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09prc_sg - Chapter 9 Pricing Policy Chapter 9 Pricing...

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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 direct segment discrimination © 2001, I.P.L. Png & C.W.J. Cheng 1
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Chapter 9: Pricing Policy GENERAL CHAPTER OBJECTIVES 1. Analyze uniform pricing and understand its limitations relative to price discrimination. 2. Understand that cost-plus 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.
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