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Chapter 9: Pricing Policy
Chapter
9
Pricing Policy
CHAPTER SUMMARY
The simplest way to set price is through uniform pricing.
At the profit
maximizing uniform price, the incremental margin percentage equals the
reciprocal of the absolute value of the price elasticity of demand. The most
profitable pricing policy is complete price discrimination, where each unit is
priced at the benefit that the unit provides to its buyer. To implement this policy,
however, the seller must know each potential buyer’s individual demand curve
and be able to set different prices for every unit of the product.
The next most profitable pricing policy is direct segment discrimination. For
this policy, the seller must be able to directly identify the various segments.
The
third most profitable policy is indirect segment discrimination. This involves
structuring a set of choices around some variable to which the various segments
are differentially sensitive. Uniform pricing is the least profitable way to set a
price.
A commonly used basis for direct segment discrimination is location.
This
exploits a difference between free on board and cost including freight prices.
A
commonly used method of indirect segment discrimination is bundling.
Sellers
may apply either pure or mixed bundling.
KEY CONCEPTS
uniform pricing
free on board (FOB)
price discrimination
delivered pricing
complete price discrimination
cost including freight (CF)
segment
bundling
indirect segment discrimination
cannibalization
d
i
r
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GENERAL CHAPTER OBJECTIVES
1.
Analyze uniform pricing and understand its limitations relative to price
discrimination.
2.
Understand that costplus pricing fails to maximize profit.
3.
Analyze complete price discrimination and its informational requirements.
4.
Analyze direct segment discrimination and its implementation and
informational requirements.
5.
Explain how location can be used as a basis for direct segment discrimination.
6.
Analyze indirect segment discrimination and its implementation and
informational requirements.
7.
Explain how bundling serves to effect indirect segment discrimination.
8.
Explain how the discriminating variable should be set.
9.
Appreciate the hierarchy of pricing policies in terms of profitability and
information requirement: (i) complete price discrimination; (ii) direct segment
discrimination; (iii) indirect segment discrimination; and (iv) uniform pricing.
NOTES
1.
Uniform pricing
.
(a)
Uniform pricing: a pricing policy where a seller charges the same price
for every unit of the product.
(b)
Profit maximizing price
(
incremental margin percentage rule)
:
a price where the incremental margin percentage (i.e., price less
marginal cost divided by the price) is equal to the
reciprocal
of the
absolute value of the price elasticity of demand.
This is the rule of
marginal revenue equals the marginal cost.
i.
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 Spring '11
 Michaelshaw

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