Thumb Rule of Pricing

In: Business and Management

Submitted By surbhisardana88
Words 722
Pages 3
10.1

MONOPOLY

A Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice. To do this, we first write the expression for marginal revenue:

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

9 of 50

10.1

MONOPOLY

A Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

Note that the extra revenue from an incremental unit of quantity, ∆(PQ)/∆Q, has two components: 1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P. 2. But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price ∆P/∆Q, which reduces the revenue from all units sold (i.e., a change in revenue Q[∆P/∆Q]). Thus,

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

10 of 50

10.1

MONOPOLY

A Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

(Q/P)(∆P/∆Q) is the reciprocal of the elasticity of demand, 1/Ed, measured at the profit-maximizing output, and Now, because the firm’s objective is to maximize profit, we can set marginal revenue equal to marginal cost: which can be rearranged to give us (10.1) Equivalently, we can rearrange this equation to express price directly as a markup over marginal cost: (10.2)
11 of 50

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

Applying MR-MC Output and Pricing
Chapter 10: Market Power: Monopoly and Monopsony

MC P  1  1  Ed    Ed  4 MC  9 9 9   $12 P .75 1 1 4

 

Copyright © 2009 Pearson Education, Inc.…...

Similar Documents

Pricing

...[pic] [pic] PRICING POLICY Introduction The fastest and most effective way for a company to realize its maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it Just as quickly. Yet many otherwise tough-minded managers shy away from initiatives to improve price for fear that they will alienate or lose customers. Consider the example of JCPenney stores for Queen sized mattress. The list price is $1699 and after giving away all discounts, the pocket price comes down to $630. Price realization is about decreasing price leakage, increasing pocket price and hence keeping a higher proportion of the list price that adds to the bottom line (profit). The leverage and payoff of improved pricing are high. Compare, for example, the profit implications of a 1 % increase in volume and a 1 % increase in price. For a company with average economics, improving unit volume by 1% yields a 3.3% increase in operating profit, assuming no decrease in price. On the other hand, 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1 %. Improvements in price typically have three to four times the effect on profitability as proportionate increases in volume. Reverse also applies in this case: a mere 1 % price decrease for an average company, for instance, would destroy 11.1 % of the company's operating profit dollars...

Words: 497 - Pages: 2

Pricing

...A Pricing Strategy to Promote Low-Fat Snack Choices through Vending Machines Simone A. French, PhD, Robert W Jeffery, PhD, Mary Story, PhD, Peter Hannan, MStat, M. Patricia Snyder, RD, MPH Introduction There is general agreement that measures that would reduce the fat content of the diet in the population as a whole would be helpful in preventing or delaying the development of several chronic diseases.1-4 An important question for public health policy, therefore, is how to encourage the population as a whole to make lower-fat food choices. To date, environmental intervention strategies to reduce the population prevalence of high-fat food consumption have focused primarily on improving consumer knowledge through mass media, schoolbased, and point-of-purchase education.-"-- Such interventions have shown positive effects on nutrition knowledge, but changes in food-choice behaviors have been modest in magnitude, variable, and often short lived. Environmental strategies designed to influence food choice through mechanisms of availability and cost rather than nutrition education have received less research attention.5-14 Perhaps the most impressive of these studies in magnitude of effect was a recent cafeteria-based study that examined pricing and availability influences on food choice.'4 Prices of fruit and salad were reduced by 50%, and the number of fruit and salad items available was increased. Purchase of fruit and salad increased threefold...

Words: 2506 - Pages: 11

Thumb Rule of Pricing

...10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice. To do this, we first write the expression for marginal revenue: Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 9 of 50 10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony Note that the extra revenue from an incremental unit of quantity, ∆(PQ)/∆Q, has two components: 1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P. 2. But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price ∆P/∆Q, which reduces the revenue from all units sold (i.e., a change in revenue Q[∆P/∆Q]). Thus, Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e. 10 of 50 10.1 MONOPOLY A Rule of Thumb for Pricing Chapter 10: Market Power: Monopoly and Monopsony (Q/P)(∆P/∆Q) is the reciprocal of the elasticity of demand, 1/Ed, measured at the profit-maximizing output, and Now, because the firm’s objective is to maximize profit, we can set marginal revenue equal to marginal cost: which can be rearranged to give us (10.1) Equivalently, we can rearrange this equation...

