Managerial EconomicsJack Wu
Pricing Policyuniform pricingcomplete price discriminationdirect segment discriminationindirect segment discriminationbundling
Northwest AirlinesMinneapolis-New York
Business class $ 1711
Unrestricted economy
$ 1267
Advance purchase, with penalties
$ 765
Advance purchase, for senior
$ 692
Asian Wall Street Journal
Price for annual subscription
Print: Hong Kong $294
Print: Singapore $173
Print: Tokyo $871
Interactive: Worldwide $59
0
30
55
80
2500 5000
marginal revenue
marginal cost
demand
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
Uniform Pricing
Uniform Pricing: Profit MaximumMR = MCEquivalently, set the incremental margin
percentage equal to the inverse of absolute value of price elasticity of demand,
(price - MC) / price = -1/e
Price Elasticityalways set price so that demand is elasticif demand more elastic, then lower
incremental margin percentage (IM%) e = -2 IM% = 1/2
e = -1.5 IM% = 2/3
Pricing Private-Label Cola Suppose that WalMart learns that demand
for private-label cola is less elastic than the demand for Coca Cola. Should WalMart set a higher price for private-label cola?
Uniform Pricing: Shortcomingsleaves buyers with
a lot of surplusdoes not sell to
every potential buyer
Complete Price Discriminationprice each unit at buyer’s benefit and sell
quantity where MB = MC � maximum profit -- theoretical ideal� different from MR = MC
implementation: must know entire marginal benefit and marginal cost curves
Complete Price Discrimination: Practice
bargainingauctions
Direct Segment Discrimination, Iprice by segmentimplementation
� fixed identifiable characteristic --- basic for segmentation
� no re-sale
Direct Segment Discrimination, IIsimple case: uniform price within each segment
� within each segment IM% = -1/e� for segment with more elastic
demand, then lower incremental margin percentage (IM%)
0
30
55
80
25003000
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
(a) Men’s demand
0
30
50
Quantity (Units a year)
Pri
ce (
Thousa
nd Y
en p
er
unit
)
(b) Women’s demand
marginal revenue
demand
40
1000
marginal revenue
demand
marginalcost
Direct Segment Discrimination, III
marg.cost
NYNEX Telephone ServiceNew York Cityresidential -- $16/month business -- $23/monthHow is discrimination possible?
Indirect Segment Discriminationstructure choice to earn different incremental
margins from each segmentimplementation
seller controls some variable to which segments are differentially sensitive
buyers cannot circumvent the variable
Traveler
Segment
Unrestricted Travel ($)
Restricted Travel ($)
Maria Business 1000 200 Tom Business 900 180 Robin Vacation 500 400 Leslie Vacation 280 224
Air Travel: Benefits
Product
Fare ($)
Sales
Total Rev. ($)
Total Cost ($)
Profit ($)
Unrestricted
900 2 1800 400 1400
Restricted 399 1 399 200 199
*MC=200
Air Travel: Indirect Segment Discrimination
Chinese Embassy: Visa Fees
Application period
1 day 3 days 7 days
Single entry $75 $60 $25
Double entry $85 $70 $35
Profitability Policy Information Requirement
Highest Complete price discrimination
Highest
Direct segment discrimination
Indirect segment discrimination
Lowest Uniform pricing Lowest
Pricing Policies: Ranking
Bundlingstrategy
pure bundlingmixed bundling
Cable Television: Benefits
“if every segment … was wild about one thing and hated the rest, they have done their job” (Economist) Segment Education
channel Music channel
Conservatives $20 $ 2
Middle of road $11 $11
Pure or Mixed BundlingWhat is the profit-maximizing pricing policy if marginal cost per channel = 0 marginal cost per channel = $5
Pure or Mixed BundlingGenerally, if item is costless, no loss from giving it to every
consumer --> pure bundling; if item is costly, then should avoid providing it to
low-benefit users --> use mixed bundling to screen out low-benefit users.
Mixed bundling is form of indirect segment discrimination
structured choice between bundle and separates