BSZ_IM_Ch07_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 7: Page 1 CHAPTER 7 P RICING WITH M ARKET P OWER This chapter extends the analysis in previous chapters to examine pricing decisions in greater detail. It starts by reviewing the benchmark case of charging one price to all customers. It then examines more sophisticated pricing policies that can be used to increase profits. C HAPTER O UTLINE P RICING O BJECTIVE B ENCHMARK C ASE : S INGLE P RICE PER U NIT Profit Maximization Estimating the Profit-Maximizing Price Potential for Higher Profits H OMOGENEOUS C ONSUMER D EMANDS Block Pricing Two-Part Tariffs P RICE D ISCRIMINATION H ETEROGENEOUS C ONSUMER D EMANDS Exploiting Information about Individual Demands Using Information about the Distribution of Demands B UNDLING O THER C ONCERNS Multiperiod Considerations Strategic Interaction Legal Issues IMPLEMENTING A PRICING STRATEGY C ASE S TUDY : iT UNES M USIC P RICING SUMMARY T EACHING THE C HAPTER This chapter is not assigned in our organizations class. In our introductory course the entire chapter is covered. We review the benchmark case (students have seen monopoly pricing in chapter 6) and discuss the potential for higher profits. Subsequently, we discuss the other topics in the chapter in sequence, typically working several problems as examples. Sometimes we give an assignment to use the Internet to examine pricing policies of companies such as Amazon.com. For example, you can compare hard cover
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 7: Page 2 with soft cover book prices. Comparisons can be made with other booksellers on the Internet. Special offers and promotions can be discussed. Occasionally we use the case: Bruce Greenwald, “Pricing NY Telephone Private Line Services,” (Casenet case, 1996). This case highlights some of the basic issues in pricing in an applied setting. C ASE S TUDY I T UNES M USIC P RICING 1 Consumers have been able to purchase digital music and audiobooks over the Internet through Apple Computer’s iTunes Music Store (Music Store) since April 2003. The Music Store is integrated with Apple’s iTunes Software, which allows users to manage their digital music libraries and to interface with their iPods Apple’s highly successful MP3 player. Apple’s stock price increased from $7/share in April 2003 to over $46/share in August 2005 (adjusted for stock splits). This 6.5 fold price increase compares to Microsoft’s stock which increased from about $21.50 share to $27/share over the same period. Apple’s strong performance was fueled by the growth in its digital music business (increased PowerBook sales also contributed). In August 2005, Apple’s market shares for downloaded music and MP3 players in the United States was approximately 75 percent and 80 percent respectively. Apple’s net sales by product from 2002 through 2004 can be found on page 28 of Apple’s 10-K statement for fiscal year 2004.
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