores na fixao de Preo

Luiz Afonso dos Santos Senna - PhD

Fatores Externos afetando as decises de preos

Preo em diferentes tipos de mercados

Mercados de Competio Pura

Luiz Afonso dos Santos Senna - PhD

Preo em diferentes tipos de mercados

Luiz Afonso dos Santos Senna - PhD

Consideraes primrias na fixao de preos

Preo baseado em custos X baseado em valor

Cost-based versus value-based pricing

Luiz Afonso dos Santos Senna - PhD

Pricing, Competio e Estrutura de Mercado

Porters Five Forces Model (old)

framework? What economic principles apply?

Substitutes and Complements

Luiz Afonso dos Santos Senna - PhD

Market Structure Internal rivalry

related. But how to define the market?

determined in large part by market structure

Luiz Afonso dos Santos Senna - PhD

numbers of buyers and sellers product

entry and exit information

Luiz Afonso dos Santos Senna - PhD

horizontal. Price is set by market at Pe

Firm can sell as much or as little as desired

at market price, but nothing if they raise P.

Luiz Afonso dos Santos Senna - PhD

Pricing in Perfect Competition

cost of capital invested.

Should we produce now? (SR) Should we stay in the industry? (LR)

Luiz Afonso dos Santos Senna - PhD

Costs at different levels of production

Cost per unit at different levels of production

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule

production of a certain item?

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule cont.

(TR - VC) - FC = [(P - AVC)Q] FC

Separate out fixed costs, focus on variable elements

As long as P>AVC, there is a positive contribution to

If shut down: Firm has a loss of fixed costs.

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule cont.

Luiz Afonso dos Santos Senna - PhD

The Shut-Down Rule

Luiz Afonso dos Santos Senna - PhD

Identifiable customer groups with differing price elasticities

Luiz Afonso dos Santos Senna - PhD

Types of Price Discrimination

Luiz Afonso dos Santos Senna - PhD

Types of Price Discrimination

SR profit for more profits later

Luiz Afonso dos Santos Senna - PhD

File patent application Challenge business charter application

File regulatory challenge

Pre-emptive entry - Wal-Mart

Luiz Afonso dos Santos Senna - PhD

products - more difficult to copy