2c_Pricing

2c_Pricing - Pricing with Market Power ManEc 387 Economics...

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Nile W. Hatch © 2002 – 2008 ManEc 387 Economics of Strategy Pricing with Market Power 1
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Nile Hatch © 1996 – 2008 Exploring Industry Structure Threat of Potential Entrants Bargaining Power of Suppliers Customer Power & Preferences Rivalry between Competitors Threat of Substitutes 2 2
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Nile Hatch © 1996 – 2008 Type of Competitive Advantage Indicates Pricing Methods • Price cutting is strategically viable when – the Frm has a technological (cost) advantage over rivals – demand will grow if price is lowered (elastic) • beware rivals’ responses • no capacity constraints allow price to go to cost – price cutting is conFned to elastic customers only Otherwise, raising prices due to reduced price sensitivity is preferred – Differentiation advantage – Switching costs 3
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Nile Hatch © 1996 – 2008 Consumer Surplus – t he value consumers get from a good but do not have to pay for “I got a lousy deal!” That car dealer drives a hard bargain! I almost decided not to buy it! They tried to squeeze the very last cent from me! Total amount paid is close to total value. Consumer surplus is low . “I got a great deal!” That company offers a lot of bang for the buck! Dell provides good value. Total value greatly exceeds total amount paid. Consumer surplus is large. 4
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Nile Hatch © 1996 – 2008 Consumer Surplus: the value received but not paid for Consumer Surplus: The Discrete Case Quantity Price Demand 5
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Nile Hatch © 1996 – 2008 Consumer Surplus: The Continuous Case Price Quantity Total price of 4 units Consumer Surplus 6
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Nile Hatch © 1996 – 2008 Price Discrimination The strategic opportunity of consumer surplus Charge higher prices to consumers with higher willingness to pay – Segment consumers by elasticity of demand – Raise price for inelastic customers – Lower price for elastic customers 7
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Nile Hatch © 1996 – 2008 Value of Price Discrimination: Some Calculations 30 70 70 30 Quantity Price Q(P)=100-P With demand curve Q(P)=100- P and no price discrimination, the Frm sells 70 units at $30 for $2100 revenue. With price discrimination, the
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2c_Pricing - Pricing with Market Power ManEc 387 Economics...

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