Econ: Ch. 11 Pricing Strategy

What is the law of one price?
Identical products should sell for the same price everywhere, assuming no transactions costs.
Arbitrage is?
buying a product in one market at a low price and reselling it in another market at a higher price.
Does a product always have to sell for the same price everywhere? Briefly explain.
No. The law of one price only holds exactly when transactions costs are zero.
Suppose two products that seem to be identical sell for different prices. Suppose also that transaction costs are zero and that the products can be resold. Why might the law of one price not hold?

The law of one price may not hold even when transaction costs are zero because…

the company of one product may be more reliable than its competitors.
Suppose transactions costs for product are zero and the product can be resold. Why might the firms that sell a product charge different prices?

Firms might charge different prices for the same product even when transactions costs are zero and the product can be resold if the…

reputations of the firms are different.
Suppose a firm practices price discrimination to increase its profits. What potentially limits price discrimination?

A firm’s ability to practice price discrimination will be limited if…

consumers who can buy a good at a low price resell it to consumers who would otherwise have to pay high prices.
What is price discrimination?
When firms charge:
– a higher price to customers whose demand is less elastic and a lower price to consumers whose demand is more elastic.
– a higher price for a product when it is first introduced and a lower price later.
– each consumer a different price equal to that consumer’s willingness to pay.
Under what circumstances can a firm successfully practice price discrimination?
Some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.
In 2015, the Rock and Roll Hall of Fame and Museum charged adults $25.85 for admission. Seniors (65 years and older) and military personnel were charged $20.50, and children between 9 and 12 years old were charged $16.25.

Using the admission fees as a guide, rank these groups based on their elasticities of demand from most to least elastic.

Children 9 to 12 years old; seniors and military personnel.
What is yield management? Give an example of a firm using yield management to increase profits.
The practice of continually adjusting prices to take into account fluctuations in demand. Examples:
– a book company adjusting the price of a novel according to time since introduction.
– a college adjusting the cost of tuition with financial aid according to whether the student applied for early admission.
– a ship adjusting cruise prices according to the number of days remaining before departure.
– an airline adjusting plane ticket prices each day according to length of the route.
Is it possible to price discriminate across time? Explain.
Yes. Firms can charge higher prices at times when consumers are less price sensitive and lower prices at times when consumers are more price sensitive.
BMW sells cars in China at a price two to three times higher than in the US. Some people have purchased BMWs in the US and exported them for resale in China. An article in the Wall Street Journal quoted a spokesman for BMW as stating, “Vehicles exported to other countries undermine our pricing and volume positioning in the US and other world-wide markets.” The company has also tried to get the US government to stop buyers from reselling cars in China because the company argues that the practice is illegal.

BMW must believe that demand for its cars in China is?

If US buyers were free to export BMWs to China that they purchased in the US, would you expect the prices of the cars to be same in both countries?

less elastic than in the US;
No, because there are significant transaction costs.
Many firms introduce new products at a high price because they know that…
early adopters have a lower price elasticity of demand than do later adopters.
Walt Disney World charges residents of Florida lower prices for various theme park ticket packages than it charges non-Florida residents. For example, in 2015, an adult Florida resident was charged $201.29 for a 3-day ticket. The price of the same ticket for a non-Florida resident was $275.00.

Disney is assuming that Florida residents have a?

Disney can keep Florida residents from buying Disney World tickets at discounted prices and reselling them to non-Florida residents at higher prices by?

Compared to the discount it offers to other residents of Florida, the discount Disney offers to students at Florida universities can be expected to be discounted…

lower willingness to pay because substitute entertainment options are more readily available to them than they are to non-residents.;

requiring proof of residency at hotel and park check-in.;

more because students are likely to be more sensitive to price than the overall Florida resident population.

Do airlines practice price discrimination? Explain.

For example, business travelers have a more _______ demand than leisure travelers, so airlines charge business travelers _____ price.

engage in price discrimination by reducing the price on seats that they expect will not be sold.;

inelastic; a higher

What is required for a firm to successfully engage in price discrimination?
the firm to know what prices consumers are willing to pay..
In the book publishing industry, how are firms able to price discriminate across time?
An author’s most devoted book fans want to buy the author’s books as soon as they are published.
Give an example of a firm using a two-part tariff as part of its pricing strategy.
A tennis club requiring the purchase of an annual membership in addition to a fee each time members use the tennis courts.;
Sam’s club requiring consumers to pay a membership fee before shopping at its stores.
Instacart is an Internet startup that offers home delivery of groceries. It buys the groceries in regular​ brick-and-mortar supermarkets, marks up the prices it​ pays, and then charges consumers the higher prices in exchange for making home deliveries. According to an article in the Wall Street Journal​, Instacart marks up the price of potato chips by 26​ percent, but it marks up the price of eggs by only 2.5 percent. Is it likely that Instacart believes that the demand for potato chips is more elastic or less elastic than the demand for​ eggs? Briefly explain
less elastic because consumers are more likely to pay larger markups when they are less price sensitive.
An example of​ cost-plus pricing is charging a price
20% higher than average cost.
Charging a price of $9.95 instead of $10.00 is an example of what type of price strategy?
odd pricing.
In a firm selling multiple products, what is the intent of cost-plus pricing?
to cover all costs, including those that are difficult to assign to a specific product.
In general, companies that take demand into account will charge ___ markups on products that are ___ price elastic.
lower; more