Pricing Flashcards
(16 cards)
What is differential pricing?
price discrimination exists when the same product is sold for different prices, that are not attributable to differences in cost.
What are the conditions for differential pricing?
- market must be divisible into sub-markets
- demand conditions (elasticity) must be different in the sub markets
- no arbitrage
- some market power
- not all customers may be of the same value
What is first degree price discrimination?
every buyer is charged the maximum they are willing to pay. Willingness to pay can be difficult to evaluate - fairness. E.G. houses and commercial
What is second degree price discrimination?
customers are charged one price for the first block of units they purchase, then a different price for the second block. E.G. electricity, water
What is third degree price discrimination?
several sub markets, each containing a number of potential customers, target different segments. Some of these markets might be less price sensitive (price inelastic) relative to other market where quantity demanded is more sensitive to price changes (price elastic).
What is a example of extreme price discrimination?
Airline Fares:
- first class
- full fare economy (no restriction)
- one week advance purchase
- one week advance purchase, Saturday night stayover
- 3 week advance purchase, Saturday night stay over
- 3 week advance, Saturday night stay over, no changes/refunds
- late sales through consolidators/internet, no refunds
What is psychological pricing ?
customers may be tricked into thinking the price of a product is lower than it is, they perceive the features/quality of the product as more important when deciding to purchase over the price.
What is anchoring?
it is a cognitive bias, when making purchase decisions, consumers tend to rely heavily on the first piece of information offered when making decisions.
Consumers make estimates by starting from an initial value that is adjust to yield the final answer.
What is important during decision making?
During decision making (including estimating value), an initial value serves as a mental benchmark (an anchor) or starting point for estimating ‘real’ value.
What does a reference price do?
a reference price may serve as an anchor that consumers make adjustments to reach their final price estimates.
What does a bundle price provide?
provides a rough estimate of the cost
What does in drip pricing do?
consumers make a estimate of the final cost from the starting one
What is mental accounting?
is the set of cognitive operations used by individuals and households to organise evaluate and keep track of financial activities.
What is the implication of mental accounting?
- pricing - segregate gains and aggregate losses
- segregate silver linings, small gains compared with huge losses
- integrate or cancel losses (when combined) with larger gains
- high end prices should be marketed as potential gifts -aiming the advertising at the giver instead of the receiver
- people prefer to receive gift in hand rather than gift in cash
- people label money according to the context it was obtained - ‘income accounting’
What is emotional accounting?
A variant of mental accounting that categorises money on the basis of the feeling it evokes and we persist that the valence and intensity of these feelings may exert a substaintial influence on recipients spending behaviours.
Money tagged with negative feelings less likely to spend on hedonic goods so used for virtuous or utilitarian circumstances - laundering effect.
When individuals are encouraged to reappraise the situation, they are less likely to laundering effect.
What do poor people experience?
scarcity and necessity of making trade off choices as they are less likely to segregate accounts and less susceptible to cognitive biases.
Companies can price products by looking into costs, competitors prices or customer value. New products can enter the market using a status quo approach or by setting a pricing strategy.
