Pricing

Question 1

Pricing to cost vs. to value

Answer 1

Firms should price to value, not to cost.

Cost-based pricing is easy, while value-based pricing is hard.

Question 2

Main factors while setting prices

Answer 2

1. Competition and elasticity
2. Ease of comparison
3. Preferences / WTP

Question 3

Pricing with elasticity information

Answer 3

Profit = (P-VC)*Q-FC

Finding optimal price:

Derivate of profit w.r.t. price equals zero

Question 4

Ease of comparison

Answer 4

• With the rise of the internet price comparison became a lot easier
• Instead of equal prices, it was observed that companiers start not to give out their prices early on
• Information friction (make comparison more difficult) generate margins to firms

Question 5

Preferences/WTP

Answer 5

• Preferences of consumers can be revealed through a Conjoint Analysis
• Consumers are shown different sets of features and are asked to rate them
• Can be used for measuring willingness to pay

Question 6

Price penetration

Answer 6

Start with a low price and increase it over time. Very aggressive strategy, thus you need good reasons to do it. Increasing prices later on is tricky.

Motivations:

• Secure position
• Gain market share
• Switching costs
• Entry deterrence
• Network externalities

Question 7

Price skimming

Answer 7

Start with a high price and reduce the price later on

Applicable if:

• high consumer heterogeneity (some customers are willing to pay a lot more than others)
• Durable products (customers buy only one unit)
• Requires high differentiation

Question 8

Veblen goods

Answer 8

The appeal of the product increases if fewer people have it –> High price makes it more appealing

Question 9

Price-quality inferences

Answer 9

Price is an indicator of quality if you have no other information about the different products.

• Consumer assert higher prices with higher quality
• These products in fact activate more pleasure senses in the brain
• Sunk costs matter: If consumers paid less, they value the product less

Question 10

Promotional pricing

Answer 10

• By promotional pricing, you can make use of different WTP
• The idea is that consumers self-select into the promotion
• There must be some friction to the discount and not all customers will make the effort.

Question 11

Leaky paywalls

Answer 11

A couple of articles are free before users have to pay for them

• retains flexibility
• allows for self-selection
• does not shut off search and social