Embed Size (px)
DESCRIPTION
Although structural modeling as a means to improve pricing decisions often appears in prestigious academic journals, its consideration in pricing textbooks remains rather limited, and knowledge about its benefits and limitations in comparison to reduced-form models is scarce among “structural nonexperts”. This presentation outlines for these “structural nonexperts” which different abilities structural and reducedform models have to improve pricing decisions. Therefore, it uses a popular textbook example that fails to consider the abilities of both models, which are the abilities to capture the effects of consumers’ responses and changes in cost structure on prices. It outlines that the major advantages of structural models are the ability to capture competitors’ reactions and the description of new market equilibriums, which come at the costs of assumptions that usually prevent structural models to further improve prices. The beauty of the simple example provided is that it enables nontechnical readers to easily understand the major differences between structural and reduced-form models.
Citation preview
10.04.2023
Differences in the Ability of Structural and Reduced-Form Models to Improve
Pricing Decisions
Prof. Dr. Bernd Skiera
Skiera, Bernd (2010), "How Do Structural Models Help Improve Pricing Decisions?", Zeitschrift
Marketing – Journal of Research and Management, Vol. 6, Issue 1, 91-99
210.04.2023
More Information about Topic
310.04.2023
What is wrong here?
Driver Old New Old Profit New Profit Change in Profit
Price 100€ 110€ 10.000.000€ 20.000.000€ +100%
Variable Costs 60€ 54€ 10.000.000€ 16.000.000€ +60%
Quantity 1.000.000 1.100.000 10.000.000€ 14.000.000€ +40%
Fixed Costs 30.000.000€ 27.000.000€ 10.000.000€ 13.000.000€ +30%
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
410.04.2023
Drivers and Effects of Prices
Price
Quantity Cost
Revenue Profit
price-response function
Cost Function
prices of competitors(price reaction function)
price reaction to cost changes
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
510.04.2023
Size of Price Elasticities (1/2)
Mean = -2.62
Mode = -2 to -2.99
Std. Dev. = 2.21
Bijmolt, T.H.A. / Heerde, van H.J. / Pieters, R.G.M. (2005), "New Empirical Generalizations on the Determinants of Price Elasticity", Journal of Marketing Research, 42, 141-156.
610.04.2023
Size of Price Elasticities (2/2)
110
100
90
80
70
60
50
40
30
20
10 -10 -8 -6 -4 -2 0 2
Mean = -1.76 Mode = -1.5 Std. Dev. = 1.74 N = 367
Frequency
Price Elasticity
Tellis, G.J. (1988), "The Price Sensitivity of Selective Demand: A Meta-Analysis of Econometric Models of Sales", Journal of Marketing Research, 25, 391-404.
710.04.2023
Measuring Price-Response
Linear demand function
Profit funktion:
Optimal Price:
pbaq
ppq 182.18180.818.2)(
Cpqcp fix )()(
b
acbp
2
100
( )
( )
100 18.18218.182 1.8
2.818.180 1.818.200 10.000
p
dq p p
dp q p
( 100) 1.000.000q p
810.04.2023
Results in Case of Price Response(Linear Price Response Function)
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
910.04.2023
Results in Case of Cost Changes(Linear Price Response Function)
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
1010.04.2023
Price-Reaction (Bertrand-Nash)
Expansion of Demand Function:
Bertrand-Nash-Equilibrium:
Optimal Price:
pbpbaq 21211111
pbpbaq 22212122
0
qp
qcp
p ii
iii
i
i 0
qbcpp iiiiii
i
b
pbacbp
11
21211111 2
b
pbacbp
22
12122222 2
1110.04.2023
Summary for Bertrand-Nash-Pricing (Linear Case)
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
1210.04.2023
Price-Reaction (Stackelberg Leader-Follower)
Stackelberg Leader-Follower Equilibrium:• Leader (here firm 1) sets price and does not react• Follower (here firm 2) reacts
0222222
2
qbcpp
011
2
2
1
1
111
1
1
qp
p
p
q
p
qcp
p
b
pbacbp
22
12122222 2
b
bbb
pbab
bbbc
p
22
211211
212122
2112111
1
22
2
1310.04.2023
Collusive Pricing
Firms choose prices to maximize combined profits
CqcpCqcp fixfix 2,2221,11121
0
qbcpbcpp iijjjiiiii
b
acbcbpbp
ii
ijijiiijij
i
2
2
1410.04.2023
Influence of Functional Form
Multiplicative sales response function• No competition:
• Competition:
pq cp
1
ppq2111
1211 ppq
21222221
021121
1
111111
1 12111211
ppppcpp
cp 1
11
111 1
cp 2
22
222 1
1510.04.2023
Summary of Results
Skiera, B. (2010), "Differences in the Ability of Structural and Reduced-Form Models to Improve Pricing Decisions", Marketing – Journal of Research and Management, 6(1), 91-99
