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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...
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- Fall '14
- The Land