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Pricing Strategy
most cases, no
life cycle of a product aims of the firm degree of competition on costs and demand
information past
practices
Limit pricing
AC new entrant
P
L
greater the power, the greater the discretion over price importance of strategy of rivals
the
AC monopolist
reactions
Limit pricing
where
Alternative aims
alternative multiple
single aims
aims
A.
B.
C.
D.
E.
difficulties
Costs ()
AVC a b
Cost-based pricing
the
Output (Q)
Costs ()
c a b
AC AVC
difficulties
Cost-based pricing
the
AFC
O
Output (Q)
The lower the output, the higher must be the profit mark-up per unit.
P1
AC
P2
B.
h g j
C.
D.
D
E.
O Q1 Q2
A.
B.
C.
D.
E.
S AC
Cost-based pricing
the
choosing the level of output choosing the mark-up equilibrium price and output?
O
S AC
in identifying the profitmaximising price and output difficulties in predicting rivals behaviour
Cost-based pricing
the
choosing the level of output choosing the mark-up equilibrium price and output?
variations
in the mark-up
1st Market level Competitors prices Direct cost plus variable mark-up Direct cost plus fixed mark-up Customer set Regulatory agency 257 161 131 108 33 1
% 39 25 20 17 5 2
% 21 35 18 8 8 1
3rd 78 100 88 42 47 5
% 12 15 14 6 7 1
Rise in material costs Rival price increase Rise in demand Prices never rise Rise in interest rates Higher market share Fall in productivity
Price Discrimination
Meaning of price discrimination Types of price discrimination
first
B.
degree
C.
D.
A.
B.
C.
D.
Additional Gains = 2 + 3
2
P1 P1
1
P2
1 MC = AC
P2
3 MC = AC
AR = D
AR = D
MR
O
Q1
MR
Q O
Q1 Q2
Price Discrimination
degree degree
AC MC MR
O
Q*
second
AR = D
Q
Price Discrimination
P1 P* P2
degree degree
second
P3
AC MC MR AR = D
Q3
third
degree
Q1
Q*
Q2
P2 P1 P1
200
150
200
DX O MRX O O
(a) Market X
DY MRY O MRT
(a) Market X
(b) Market Y
(a) Market X
(b) Market Y
MC
MC
(a) Market X
(b) Market Y
(a) Market X
(b) Market Y
MC
MC
(a) Market X
(b) Market Y
(a) Market X
(b) Market Y
MC 9 5 DY DX O 1000 O MRX 2000 MRY O 3000 MRT O 1000 DX O MRX 2000 5 DY MRY O 3000
MC
MRT
(a) Market X
(b) Market Y
(a) Market X
(b) Market Y
Q Which one of the following conditions is NOT necessary for (third-degree) price discrimination to take place?
MC
A. The firm must be a monopoly. B. Price elasticity of demand must differ in each market.
20%
20%
20%
20%
20%
9 5
C. The firm must not be a price taker. D. The markets must be separate. E. People buying in the lowprice market must not be able to sell to those buying in the high-price market.
O 1000
(a) Market X
(b) Market Y
A.
B.
C.
D.
E.
Price Discrimination
Price Discrimination
must be able to set its price must be separate elasticity must differ between
markets demand
markets
pricing pricing
Inter-temporal Two-part
tariff
Transfer Pricing
of independent pricing
pricing
leaders
meaning setting
Interrelated production
shared
of transfer prices
inputs
by-products
Q If a profit-maximising oligopoly produces a semi-finished product in Country A and converts it into a finished product in Country B, and if a lower profit tax is charged in Country A, the firm will
A. Choose a high transfer price and a final price equal to marginal cost. B. Choose a high transfer price and a final price above marginal cost. C. Choose a low transfer price and a final price equal to marginal cost. D. Choose a low transfer price and a final price above marginal cost.
25% 25% 25% 25%
four stages
A.
B.
C.
D.
Time
(1) Launch
(2) Growth
(3) Maturity
(4) Decline
Time
Q In which stage is it likely that price competition is intense and firms invest in product innovation to stimulate growth in sales?
A. Launch B. Growth C. Maturity D. Decline
25% 25% 25% 25%
four stages
launch stage the growth stage the maturity stage the decline stage
A.
B.
C.
D.