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MANAGERIAL ECONOMICS 11 th Edition. By Mark Hirschey. Pricing Practices. Chapter 15. Chapter 15 OVERVIEW. Pricing Rules-of-thumb Markup Pricing And Profit Maximization Price Discrimination Price Discrimination Example Multiple-product Pricing Joint Products

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Presentation Transcript
chapter 15 overview
Chapter 15OVERVIEW
  • Pricing Rules-of-thumb
  • Markup Pricing And Profit Maximization
  • Price Discrimination
  • Price Discrimination Example
  • Multiple-product Pricing
  • Joint Products
  • Joint Product Pricing Example
  • Transfer Pricing
  • Global Transfer Pricing Example
chapter 15 key concepts
competitive market pricing rule-of-thumb

imperfectly competitive pricing rule-of-thumb

markup on cost

profit margin

optimal markup on cost

markup on price

optimal markup on price

Lerner Index of Monopoly Power

price discrimination

market segment

first-degree price discrimination

second-degree price discrimination

third-degree price discrimination


common costs

vertical relation

vertical integration

transfer pricing

pricing rules of thumb
Pricing Rules-of-thumb
  • Competitive Markets
    • Profit maximization always requires setting Mπ = MR - MC = 0, or MR=MC, to maximize profits.
    • In competitive markets, P=MR, so profit maximization requires setting P=MR= MC.
  • Imperfectly Competitive Markets
    • With imperfect competition, P > MR, so profit maximization requires setting MR=MC.
    • MR = P[1 + (1/εP)]
    • Optimal P* = MC/[1 + (1/εP)]
markup pricing and profit maximization
Markup Pricing And Profit Maximization
  • Optimal Markup on Cost
    • Markup on cost uses cost as a basis.
    • Markup pricing is an efficient means for achieving the profit maximization objective.
    • Optimal markup on cost = -1/(εP + 1)
  • Optimal Markup on Price
    • Markup on price uses price as a basis.
    • Optimal markup on price = -1/εP
price discrimination
Price Discrimination
  • Profit-Making Criteria
    • Price discrimination exists if P1/P2 ≠ MC1/MC2.
    • Ability to segment the market.
    • Multiple markets with no reselling.
    • Price elasticity of demand differs across submarkets.
  • Degrees of Price Discrimination
    • First degree: Different prices for each consumer.
      • Creates maximum profits for sellers.
    • Second degree: Block‑rates or quantity discounts.
    • Third degree: Different prices by customer age, sex, income, etc. (most common).
price discrimination example
Price Discrimination Example
  • Price/Output Determination
    • Maximizes profits by setting MR=MC in each market segment.
  • One-price Alternative
    • Without price discrimination, MR=MC for customers as a group.
    • With price discrimination, MR=MC for each customer or customer segment.
    • Profitable price discrimination benefits sellers at the expense of some customers.
  • Graphic Illustration
multiple product pricing
Multiple-product Pricing
  • Demand Interrelations
    • Cross‑marginal revenue terms indicate how product revenues are related to another.
  • Production Interrelations
    • Joint products may compete for resources or be complementary.
    • A by-product is any output customarily produced as a direct result of an increase in the production of some other output.
joint products
Joint Products
  • Joint Products in Variable Proportions
    • If products are produced in variable proportions, treat as distinct products.
    • For joint products produced in variable proportions, set MRA=MCA and MRB=MCB.
    • Common costs are joint product expenses.
      • Allocation of common costs is wrong and arbitrary.
  • Joint Products in Fixed Proportions
    • Some products are produced in a fixed ratio.
    • If Q=QA=QB, set MRQ=MRA+MRB=MCQ.
joint product pricing example
Joint Product Pricing Example
  • Joint Products Without Excess By-product
    • Profit-maximization requires setting MRQ=MRA+MRB=MCQ.
    • Marginal revenue from each byproduct makes a contribution toward covering MCQ.
  • Joint Production With Excess By-product (Dumping)
    • Profit-maximization requires setting MRQ=MRA+MRB=MCQ.
      • Primary product marginal revenue covers MCQ.
      • Byproduct MR=MC=0.
transfer pricing
Transfer Pricing
  • Transfer Pricing Problem
    • Pricing transfer of products among divisions of a single firm can become complicated.
  • Products Without External Markets
    • Marginal cost is the appropriate transfer price.
  • Products With Competitive External Markets
    • Market price is the optimal transfer price.
  • Products With Imperfectly Competitive External Markets
    • Optimal transfer price is the marginal revenue derived from combined internal and external markets.
global transfer pricing example
Global Transfer Pricing Example
  • Profit Maximization for an Integrated Firm
    • Optimal transfer price is profit maximizing.
  • Transfer Pricing with No External Market
    • Optimal transfer price balances supply/demand.
  • Competitive External Market with Excess Internal Demand
    • Firm employs own and external inputs.
  • Competitive External Market with Excess Internal Supply
    • Firm supplies inputs to internal and external markets.