Monopoly & Monopolistic Competition

Pricing Strategies for the FirmsWeek 10Markup PricingProfit Maximization and Markup PricingPrice DiscriminationDefinitionTheoretical ModelsFirst DegreeSecond DegreeThird DegreePrice Discrimination StrategiesPersonalized PricingGroup PricingVersioningBundlingCoupon and SalesTwo-Part PricingMacroeconomics and Pricing PoliciesMarkup PricingCalculating the price of a product by determining the average cost of producing the product and then setting the price a given percentage above that cost.

Cost-plus PricingP = average total cost + (m)(average total cost) = (1 + m) average variable costwhere m is the markup on unit cost.calculation of average variable costsize of the markupProblems with cost-plus pricingConsiders only cost of production and does not incorporate information on demand and consumer preferences.

Thus, is not a profit-maximizing pricing strategy.SMC3,0004,0005,000$18MRDATC1Manager assumes that firms operates at 5,000 unit, i.e. cost per unit is $20.2A203040$QASince standard markup employed is 50%; then manager charges $30(=1.5x$20). Profit margin expected $10 (=$30-$20) per unit. If able to sell 5,000 units, then would earn $50,000 (=$10x5,000)3Given actual D, only 4,000 units are sold at $30 per unit.CC4Actual profit is $48,000 (= ($30-$18)4,000ObservedMarkup differs from one product to anotherMarkup will probably change on a given product from time to time.Differs according to such factors as the degree of competitiveness in the market and the price elasticity of demand.Lower markup where competition is intense.Lower markup when price is more elastic.The Relationship between Marginal Revenue and the Price Elasticity of DemandValue of ElasticityValue of Marginal RevenueNumerical ExampleMR > 0eP = -2;MR < 0eP = -1/2;MR = 0eP = -1;

MR = MCThe Profit-Maximizing Rule for Markup PricingOptimal markup:where,m = markup andep = price elasticity of demand

ElasticityCalculationMarkup-2.0m = -[1/(1 - 2)] = +1.001.00 or 100%-5.0m = -[1/(1 5)] = +.250.25 or 25%-11.0m = -[1/(1 - 11)] = +0.100.10 or 10%m = -[1/(1 - )] = 00.00 (no markup)Optimal markup:The less elastic is the demand curve, the larger will be the markup.No ep < 1 is included since MR is ve then and profit max level of output never occurs where MR is ve.What types of goods have lesser elasticity? What types of markets?Price discrimination is the practice of charging different prices to various groups of customers that are not based on differences in the costs of production.

Price DiscriminationBy charging such customers a different price, the company could profitably sell to a much larger customer base.Why Do Companies Price Discriminate?MC20$405080100Rounds of golf601Price as a price controller; $60. Hence, profit; $1,600 (=$60-$20(40))2Some customers are willing to pay more than $60. Hence possible additional profit from consumer surplus; $800 (=1/2x40($100-$60))3Some customers are willing to pay if $20