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Pricing Policy. Managerial Economics Jack Wu. Pricing Policy. uniform pricing complete price discrimination direct segment discrimination indirect segment discrimination bundling. Northwest Airlines Minneapolis-New York. Asian Wall Street Journal. Uniform Pricing. 80.

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Pricing policy

Pricing Policy

Managerial Economics

Jack Wu

Pricing policy1

Pricing Policy

  • uniform pricing

  • complete price discrimination

  • direct segment discrimination

  • indirect segment discrimination

  • bundling

Northwest airlines minneapolis new york

Northwest AirlinesMinneapolis-New York

Asian wall street journal

Asian Wall Street Journal

Uniform pricing

Uniform Pricing


Price (Thousand Yen per unit)


marginal cost



marginal revenue




Quantity (Units a year)

Uniform pricing profit maximum

Uniform Pricing: Profit Maximum

  • MR = MC

  • Equivalently, set the incremental margin percentage equal to the inverse of absolute value of price elasticity of demand,

    (price - MC) / price = -1/e

Price elasticity

Price Elasticity

  • always set price so that demand is elastic

  • if demand more elastic, then lower incremental margin percentage (IM%) e = -2  IM% = 1/2

    • e = -1.5  IM% = 2/3

Pricing private label cola

Pricing Private-Label Cola

Suppose that WalMart learns that demand for private-label cola is less elastic than the demand for Coca Cola. Should WalMart set a higher price for private-label cola?

Uniform pricing shortcomings

Uniform Pricing: Shortcomings

  • leaves buyers with a lot of surplus

  • does not sell to every potential buyer

Complete price discrimination

Complete Price Discrimination

  • price each unit at buyer’s benefit and sell quantity where MB = MC

    • maximum profit -- theoretical ideal

    • different from MR = MC

  • implementation: must know entire marginal benefit and marginal cost curves

Complete price discrimination practice

Complete Price Discrimination: Practice

  • bargaining

  • auctions

Direct segment discrimination i

Direct Segment Discrimination, I

  • price by segment

  • implementation

    • fixed identifiable characteristic --- basic for segmentation

    • no re-sale

Direct segment discrimination ii

Direct Segment Discrimination, II

simple case: uniform price within each segment

  • within each segment IM% = -1/e

  • for segment with more elastic demand, then lower incremental margin percentage (IM%)

Direct segment discrimination iii

Direct Segment Discrimination, III

(a) Men’s demand

(b) Women’s demand



Price (Thousand Yen per unit)

Price (Thousand Yen per unit)













marginal revenue






Quantity (Units a year)

Quantity (Units a year)

Nynex telephone service

NYNEX Telephone Service

New York City

  • residential -- $16/month

  • business -- $23/month

    How is discrimination possible?

Indirect segment discrimination

Indirect Segment Discrimination

  • structure choice to earn different incremental margins from each segment

  • implementation

    • seller controls some variable to which segments are differentially sensitive

    • buyers cannot circumvent the variable

Air travel benefits

Air Travel: Benefits

Air travel indirect segment discrimination

Air Travel: Indirect Segment Discrimination


Chinese embassy visa fees

Chinese Embassy: Visa Fees

Pricing policies ranking

Pricing Policies: Ranking



  • strategy

    • pure bundling

    • mixed bundling

Cable television benefits

Cable Television: Benefits

Pure or mixed bundling

Pure or Mixed Bundling

What is the profit-maximizing pricing policy if

  • marginal cost per channel = 0

  • marginal cost per channel = $5

Pure or mixed bundling1

Pure or Mixed Bundling

  • Generally,

  • if item is costless, no loss from giving it to every consumer --> pure bundling;

  • if item is costly, then should avoid providing it to low-benefit users --> use mixed bundling to screen out low-benefit users.

  • Mixed bundling is form of indirect segment discrimination

  • structured choice between bundle and separates

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