Pricing Strategies - Pricing Strategies A Fixed Price A...

Info icon This preview shows pages 1–2. Sign up to view the full content.

Pricing Strategies A Fixed Price A fixed price is a price that is set and known. Everyone would pay the same price. A fixed price is usually what we think about in economics as resulting from the interaction of supply and demand. A fixed price is not so much a pricing strategy than is a condition that can’t be avoided. In a competitive setting, it’s set by Supply and Demand and reflects the marginal cost of production. In the long run, it should be equal to the average cost of production. In an imperfectly competitive industry, price will reflect not only marginal cost and average cost but also elasticity of demand, the more inelastic the demand, the higher the price. In oligopolistic industry, pricing depends on the nature of firms’ interactions (game theory). A common fixed price eliminates gains from arbitrage. A fixed price is fixed only within a specific time frame. Fixed prices do change over time. Some change more rapidly than others. Variable Prices Definition: Variable prices are prices that change from buyer to buyer within the same time frame. Examples: Negotiated prices, for example how most people buy a car (new or used). Auctions. There are different types of auctions: Open ascending-bid (what most people think of as an auction) First-price sealed bid (people submit only one bid, it’s is sealed, highest wins) Second-price sealed bid (Vickrey auction, the highest bidder wins, but pays what the second highest bidder bid) Reserve auctions (a reserve is an amount that the auction price must match or exceed or the seller has a right to withhold the good from sale) Open descending-bid (Dutch auction, price starts high and declines. First person to bid gets the good.) All-pay auctions (everyone must pay the price) Reverse auctions (where sellers bid to supply, instead of buyers bidding). Price Discrimination Definition: Price discrimination is charging different prices to different people for the same good. Traditionally, economists see the goal as a way for the firm to increase profits by expropriating the consumer surplus of high value (inelastic) buyers through higher prices. Economists describe three different “degrees” of price discrimination. First degree price discrimination is impossible. This is when sellers would charge the maximum the consumer would be willing to pay for each good sold. This would require the seller to know the mind perfectly of every consumer. Theoretically, this would be efficient and would expropriate all consumer surplus to the producer. Second degree price discrimination is quantity based price discrimination, when price is reduced for larger quantities. Frequent buyer clubs (such as frequent flyer miles) can be a method of quantity discounting. Though, not all quantity discounts are necessarily forms of price discrimination.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern