Module 9

• For firms that sell multiple products, or those who use low prices to win new customers, this rule does not hold.

  MR=MC
• To price commonly owned products, use

  marginal analysis
• After acquiring a substitute product, raise the price of both product/s to reduce price competition between them/so they don’t directly compete with each other.
• When pricing substitute products, raise price more on the low-margin product
• When acquiring a substitute product, reposition the products so that there is less substitutability between them.
• (Some of ) Critical Factors for Repositioning

  • A downward trend in sales
  • A shrinking core audience
  • Industry shakeups
• When acquiring a complementary product, reduce price on both products to increase demand for both products
• Products used together


  Complementary Products
• With bigger MR, reduce price to maximize profit
• Demand for a bundle of complements is more elastic than demand for the individual products
• If fixed costs are large relative to marginal costs, capacity is fixed, and MR > MC at capacity, then set price to fill available capacity
• For firms with mostly fixed and sunk costs + business facing capacity constraints

  The first decision for these firms is how much capacity to build because this is an extent decision, marginal analysis can be used.
• When capacity is built, firms make pricing decisions, ignoring the sunk or fixed costs of building capacity.
• If MR>MC at capacity

  Price to fill available capacity
• When demand is difficult to predict, pricing to fill capacity is also difficult.
• When demand is difficult to predict, to maximize profit

  balance the cost of over-pricing against the cost of under-pricing
• Optimal price minimizes the expected costs of over-pricing and under-pricing
• If lost profit from over-pricing > lost of profit from under-pricing


  the price that is lower than would fill capacity
• If lost profit from over-pricing < lost of profit from under-pricing


  the price that is greater than would fill capacity
• If demand is hard to forecast and the costs of underpricing are smaller than the costs of overpricing

  Underprice
• Price-related promotions (coupons, end-of-aisle displays, etc.) tend to make demand more elastic
• If promotion makes demand more elastic, it makes sense to reduce price concurrently
• Product-related promotions (quality advertising, celebrity endorsements, etc.) tend to make demand less elastic
• If promotions make demand less elastic, it makes sense to raise price concurrently
• If promotional expenditures make demand more elastic, then reduce price when you promote the product
• can affect optimal pricing decisions.

  Biases
• Consumers are also very sensitive to fairness
• To avoid looking unfair, companies must come up with creative solutions
• suggest being aware of price expectations and “framing” price changes as gains rather than as losses.

  Psychological Biases