204_summer_2009_lecture_18

204_summer_2009_lecture_18 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 18 1 S. Ajaz Hussain. [email protected] Last Time ¡ Pricing with opportunity cost ¡ Economics of multiple activities ¡ Mathematics of multiple activities ¢ Opportunity cost technique ¢ Multivariate optimization technique ¢ Marginal profit technique ¡ Franchise Contracts ¢ Revenue sharing contracts ¢ Franchisor sets prices ¢ Franchisee sets prices ¢ Profit sharing contracts S. Ajaz Hussain. [email protected] 2 Today Pricing under uncertainty The optimal price rule ¢ A practical rule for optimal prices ¢ What not to consider when setting prices ¢ The cost plus rule re ‐ examined ¢ Basis for market segmentation The optimal markup rule ¢ A practical rule for optimal markups ¢ Optimal markups from financial statements ¢ A look at Apple Computers S. Ajaz Hussain. [email protected] 3 Ahead: Two Models of Real Companies S. Ajaz Hussain. [email protected] 4 Firm Output Inputs Price Maker Price Taker Customer Firm Output Inputs Price Maker Customer rice Taker Distribution Output Retail Output Pricing: Decision Making Process S. Ajaz Hussain. [email protected] 5 Forecast demand Estimate Cost Choose optimal output (“target output”) Price follows from demand curve Pricing and output over a planning period (no inventory) START END Produce target output Choose optimal L and/or K to produce target output (q) Sell produced target output With complete certainty, customers purchase output offered for sale Uncertainty ¡ Uncertainty is a fact of life in business: ¢ Demand ¢ Cost ¢ Interest rates ¢ Exchange rates ¢ Market forecasts ¢ Optional: WSJ article on business forecasting ¢ Take ECO 374 for forecasting techniques and tools ¡ Uncertainty may arise at any stage of the production process ¢ May lead to revised prices and output offered for sale ¢ Uncertainty has an impact after a “sunk” decision S. Ajaz Hussain. [email protected] 6 Uncertainty: Golden Rule Profit Maximizing Output is where: MR = MC Always choose output ‐‐ and therefore price ‐‐ on the basis of MR = MC going forward The past is the past The Moving Finger writes; and, having writ, Moves on: nor all your Piety nor Wit Shall lure it back to cancel half a Line, Nor all your Tears wash out a Word of it ~ Omar Khayyam S. Ajaz Hussain. [email protected] 7 “Golden Rule” Debunks Typical Managerial Response to Uncertainty ¡ Review these statements after analysis below: ¡ If demand is weaker than expected: ¢ Reduce price to clear inventory of goods ¢ NYC retail stores ( update ) ¢ Reduce price to what “market can bear” ¢ Maintain price to preserve brand value ¢ Abercrombie and Fitch , Brioni ¡ If demand is stronger than expected: ¢ Increase price to capture what “market can bear” ¡ Look at articles posted on 204 site in micro in the news section. They will help solidify your understanding ....
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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204_summer_2009_lecture_18 - University of Toronto...

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