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. sayed.hussain@utoronto.ca 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. sayed.hussain@utoronto.ca 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. sayed.hussain@utoronto.ca 3 Ahead: Two Models of Real Companies S. Ajaz Hussain. sayed.hussain@utoronto.ca 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. sayed.hussain@utoronto.ca 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. sayed.hussain@utoronto.ca 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. sayed.hussain@utoronto.ca 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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204_summer_2009_lecture_18 - University of Toronto...

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