PRICING TECHNIQUES AND

ANALYSIS

GROUP 8
Cruz, Melanie
Dela Cruz, Charle- son
Gamboa , Jezzarene
 Advanced Pricing Techniques
Price discrimination
Multiple products
Cost-plus pricing

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 Capturing Consumer Surplus
Uniform pricing
Charging the same price for every unit of
the product
Price discrimination
More profitable alternative to uniform
pricing
Market conditions must allow this practice
to be profitably executed
Technique of charging different prices for
the same product
Used to capture consumer surplus
(turning consumer surplus into profit)

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 The Trouble with Uniform Pricing
(Figure 1)

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 Price Discrimination
Exists when the price-to-marginal cost ratio
differs between two products:

PA PB
≠
MC A MCB

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 Price Discrimination
Three conditions necessary to practice
price discrimination profitably:
1) Firm must possess some degree of
market power
2) A cost-effective means of preventing
resale between lower- and higher-price
buyers (consumer arbitrage) must be
implemented
3) Price elasticities must differ between
individual buyers or groups of buyers

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 First-Degree (Perfect) Price
Discrimination
Every unit is sold for the maximum
price each consumer is willing to pay
Allows the firm to capture entire
consumer surplus
Difficulties
Requires precise knowledge about every
buyer’s demand for the good
Seller must negotiate a different price for
every unit sold to every buyer

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 First-Degree (Perfect) Price
Discrimination (Figure 2)

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 Second-Degree Price
Discrimination
Lower prices are offered for larger
quantities and buyers can self-
select the price by choosing how
much to buy
When the same consumer buys
more than one unit of a good or
service at a time, the marginal
value placed on additional units
declines as more units are
consumed
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 Second-Degree Price
Discrimination
Two-part pricing
Charges buyers a fixed access charge (A) to
purchase as many units as they wish for a
constant fee (f) per unit
Total expenditure (TE) for q units is:

TE = A + fq

TE A + fq
Average price ( p ) is: p= =
q q
A
= +f
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q
 Second-Degree Price
Discrimination
When consumers have identical
demands, entire consumer surplus
can be captured by:
Setting f = MC
Setting A = consumer surplus (CS)
Optimal usage fee when two
groups of buyers have identical
demands is the level for which MRf =
MCf

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 Inverse Demand Curve for Each of 100
Identical Senior Golfers (Figure 3)

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 Demand at Northvale Golf Club
(Figure 4)

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 Second-Degree Price
Discrimination
Declining block pricing
Offers quantity discounts over
successive discrete blocks of quantities
purchased

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 Block Pricing with Five Blocks
(Figure 5)

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 Third-Degree Price
Discrimination
If a firm sells in two markets, 1 & 2
Allocate output (sales) so MR1 = MR2
Optimal total output is that for which MR =
T
MC
For profit-maximization, allocate sales of
total output so that
MRT = MC = MR1 = MR2

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 Third-Degree Price
Discrimination
Equal-marginal-revenue principle
Allocating output (sales) so MR1 = MR2 which
will maximize total revenue for the firm (TR1
+ TR2)
More elastic market gets lower price
Less elastic market gets higher price

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 Allocating Sales Between Markets
(Figure 6)

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 Constructing the Marginal Revenue
Curve (Figure 7)

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 Profit-Maximization Under Third-Degree
Price Discrimination (Figure 8)

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 PRICING OF MULTIPLE
PRODUCTS

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 Multiple Products
Related in consumption
For two products, X & Y, produce & sell
levels of output for which
MRX = MCX and MRY = MCY

MRX is a function not only of QX but also of

QY (as is MRY) -- conditions must be satisfied
simultaneously

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 Multiple Products
Related in production as
substitutes
For two products, X & Y, allocate production
facility so that
MRPX = MRPY
Optimal level of facility usage in the long run
is where MRPT = MC
For profit-maximization:

MRPT = MC = MRPX = MRPY

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 Multiple Products
Related in production as
complements
To maximize profit, set joint marginal revenue
equal to marginal cost:
MRJ = MC
If profit-maximizing level of joint production
exceeds output where MRJ kinks, units beyond
zero MR are disposed of rather than sold
Profit-maximizing prices are found using
demand functions for the two goods

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 Profit-Maximizing Allocation of
Production Facilities (Figure 9)

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 Profit-Maximization with Joint
Products (Figure 11)

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 Cost-Plus Pricing
Common technique for pricing
when firms do not wish to estimate
demand & cost conditions to apply
the MR = MC rule for profit-
maximization
Price charged represents a markup
(margin) over average cost:
P = (1 + m)ATC
Where m is the markup on unit cost
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 Cost-Plus Pricing
Does not generally produce profit-
maximizing price
Fails to incorporate information on demand &
marginal revenue
Uses average, not marginal, cost

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 Practical Problems with Cost-Plus
Pricing (Figure 13)

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