Managerial Economics in a Global Economy Pricing Practices PowerPoint Slides Prepared by Robert F....

Managerial Economics in a Global Economy

Pricing Practices

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

of Thomson Learning. All rights reserved.

Pricing of Multiple Products

• Products with Interrelated Demands

• Plant Capacity Utilization and Optimal Product Pricing

• Optimal Pricing of Joint Products– Fixed Proportions– Variable Proportions




Products with Interrelated Demands

For a two-product (A and B) firm, the marginal revenue functions of the firm are:

A BA

A A

TR TRMR

Q Q

B AB

B

TR TRMR

QB Q

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a

division of Thomson Learning. All rights reserved.


Plant Capacity Utilization

A multi-product firm using a single plant should produce quantities where the marginal revenue (MRi) from each of its k products is equal to the marginal cost (MC) of production.

1 2 kMR MR MR MC




Plant Capacity Utilization




Joint Products in Fixed Proportions

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

Pricing of Multiple ProductsOutput yang dihasilkan: Nanas Kaleng (QA) dan Jus Nanas (QB). Setiap 10 Pon Nanas menghasilkan 5 kaleng Nanas dan 5 liter jus nanas. Fungsi permintaan masing-masing adalah:QA = 80 – 5PA dan QB = 50 – 5 PB. Fungsi Biaya Marginal (MC) = 8+ 0.1Q. Tentukan tingkat output dan harga terbaik masing-masing.



Pricing of Multiple ProductsQA = 80 – 5PA5PA = 80 – QAPA = 16 – 0.2QA

TRA = P.Q = (16 – 0.2QA)QA = 16QA – 0.2QA2

MRA = 16 – 0.4QA

QB = 50 – 5PB5PB = 50 – QB PB = 10 – 0.2QB

TRB=P.Q= (10 – 0.2QB) QB = 10QB – 0.2QB2

MRB = 10 – 0.4QB

MRT = MRA + MRB = 26 – 0.8Q , DIMANA Q = QA + QB

JIKA , MC = 8+ 0.1Q. MAKAMRT = MC26 – 0.8Q = 8 + 0.1Q

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.

Copyright ©2004 by South-Western, a division of Thomson Learning. All

rights reserved.

Pricing of Multiple ProductsJIKA , MC = 8+ 0.1Q. MAKA

MRT = MC26 – 0.8Q = 8 + 0.1Q0.9Q = 18, Q = 18/0.9= 20

PA = 16 – 0.2Q = 16 – 0.2*20 = 12PB = 10 – 0.2Q = 10 – 0.2*20 = 6




Joint Products in Variable Proportions



Price Discrimination

Charging different prices for a product when the price differences are not justified by cost differences.

Objective of the firm is to attain higher profits than would be available otherwise.



Price Discrimination

1.Firm must be an imperfect competitor (a price maker)

2.Price elasticity must differ for units of the product sold at different prices

3.Firm must be able to segment the market and prevent resale of units across market segments PowerPoint Slides Prepared by

Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division


First-DegreePrice Discrimination

• Each unit is sold at the highest possible price

• Firm extracts all of the consumers’ surplus

• Firm maximizes total revenue and profit from any quantity sold



Second-DegreePrice Discrimination

• Charging a uniform price per unit for a specific quantity, a lower price per unit for an additional quantity, and so on

• Firm extracts part, but not all, of the consumers’ surplus



First- and Second-DegreePrice Discrimination

In the absence of price discrimination, a firm that charges $2 and sells 40 units will have total revenue equal to $80.




In the absence of price discrimination, a firm that charges $2 and sells 40 units will have total revenue equal to $80.

Consumers will have consumers’ surplus equal to $80.




If a firm that practices first-degree price discrimination charges $2 and sells 40 units, then total revenue will be equal to $160 and consumers’ surplus will be zero.




If a firm that practices second-degree price discrimination charges $4 per unit for the first 20 units and $2 per unit for the next 20 units, then total revenue will be equal to $120 and consumers’ surplus will be $40.



Third-DegreePrice Discrimination

• Charging different prices for the same product sold in different markets

• Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production




Q1 = 120 - 10 P1 or P1 = 12 - 0.1 Q1 and MR1 = 12 - 0.2 Q1

Q2 = 120 - 20 P2 or P2 = 6 - 0.05 Q2 and MR2 = 6 - 0.1 Q2

maka MC = 2,

MR2 = MC

12 - 0.2 Q1 = 2

Q1 = 50

6 - 0.1 Q2 = 2

Q2 = 40

P2 = 6 - 0.05 (40) = $4P1 = 12 - 0.1 (50) = $7PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-

Western, a division of Thomson Learning. All

rights reserved.

MR1 = MCTC = 90+ 2Q,


TR1 = P1*Q1 = 7*50 = 350

TR2 =P2*Q2 = 4*40 = 160

TR = 510

TC = 90 + 2 (50+40)

= 90 + 2 (90) = 90 + 180 = 270

PROFIT = TR – TC = 510 – 270 = 240



InternationalPrice Discrimination

• Persistent Dumping

• Predatory Dumping– Temporary sale at or below cost– Designed to bankrupt competitors– Trade restrictions apply

• Sporadic Dumping– Occasional sale of surplus output



Transfer Pricing

• Pricing of intermediate products sold by one division of a firm and purchased by another division of the same firm

• Made necessary by decentralization and the creation of semiautonomous profit centers within firms



Transfer PricingNo External Market

Transfer Price = Pt

MC of Intermediate Good = MCp

Pt = MCp



Transfer PricingCompetitive External Market

Transfer Price = Pt

MC of Intermediate Good = MC’p

Pt = MC’p



Transfer PricingImperfectly Competitive External Market

Transfer Price = Pt = $4 External Market Price = Pe = $6



Pricing in PracticeCost-Plus Pricing

• Markup or Full-Cost Pricing

• Fully Allocated Average Cost (C)– Average variable cost at normal output– Allocated overhead

• Markup on Cost (m) = (P - C)/C

• Price = P = C (1 + m)PowerPoint Slides Prepared by



Pricing in PracticeOptimal Markup

11

P

MR PE

1P

p

EP MR

E

MR C

1P

p

EP C

E



Pricing in PracticeOptimal Markup

1P

p

EP C

E

(1 )P C m

(1 )1

P

p

EC m C

E

11

P

P

Em

E

PowerPoint Slides Prepared by



Pricing in PracticeIncremental Analysis

A firm should take an action if the incremental increase in revenue from the action exceeds the incremental increase in cost from the action.



Pricing in Practice

• Two-Part Tariff

• Tying

• Bundling

• Prestige Pricing

• Price Lining

• Skimming

• Value PricingPowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division


Managerial Economics in a Global Economy Pricing Practices PowerPoint Slides Prepared by Robert F....

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