How can a business alter the customers price

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: n the _________________________________________________________________________________________________ Example: Suppose a company has the demand function and the cost function ( ) . What is the profit maximizing optimal price? Noting that we use the optimal price rule: Now suppose, perhaps due to advertising, the demand function becomes more inelastic: elasticity was and is now Notice that demand has become . The new optimal price is: __________________________________________________________________________________________________ This example offers a valuable insight: one way for a business to command higher prices is to “make” demand less price sensitive – this is what marketers mean by “branding”. How can a business alter the customers’ price elasticity for its products? Marketers preach that advertising, viral marketing, customer value propositions etc. render demand inelastic 11 Source: Heineken internal marketing memo on introduction of Buckler (11/11/1987) 78 ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online