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Pricing Policy. Managerial Economics Jack Wu. Northwest Airlines Minneapolis-New York. Emirates Airline, Dubai-Mumbai, Economy class, May 2004. Emirates Airline, Mumbai-Dubai, Economy class, May 2004. Emirates Airline. - PowerPoint PPT Presentation
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PRICING POLICYManagerial Economics
Jack Wu
NORTHWEST AIRLINESMINNEAPOLIS-NEW YORK
Business class $ 1711
Unrestricted economy
$ 1267
Advance purchase, with penalties
$ 765
Advance purchase, for senior
$ 692
EMIRATES AIRLINE, DUBAI-MUMBAI, ECONOMY CLASS, MAY 2004
Fare Restrictions Price
Year KRTAE1 None AED 2250
(US$ 613)
Special Excursion QEE4MAE1
Min. 7 days, max. 4 mths stay
AED 1900
Basic Season Special Excursion LLE4MAE1
Low season; min. 7 days, max. 4 mths stay
AED 1550
Basic Season Special Excursion VLE4MAE1
Low season; min. 7 days, max. 4 mths stay
AED 1200
EMIRATES AIRLINE, MUMBAI-DUBAI, ECONOMY CLASS, MAY 2004
Fare Restrictions Price
Economy unrestricted LRT
None INR 25,600
(US$ 557)
Economy restricted LRTIN1
None INR 22,700
Regular Excursion LEE3M1
Min. 7 days, max. 3 mths stay
INR 20,100
Special Excursion VEE3MIN1
Max. 3 mths stay. INR 17,000
EMIRATES AIRLINE
Why does Emirates charge lower fare for passengers originating from Mumbai?
How is this discrimination possible?
PRICING POLICY
uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling
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 MAXIMUM
MR = MC Equivalently, set the incremental margin
percentage equal to the inverse of absolute value of price elasticity of demand,
(price - MC) / price = -1/e
PRICE ELASTICITY
always set price so that demand is elastic if 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: SHORTCOMINGSSHORTCOMINGS
leaves buyers with a lot of surplus
does not sell to every potential buyer
marginal cost
price
buyer surplus
potential buyers
$
0quantity
COMPLETE PRICE DISCRIMINATION
price 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
bargaining auctions
DIRECT SEGMENT DISCRIMINATION, I
price by segment implementation
� fixed identifiable characteristic --- basic for segmentation
� no re-sale
DIRECT SEGMENT DISCRIMINATION, II
simple 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 SERVICE
New York City residential -- $16/month business -- $23/monthHow is discrimination possible?
ASIAN WALL STREET JOURNAL
Price for annual subscription, May 2006
Print: Hong Kong (HK$ 2,700)
US$ 348
Print: Singapore (S$ 525) US$ 331
Print: Tokyo (Yen 94,500) US$ 845
Interactive: Worldwide US$ 99
Why different prices for print edition but not interactive edition?
INDIRECT SEGMENT DISCRIMINATION
structure choice to earn different incremental margins from each segment
implementation 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
BUNDLING strategy
pure bundling mixed 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 BUNDLING
What is the profit-maximizing pricing policy if marginal cost per channel = 0 marginal cost per channel = $5
PURE OR MIXED BUNDLING Generally, 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
DISCUSSION QUESTION
One channel: _________ Two channels: _________
