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