Words: 722 - Pages: 3

Pricing

...Pricing Strategy Sabrina Morgan Strategic Market Pricing Dr. Green February 2, 2012 Pricing Strategy I have fond childhood memories. Some of them are centered around Saturday afternoons at Ollie’s. Ollie’s was the restaurant that my uncle Oliver opened when I was about eight years old. The restaurant was a charming neighborhood favorite known for its burgers and homemade shakes. I shared many meals there with my family. I had birthday parties there and worked for my uncle when I was in high school. The restaurant nestled in a residential area and near several local businesses thrived for many years through the patronage of neighbors and regulars within the community. My uncle retired and closed the restaurant closed the restaurant two years ago. Recently I inherited Ollie’s. I am now faced with the task of how to reopen the restaurant and which direction to take. My choices guide the success of my business . There are many factors to consider when venturing to open a new restaurant. The building isn’t new but my concept will be. My uncle’s concept was basically a full service family style restaurant with menus items for breakfast, lunch and dinner. When I think the kind of restaurant...

Words: 1593 - Pages: 7

Sore Thumb

...Course: English Composition 115 Assignment 1.2: Summary and Personal Response The Brief McGraw-Hill Guide: Writing for College, Writing for Life (2nd Ed.) Memoir: “Farm Girl” By Jessica Hemauer Title of Summary: Sore Thumb Sore Thumb Jessica Hemauer’s memoir, “Farm Girl,” is a sensor filled passage that shows the reader how a well-developed work ethic leads to standing out like a “sore thumb.” Young people that work on a farm learn a well-developed work ethic through teamwork, leadership, sacrifice, responsibility, time management, and following an agenda. Jessica Hemauer did not want the life of a farm girl because she wanted to be normal. She finally realized that she had become better than normal due to a well-developed work ethic. The audience for this essay was probably for seventh to ninth graders for the purpose to help motivate them into developing a good work ethic by planning and working hard. The tone of this essay is a rollercoaster of emotions. It goes from sad, to angry, and to happy. The genre of this essay is a memoir that tugs at the reader’s emotions due to the numerous sensor details of her days. Teamwork is defined as individuals working as a team to complete a task. The farm came first to the family, so it took every individual family member to work as one to keep the farm functioning and growing. In paragraph five, Jessica says, “While Melissa and my father milk the one hundred cows, Nick and Angie feed them, and I feed the...

Words: 818 - Pages: 4

Pricing

...Pricing Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organization. The remaining 3p’s are the variable cost for the organization. It costs to produce and design a product , it costs to distribute a product and costs to promote it. Price must support these elements of the mix. Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean a loss of sales for the organization. Pricing should take into account the following factors: 1. Fixed and variable costs. 2. Competition 3. Consumers To price this product we are going to use the cost based pricing method. The procedure of this method is that the product cost should be calculated first. To calculate the product cost we need to include the cost of operating the business, which includes raw materials, advertising, wages, rents, and other indirect cost incurred on the product. Once the product cost is calculated, then add the profit level to the product cost to get the selling price. We are using the market penetration pricing strategy to achieve high volumes of sales and deep market penetration of our new product. Calculation of selling price of our product Direct material cost Rs: 10.00 Direct labor cost Rs : 08.00 Variable production overhead Rs: 15.00 Fixed production overheads Rs : 10.00 Total cost...

Words: 628 - Pages: 3

Pricing

...This paper written by John Gourville and Dilip Soman connects the two important dots which many people were unaware of i.e. Pricing and the consumption. The author starts the article by relating pricing with demand and with consumption.The firms give more importance to the former than the latter. In the world where word of mouth is considered to be an effective marketing strategy, companies are trying to make the customers to use the product so that they can increase the sales. To make this happen, firms must use the most important tool i.e. pricing. On the other side, consumers are more likely to use the product if they are aware of the cost. But there are some practices followed by the companies which hinder the above fact. Some of these pricing strategies are advance sales, price bundling, season tickets, etc. The author then explains each of these pricing tools with an example. Advance sales take place in most of the gyms, clubs and in magazine subscription. People are more likely to read the magazine if they pay cash each time they get the magazine than the subscription. The author then explains the mentality of the consumers with the term Sunk cost. Once the consumers are aware of the cost of the product, they are unlikely to forgo the product under any circumstances. Because they have paid for the product, it creates the feeling of wasting money and they end up using the product. He then explains that mode of payment also plays an important role while using the...

