Unformatted text preview: se “that’s the way it has been”.
22% [of executives] set all prices only to recover costs and tack on profit: The optimal price rule tells us that variable cost
(more precisely, marginal cost) is one component of pricing – the other component is price sensitivity. A manager must
consider both components when setting prices. For example, when Heineken first introduced the non-alcoholic beer
Buckler in Europe it set prices according to11: “The pricing will be a 20% premium above regular beer or more, the latter
if exported. When the product is exported it will be higher due to the higher costs of transport”. This approach is flawed
because it only considers
and ignores price sensitivity.
18% [of executives] do customer research to determine value to buyer: This is the “needs and wants” approach to
setting prices: this is not the same as price sensitivity.
Intuitively, and as we saw earlier, as
: to recover the higher variable (not fixed) cost the firm should raise
prices. This result follows from the optimal price rule: As
then to balance the equation
Similarly, if demand becomes relatively more inelastic (i.e.
firm should charge a higher price. Here’s an example. ) the...
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This document was uploaded on 01/19/2014.
- Fall '14
- The Land