SkeletonSlide6_2010Fall_MGMT324

The practice of selling a product or service at a

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The practice of selling a product or service at a very low price (often lower that a marginal cost), intending to ward off competitors or create barriers to entry for potential new competitors Predatory Pricing What is it? Examples vs. Airline industry
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Manufacturers sometimes give retailers one-time payment for product placement on store shelves Slotting Allowances (Raising Rival’s Fixed Costs) What is it? Who has to pay it? Slotting allowances are mostly common to new products Slotting allowances are often waived to 1) Most established products or 2) New offerings with a high likelihood of success Why?
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Toy market in mid 90s (Raising Rival’s Variable Costs) accounted for about 20% market share Main competitors: Wal-mart and Target Warehouse clubs such as Sams and BJs started selling toys Vs. Warehouse Clubs "Hollywood Hair" Barbie @ $10.95 Barbie packaged with a dress @ $15.99 "Toy Story" version of Mr. Potato Head Must buy Mrs. Potato Head In addition to Mr. Potato head
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Limit Pricing (Signaling Low Cost) Monopolist’s pricing decision D P MC true Q MR P m Q m Why P limit rather than P m ? Potential entrants may know D (thereby MR ) but NOT MC true If a monopolist chooses P limit , it can signal to potential entrants that its marginal cost is low ( MC false < MC true ) P limit MC false
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Survey of Fortune 500 firms Entry Survey “Entry is inevitable”, “Too costly”, “We don’t need to” and so on How often do you try to induce exit of rivals or deter entry? Rate various strategies on a scale of 1-5 with 5 being always use this strategy, 3 being often use this strategy, 1 being never use this strategy % of Firms with Scores of 3 or higher Product proliferation 79% Raising rival’s costs 78% Limit pricing (Signaling low costs) 43% Predatory pricing 49% Hiding profit data 79% Entry Deterring Strategies Only 2% of firms did not “at least sometimes” try to deter entry. Why?
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