Words: 539 - Pages: 3

Pricing

...Case of the Pricing Predicament This case is about a bid from Scott at Standard Machine to Occidental Aerospace, their largest and most loyal account. Scott placed a bid for $429K. Joann is the purchasing agent at Occidental Aerospace. Joann notified Scott she had received lower bids and offered him a chance to change his bid to $22k less than his original bid. Joann also reminded him they would be building two more plants which could be more potential business. Standard Machine uses a fixed policy for bids. It appears that Occidental Aerospace wants to continue doing business with Standard Machine which is why they are giving them a chance to submit a new bid. I believe the main reason Standard Machine is in this difficult situation is because they are sticking to a fixed pricing policy. In order to beat the competition and keep the relationship with Occidental Aerospace, they need to figure out a different pricing strategy. Another reason they may be in this situation is the fact Occidental Aerospace is giving information out regarding bids by other competitors. This could be considered a violation of ethics. Standard Machine also does not know if this “inside” information is accurate or not. Joann could just be giving false information to get a lower bid and still keep the relationship between them and Standard Machine. As far as what has changed in the business relationship between Standard Machine and Occidental Aerospace, competition has increased and better...

Words: 1347 - Pages: 6

Pricing

...Although dropping prices in the short runs would increase sales revenue in the short term, it causes numerous other factors that must be put into consideration. When concentrating on the long-term effects of a price drop there are many consequences that come into play. With a price drop during an economic downturn, its seems wise as it will boost short term sales, but when the economy begins to recover it will be difficult for the client to raise the price after selling at a lower price for some time. This is due to the customer’s reference price, which is the price that customers have in their head about what the product should cost depending on what they paid in the past for it or for competitor’s prices. If their reference price is the price drop that we are considering and they later come to find that the price has increased, they will not purchase the item, thus decreasing demand in the long term. Customer’s price sensitivity during economic down turns is increased which means they are looking for the best deal they can get, therefore if you lower the price of your product competitors may follow or represent their brand as having higher value. This increase in competition will negatively affect your sales as some competitors may be able to sell at a lower price. Another consequence would be that a price drop may affect the customer’s perceived value of the product. Due to psychological pricing customers will interpret a lower price as lower quality of a product which...

Words: 696 - Pages: 3

Pricing

...Marketing 635 MARKETING ANALYTICS AND PRICING Fall 2015 MW 9:35-10:50 – WCBA 184 Instructor: Office: Office Hours: Office Phone: E-mail: Website: Dr. Yan Liu 220U Wehner Building by appointment 845-2547** yliu@mays.tamu.edu https://elearning.tamu.edu **Outside of the classroom, my preferred method of communication is via e-mail. Please note that I will often use e-mail to communicate with you class information. I will send these messages to your neo email account, so please check this account on a regular basis. Required Materials (1) Text Book  (2) Nagle, Thomas T., John E. Hogan and Joseph Zale, the Strategy and Tactics of Pricing, Fifth Edition, Pearson-Prentice Hall, Upper Saddle River, NJ. Packet of Cases and Readings. (https://cb.hbsp.harvard.edu/cbmp/access/38228396)  Click the link above and set up a HBP account as a student if you don’t have one.(you can use any email address, not necessarily school email address)  Choose coursepack mktg653 and make the purchase (audio version of the cases are optional).  You have one-year access to this online course pack.  Please save the cases to your computer for future usage.  Although you purchase digital version of the cases, you can print them out if you wish. Course Prerequisite Completed MKTG 625 Course Description This course is designed to introduce you to pricing fundamentals and pricing strategies. The course is quantitative in nature and will cover a...

Words: 4739 - Pages: 19

Pricing

...SUMMER 2007 V O L . 4 8 N O. 4 Arvind Sahay How to Reap Higher Profits With Dynamic Pricing Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published. REPRINT NUMBER 48415 pricing How to Reap Higher Profits With  Dynamic Pricing S un Microsystems Inc. chairman Scott McNealy forecast that “With recent advances in wireless and information technology, even our cars could … call for bids whenever the fuel tank runs low, displaying a list of results from nearby gas stations right on the dashboard.”1 It sounds far-fetched. But dynamic pricing — where prices respond to supply and demand pressures in real time or near-real time — is making inroads in many different sectors, including apparel, automobiles, consumer electronics, personal services (such as haircuts), telecommunications and second-hand goods. The advent of the Internet led to cost transparency, decreased search costs and ease of price comparison. Some observers concluded that as a result, prices would decrease and equalize across different channels, and that fixed prices would continue to be the norm.2 However, price dispersion continues to be widespread and dynamic pricing is entering new sectors. EBay Inc. used auctions to sell more than $20 billion worth of goods in 2005. Ford Motor Co. sold more than $50 billion worth of automobiles in North America with demand-based DP in...

Words: 6384 - Pages: 26

Pricing

...European Journal of Operational Research 224 (2013) 507–519 Contents lists available at SciVerse ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor Production, Manufacturing and Logistics Pricing decisions for complementary products with firms’ different market powers Jie Wei a,⇑, Jing Zhao b, Yongjian Li c a General Courses Department, Military Transportation University, Tianjin 300161, PR China School of Science, Tianjin Polytechnic University, Tianjin 300160, PR China c Business School, Nankai University, Tianjin 300071, PR China b a r t i c l e i n f o Article history: Received 25 July 2011 Accepted 5 September 2012 Available online 11 September 2012 Keywords: Pricing Complementary products Market power Stackelberg game a b s t r a c t This article reports the results of a study that explores the pricing problems with regard to two complementary products in a supply chain with two manufacturers and one common retailer. The authors establish five pricing models under decentralized decision cases, including the MS-Bertrand, MS-Stackelberg, RS-Bertrand, RS-Stackelberg, and NG models, with consideration of different market power structures among channel members. By applying a game-theoretical approach, corresponding analytic solutions are obtained. Then, by comparing the maximum profits and optimal pricing decisions obtained in different decision cases, interesting and valuable...

Words: 11966 - Pages: 48

Pricing

...Nowadays many people know that what is F&N. F&N is the one of the largest soft drinks manufacturer in Malaysia. Many people know their products as well and the consumers are drinking their beverages and those beverages’ price are quite cheap. So the customers can afford that and able to purchase those beverages and not be affected to the customers’ purchasing power by any problem. From 2015, F&N had announced their soft drinks with 500ML price are just RM1 for each one. This pricing strategy are helpful for the company and giving customers many benefits. When we are feeling thirsty, we can go any convenience stores to find these soft drinks and solve our thirsty problems. For customers can buy more with the cheap price and focus on this products and also not looking for any expensive soft drinks in thirsty situation. The one of famous soft drink is 100Plus. As this products that can able to let patient to drink exactly the needs of the customers. Not only that, F&N also doing one of the similar pricing strategy for the customers. This means customers need to buy RM6+22oz F&N drink in a single receipt to get a soft drink. This pricing strategy able to sell more the slow-moving products and their goods to the customers and raise the sales. Even that, this pricing strategy also can let the customers become more loyal because the customers’ needs are satisfied by providing this. Another one pricing strategy is the multiple-unit pricing strategy has...

Words: 535 - Pages: 3

Pricing

...Pricing is one of the four important elements of marketing mix. Pricing of the handheld scanner is based on production, advertising, and labor, after all these things are looked into a percentage is then considered to make a profit. For the handheld scanner to be successful a pricing strategy needs to be set into place and finding a price point. Setting a price for the new handheld scanner must follow several steps: With these steps incorporated the proper pricing strategy that will be appropriate for the handheld scanner is, Product Life Cycle Pricing. This type of pricing is for unique products like the handheld scanner. Products have life spans, and go through cycles, the introduction, growth, maturity, and decline stages (Richards, 2012). The introduction cycle when the handheld scanner is introduced to such business as Wal-Mart and other retail stores, and this is when consumers and business become aware of the benefits of the handheld scanner. The growth cycle, is the cycle when the sales of the handheld scanner will be booming and the pricing of the scanner will be higher. The handheld scanner is a new technology and soon will be in high demand because of its capabilities, at this time setting the price higher will be the appropriate action. The maturity cycle, when profits are high, sales increase at a slow pace. Advertising expenses decrease because the handheld scanner is well known and both businesses and consumers have a strong awareness of the......

Words: 301 - Pages: 2

Pricing

...3 (a) Price Point In arriving at a price point, a three prong approach was taken to ensure coherence between the various parties involved. The three aspects considered were company approach, customers’ value and lastly competitive situation. * Customers The continued assessment of prices on consumers’ part is crucial in deriving their perceived value Reference Prices Price and Perceived Quality Measuring customer value * Company This stresses on the alignment of marketing strategy with pricing strategy Price In arriving at price, the following factors were considered. * Price sensitivity of target segment: Notably within our target segment, they are not price sensitive given the differentiated product and service. * Price flexibility of target segment: In saying that however, the price sensitivity is wide since they are willing to pay high prices as well as low prices. In that sense the price band width is large within the targeted segment. * Importance of price: Price is relatively unimportant as other attributes such as health concerns and quality were ranked higher than price during the concept testing stage. Cost Price is assumed to be greater than variable cost since we are profit making enterprise * Variable cost: Costs are not that high given that supplies are bought in bulk and the buyer’s purchasing power is not that big given the frequency of deliveries. Brand Positioning: Given that The Bread Break positions itself as a premium...

Words: 741 - Pages: 3